A Bad Bad Bank?

By: PAUL JACKSON
January 19, 2009 12:40 PM CST

Paul Krugman is going to become required reading if he keeps this up. He writes today about the idea of a federal “bad bank” that sops up illiquid assets — ahem, private-party MBS, anyone? — but says that what’s being batted around now smacks nothing of the RTC we once knew:

… the creation of the RTC did not rescue the S&Ls. The S&Ls were rescued by (1) having FSLIC seize them, cleaning out the stockholders (2) having FSLIC pay down enough debt to make them viable (3) reselling them to new investors. The RTC’s takeover of the bad assets was just a way for taxpayers to reclaim some of the cost of recapitalizing the banks.

What’s being contemplated now, if Sheila Bair’s interview is any indication, is the creation of an RTC-like entity without the rest of the process. The “bad bank” will pay “fair value”, whatever that is, for the assets. But how does that help the situation?

It appears as if our regulatory leaders are stuck in a negative feedback loop all their own. Didn’t we go down the uselessness of the “instrinsic value” of an asset argument earlier when TARP was first rolled out? Apparently, the concept hasn’t died on the vine just yet. Look out below, if you’re an investor in the distressed mortgage space.