The Bank Repair Plan: Neither Fish Nor Fowl

The Administration is looking at a hybrid plan to save the nation’s banks. It world involve buying some toxic assets from the firms and putting them into a "bad bank." The value of other assets would simply be guaranteed by the government.

The program is something right out of the Mad Hatters Tea Party.

According to The Wall Street Journal, "Under the concept being discussed, the government `bad bank,’ possibly run by the FDIC, would buy only assets banks have already marked down heavily. In addition, the remaining troubled assets — likely a sizable amount — would be covered by a type of insurance against future losses."

There is a fine line between owning assets and guaranteeing them. At some point, it may be no line at all. It also raises the issue of what a toxic asset is. Mortgages that may or may not default? Pools of credit card loans? Commercial real estate loan or LBO lending? Each of these could run into the troubles that mortgage-backed securities have. The past estimates of default risk were much lower.

The new ideas are meant to save the taxpayer from the folly of the banks which is likely to be compounded by the folly of the government.The credit crisis is almost certainly going to get much worse before it gets better. Default rates on almost all loans are likely to skyrocket as unemployment rises and housing values fall. Many analysts believe that companies financed by junk debt will begin to default on that debt at remarkable rates and that holders of commercial real estate will have to abandon properties without tenants.

There is very little distinction between owning a mule and renting one. If the mule dies, the liability for the cost of the animal is no different.

The Administration and Congress may believe that they are doing taxpayers a favor. But, as the guaranteed loans begin to fail the cost of the bailout will grow and there will still only be one source for money. That’s the taxpayer.

Douglas A. McIntyre