The Moral Hazard of the “Bad Bank”

[girl gone mad]

I’ve been closely following the various (new & improved!) bailout plans for the big banks — from the modified TARP to the recapitalizations to the “bad bank” plan.

I’ve noticed something I find a bit disturbing about our new Treasury Secretary: He has not yet fully come to terms with his new job, role — and boss. Granted, he’s been in the job for only two days. But given the extraordinary circumstances the financial sector and the economy is in, it is important for the Treasury Secretary to get up to speed as soon as possible.

Consider this statement from Geithner, who said that Treasury is considering a “range of options” for its financial rescue plan, with the goal of preserving the private banking system. “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

No! Defending these idiots was your old gig. In the new job, you no longer work for the cretins responsible for bringing down the global economy. Please stop rationalizing their behavior, and preserving the status quo!

Yesterday’s 13% surge in bank stocks is a clue as to what an obscene taxpayer giveaway this “bad bank” plan is — its free money for the firms that caused the problems, many of whom still have the same incompetent management in place that caused the problem. Purging toxic assets from bank balance sheets, without punishing the management, shareholders and creditors of these institutions for their horrific judgment will only encourage more of the same in the future. Its moral hazard writ large.

http://www.ritholtz.com/blog/2009/01/who-is-the-treasury-secretarys-boss/

[pa28]

1. He wants to nationalize. I think he's mostly right.

This is also in tune with what George Soros is saying - that the "bad bank" won't be enough to fix the problem. And if George Soros is saying it that automatically merits serious consideration IMO.

Here are some of Ritholz' expanded comments from "Fast Money". http://www.cnbc.com/id/28915735

He's strongly advocating nationalization and a wipeout of common stockholders and debt as opposed to socializing these massive losses.

[Joanne98]

2. I think the "bad bank" is a horrible idea. It doesn't solve the basic problems.

It's the derivatives.