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Why Should I Care: The Bad Bank


Like shooting finance in a barrel.

It's not some place you ever really want to go. It's where you find yourself at the tail end of a marathon move - one where your shoulders ache and your hands are raw from hours of lugging boxes, lamps, couches and tables up and down stairs, squeezing them into narrow doorways - and generally taking precious years off the shelf life of your lower back.

Your Suburban loaded to the brim, you schlep off to the city dump to deposit a mountain of bric-a-brac with the rest of the foul-smelling refuse discarded by the local population.

That's sort of where we are with the financial system: Steaming piles of toxic assets on bank balance sheets, CEOs driving around looking for a place to park while they do their best to survive another day.

Enter the so-called "bad bank," a dumping ground for the exotic financial instruments dreamt up over the past decade - the ones that helped bring about the crisis in which we currently find ourselves embroiled.

In his hazily outlined bank-rescue plan, Treasury Secretary Timothy Geithner paved the way for a trillion-dollar investment fund set up to rid the likes of Citigroup (C), Bank of America (BAC) and JPMorgan (JPM) of their investments gone awry. Officials argue that getting these troubled assets off banks' books will get them to start lending again, allowing credit to once again flow freely to the rest of the economy.

Setting up a bad bank is a common strategy to clean up financial institutions overwhelmed by lousy loans. The government steps in and assumes control of the assets in question, freeing up the offending bank to focus on whatever good parts of its business remain.

Since the government isn't required to meet certain profitability targets, set aside cash for loans that may sour in the future, or mark its portfolio of assets to a market price, a bad bank can hold onto assets for as long as it takes to sort out the problems.

In the present situation, this bad bank is being set up to save the entire system.

And that's what makes it so damn complicated.
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