Bad Bank Floating of Swimming

By Mike Colpitts

Bad Bank Sponsored by U.S. GovernmentThe mass media loves to float ideas — concepts that many times never do become reality. But in the effort to get the news out news sources of all types online, TV and in print jump on the band-wagon. The so-called “BAD BANK” President Obama may propose to handle the toxic mortgages that have weakened the nation’s financial structure is a perfect example.

Flash back to 1989. The U.S. Savings and Loan Crisis was exploding and the government was trying to figure out how to fix the nation’s economy riddled and robbed by the S&L scandal. Like today, For Sale signs were on almost every block and foreclosures were abundant. But it’s not that way everywhere in the country, and it’s not likely to be that way.

This is a different sort of financial melt down. Sure, it involves many more troubled assets – more property, at least four times that of the S&L Crisis by our measure. But not everywhere has been equally annihilated. Since that scandal 75% of all mortgages have been unregulated. I don’t know many people who knew that. The government is supposed to be there to protect us. Perhaps that’s the illusion.

There’s a lot of anger over the economic climate. We know. We hear it all the time. After all we forecasted the crisis first. The election of Obama was at first floated and then the campaign ran on the promise of “Change.”

As the country battles with what will certainly and inevitably become sweeping changes, it could do all of us some good to keep a positive outlook. The S&L Crisis made many investors and investor-wannabes fortunes amid the pain and hardship of others. Property sold for as little as a dime on a dollar.

FDIC Chairwoman Sheila Bair is reportedly pushing to run the “BAD BANK.” It would presumably buy the toxic assets clogging the lending system and dispose of homes and other property in auctions and through similar programs used during the S&L days. Bair may be the right person for the job and her agency could finance the effort issuing bonds guaranteed by the FDIC. President Obama’s team may announce the program as early as next week, according to an administration official.

“It doesn’t make sense to give the authority to anybody else but the FDIC,” said John Douglas, a former general counsel at the agency who is now a partner at a law firm in Atlanta. “That’s what the FDIC does. It takes bad assets out of banks and manages and sells them.”

The bad bank would be a multi-trillion dollar endeavor considering the epidemic of foreclosures, which have topped 3.4-million. We’re waiting to see what the government plans to do to stop foreclosures before we update our foreclosure forecast, which now stands to total 6.4-million units through 2011. Some banks will be taken over by the government in the crisis.

The government could rewrite mortgages to levels affordable to homeowners and sell off the rest of the inventory. The old Resolution Trust Corporation (RTC) that handled the S&L crisis could help, and after enough money is sent into the system by the government the housing market should eventually stabilize. If we look to history to be the teacher, it’ll take more than a decade to get us out of this mess. That’s about what it took the S&L scandal, which cost every man, woman and child in the U.S. an average of $10,000, a drop in the bucket compared to this crisis.

I just have to wonder how much cheaper it would be this time around if we just let the troubled banks go bust?

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