Forget the “bad bank”; let’s create some “good banks”
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Here’s an idea for ending the credit crunch: Instead of creating a government-run ‘bad bank’ to take away the rotting assets of the nation’s ailing lenders, how about encouraging the creation of ‘good banks’?
Carl Weinberg, a veteran economist at High Frequency Economics in Valhalla, N.Y., offered up this proposal in a recent newsletter to clients.
The idea is elegant in its apparent simplicity. ‘Why create a ‘bad’ bank when it would be perhaps more constructive, and economically Darwinian, to create a ‘good’ bank instead?’ Weinberg asked. ‘Indeed, the rewards to the founders of a ‘good’ bank today should be so great that free market forces will capitalize it in spades and send it tons of business, all without any government subsidies.’
The Obama administration appears set on launching a government-run ‘bad bank’ to buy up toxic loans from lenders. Rumors late Tuesday that the plan will be announced next week drove up shares of Citigroup, Bank of America and other ailing banks in after-hours trading.
Weinberg, among others, doesn’t like the idea of throwing good money after bad. He wrote:
Why spend good money to support bankrupt institutions, who have lost investor confidence and whose capital bases have been depleted by ‘bad’ transactions? Imagine the competitive advantage of a newly chartered bank in today’s market environment. With no need to put aside cash to restore its capital base, all deposits received could be loaned out in income-earning deals. Indeed, the fact that a new bank could loan at all would make it very competitive compared to older banks. It would steal business -- both deposits and credit relationships -- from nearly insolvent existing institutions very fast. If the new bank became large enough, or if enough new banks were formed, old banks would lose almost all of their deposits and most of their good loan assets. The old banks would become, via market forces, the ‘bad’ banks that government [is] now thinking of creating.
I think the obvious problem with Weinberg’s idea is that any new bank would take substantial time to get up and running on the scale needed to pull in significant deposits and make significant loans. Filling the gap left by the likes of Citigroup couldn’t happen overnight.
Still, the idea of allowing private capital to find a solution, as opposed to more use of taxpayer funds, has natural appeal.
‘What is needed are enough brave people to come forth with the capital and expertise in banking to start up one or more new banks,’ Weinberg said. ‘Where are the capitalists and risk takers of this world when we need them?’
-- Tom Petruno