Word is out that the new administration will unveil plans next week for what I’m going to call TARP II – Good Bank/Bad Bank. If you recall, the original purpose of the tarp was to remove ‘troubled’ assets from the balance sheets of the ailing banks. That quickly morphed into the Treasury making capital infusions into the participating banks and taking an equity interest as a preferred shareholder. Government gets a return on that money in the 5%-8% range. I kind of liked the idea, even though a lot of people thought it smacked of ‘socialism’. Heck, why not get a return on our money! How much ‘return’ do we get with some of these ‘earmarks’ that get stuck into bills in Congress? Now it looks like the spirit of the original TARP has come back into play. So I guess Paulson, Bernanke & Company didn’t have such a bad (original) idea after all?
One of the problems with the original TARP was how to come up with a reasonable market value of the assets to assume. Apparently the new plan will be addressing that, though I’m not sure I exactly trust the government in coming up with an optimal price.
However, the consensus is growing that infusions won’t be enough to ultimately help out. That may be true. Recently, NYU Professor Nourial Roubini made the statement that the U.S. banking system is insolvent. Expected losses of about $2 trillion exceed bank capital of $1.5 trillion, he said. FYI-Roubini had predicted the coming crisis a few years back as he said real estate values were riding ‘a speculative wave’ and would soon sink the economy.
So, this plan essentially makes ‘Bad Banks’ good by lifting depreciated assets and creates ‘SuperBad Bank (SBB)’. That’s great. One suggestion I have for the new CEO of SBB: classify all your assets as Held to Maturity, please. Oh and a suggestion for Bernanke and Tim Geithner, the new Treasury Secretary – make SBB completely exempt from FAS 115 requirements. Maybe something that should have been considered sooner for the banks, thrifts and credit unions.