Bad Banks and the Land of Loan Quarantines
Financial stocks are ripping upwards in the aftermarket on rumors that the government may be getting closer to establishing a Bad Bank that would accept troubled loans, similar to the Resolution Trust Company that proved successful during the early eighties Savings and Loan crisis.
In the Book of Leviticus, God tells Moses to impose quarantines on anyone with an infectious disease by sending them outside the boundaries of the camp for a period of time, until they are better. The idea is that by physically separating the sick from the healthy for a time, you prevent a greater breakout within the population at large.
While I very much doubt that Congress has modeled a Bad Bank program after the book of Leviticus, the idea rhymes and could in a sense be divinely inspired. By having bad loans quarantined in Bad Bank Land for a time, the risk of bad loans infecting the entire credit system may be reduced. Banks might loan to the healty once again while the loans in Bad Bank Land get greater attention, longer workout periods and hopefully an eventual return for enterprising investors.
I like the idea. How about you?
In the Book of Leviticus, God tells Moses to impose quarantines on anyone with an infectious disease by sending them outside the boundaries of the camp for a period of time, until they are better. The idea is that by physically separating the sick from the healthy for a time, you prevent a greater breakout within the population at large.
While I very much doubt that Congress has modeled a Bad Bank program after the book of Leviticus, the idea rhymes and could in a sense be divinely inspired. By having bad loans quarantined in Bad Bank Land for a time, the risk of bad loans infecting the entire credit system may be reduced. Banks might loan to the healty once again while the loans in Bad Bank Land get greater attention, longer workout periods and hopefully an eventual return for enterprising investors.
I like the idea. How about you?
It often seems like the shifts in the market are indicators not necessarily of the true "state of the economy" but the collective state of financial "mental health" of the national and global community in general. Often the downturns are an exaggerated view of the true state of affairs while the upturns and peaks are just as deceptive about the "health" of the economy. This "Bad Bank" idea may be just what the doctor ordered. It does not get rid of the bad paper, but excises it from the bigger financial picture. If not for practical purposes, then purely for the psychological effects. I say let's segregate the bad from the good and address the problem all at once as a collective group. Maybe then we can find a more creative solution and avoid the calamity and "pork barrel" of the TARP initiatives.