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Retirement Planning: Bad Bank Idea February 12, 2009

Posted by retirementwithaplan in Uncategorized.
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If you are asking why I am commenting on the state of banks in this country at this particular moment in time, you would be justified. The economic picture that this country faces is having dire effects our our retirement planning efforts.

021209_bdnk1The idea of a bad bank, one that has been floated around Washington for a couple of weeks, would essentially take the bad assets form the banks and create a new bank to sell off those assets over time, and, if the Swedish model is any indication – albeit on a smaller scale than our current situation – we would eventually make a profit. (Sweden closed the doors to their bad bank three years after opening it although they were chartered for fifteen years.)

I like the idea of a bad bank but I believe that the process, as it took place in Sweden, would need to work in reverse here in the US. For instance, instead of creating a bad bank for all of the toxic assets to be sold so the other portion of the bank could have a clean balance sheet – and supposedly move forward – the taxpayer would be much happier if we took the good assets and left the bank with the bad.

Two things would happen here. First, we would be in the black right from the beginning. The taxpayer could lower the interest rates on themselves, make credit card repayment much simpler, and lower the bar to access credit.

The second part of this idea would test the mettle of these top bankers – making lemonade from lemons should not fall to the expertise of the taxpayer or the government who knows little about banking, but the the executives who sheepishly claim that they are doing their job. Let’s see how quickly they turn this around given stuff they would just as soon dump on us.

Once the bad bank showed a profit, we could offer to sell our portion back to them for a tidy profit. On the other hand, they might fail at their attempt to resurrect the bad bank and not be able to purchase the good assets. That would be too bad – for them, not us.

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