Bad Banks

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Michael Höhne's picture
Michael Höhne
Status: Silver Member (Offline)
Joined: Nov 16 2008
Posts: 119
Bad Banks

It was mentioned in the news that the UK is thinking about creating a "bad bank" and I'm sure that other countries are on the same track. As far as I understand, the idea of a bad bank simply is to move toxic assets from major institutions to a single, newly created bank. This, of course, help failed banks to get rid of these assets. I prefer seing them fail instead, but that's another topic.

What I wonder is, how a bad bank can make a difference. The only reasonable explanation is that such a new institution is made solely to default in the future, without affecting people responsible for this mess. Defaults arte possible today by just stopping bailouts, so besides shifting even more money to the rich, what other reason exists to create a bad bank, if any?

jmar8692's picture
jmar8692
Status: Member (Offline)
Joined: Oct 26 2008
Posts: 13
Re: Bad Banks

Hi Michael,

I am happy to contribute again with some experience from my country. We also have a "bad bank" in the Czech Republic. Socialists founded it in 2001 and moved there toxic assets from failed institutions, mostly big banks, which used to borrow too much and too risky in 90's when our industry was largery privatized. The resemblance with US today is striking. There are some key differences though - in our case the rescued banks were owned by the state.

For what I remember, they used to argue that one specialized institution will more likely succeed in recovering the problematic debt. But above all, this allowed them to save the banking sector, thus avoiding bank runs and possibly large savings loses among citizens. At that time, the deposits were insured, but the reserve fund was depleted and could never sustain a fall of the big institutions (which, as I believe, it couldn't sustain anytime anywhere, anyway - so much for today 100 % guarantees for all deposits...) Furthermore, the "refined" banks were quickly privatized to the large foreign banks, which would be hardly possible with all their bad debt.

I must say that even in this scenario, I would like to see the banks fail, rather than moving loses to a "bad bank" owned by state. But I have some understanding for it, as the circumstances were quite non-standard in our case. Our economy was transforming from central planing to free market (more or less) and it was of course very painful era with much corruption, wealth destruction, frauds, thievery at the daylight, etc. Privatization of the bing banks was really needed, because the state proved itself to be an exceptionaly bad and extremely corrupted owner.

In current situation, however, I have no understanding at all for such a kind of action. The failed banks should fail. This "free market" economy where gains are private and loses nationalized is really disgusting. Moving bad assets to bad bank does not solve anything, it is just another way of helping the bankers out of the mess they created. I guess that if the bad bank is introduced, the state would keep it afloat, they would try to get something from the assets, but would end with most of them written down after several years. Of course it would be a nice place for many politicians and their cronies to sit in the board, take fat salaries, etc., effectively increasing the total cost placed on the back of the taxpayers.

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Bad Banks

Citigroup might also split into "good" and "bad" banks

http://www.reuters.com/article/mergersNews/idUSWEN263820090114?feedType=...

In Belgium, where I live, the Gov't made the same scenario with Fortis, the biggest bank in Belgium: moving the "good" banks out, leaving the "mother" bank with most troubled assets and nothing else. The Dutch would have taken back ABN Amro and the French BNP Parisbas would buy the rest of the good bank. This has been suspended because the Gov't took decisions without reffering the share holders. The Gov't even tried to influence the judges, leading to a "Fortisgate" and fall of prime & justice ministers.

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Citigroup splits in Bad & "Good" Banks

Citigroup loses $8.29 billion, splits in two

Will the "bad bank" ever become "good" again? I have doubts...

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