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Why not build a good bank?



January 31, 2009 – Comments (4)

Instead of lending money to all the impaired financial institutions, why doesn't the government use 700 billion to create a new bank that has no bad assets and then hire all the layed off bankers to run the place.

 A bank with 700 billion in capital that doesn't have any losses which need to be covered will be in a much better position to lend.

 Let the banks that deserve to die go bankrupt and this new bank can buy up the assets on the cheap along with the other surviving banks.

4 Comments – Post Your Own

#1) On January 31, 2009 at 1:24 PM, rd80 (96.82) wrote:

The media stories would have us believe that every bank is doomed.  That simply isn't the case.  Among the big four commercial banks (JPM, WFC, BAC and C), only Citi lost money last year.  JPM hasn't reported a quarterly loss through the whole mess.  WFC's loss in the fourth quarter was driven by a massive loss reserve build up to deal with the Wachovia acquisition. The story is similar among regional and community banks.  The banking industry is in rough shape, but most are surviving and a few are thriving. 

Among the reasons not to start a gov't funded good bank:

1.  The banks that will survive this (which is most of them) could not compete with a gov't funded bank.  The gov't bank you propose would not have to be profitable since politicians could use the Treasury to subsidize losses and fund gov't loan programs they could never pass in an open vote.

2.  When nearly every other bank fails because it can't compete, one of two things happens when the FDIC runs out of money.  Either taxpayers foot the bill for the FDIC overruns or FDIC defaults on its obligations to depositors.

3.  Why would we believe that bankers who lost their jobs after running their own banks into the ground would be any better at running this gov't bank?

4.  The massive increase in bank failures that would come from trying to compete against a stacked deck would destroy even more value than we've already seen lost in investors' IRAs,  401k's and mutual fund holdings as the value of bank equities drops to virtually nothing.

5.  The most recent gov't attempts at something like this were Fannie Mae and Freddie Mac.  Why should we expect the gov't to do any better with a bank?

I'm all for letting the banks that can't make it go under, but there's no need for a newly created gov't backed 'good bank.' 

If we get to a point where the FDIC can't find buyers for failed banks, it may be necessary to revisit something like the Resolution Trust Corp.  We're not there yet.  

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#2) On January 31, 2009 at 3:17 PM, UltraContrarian (30.15) wrote:

Agree with rd80, there are a lot of problems with the government creating a consumer bank.  The government backing of FNM and FRE made those companies insanely aggressive with leverage.

If we don't revise and reinforce antitrust era banking laws our failures will get more catastrophic over the next few decades.  The four banks mentioned above are too concentrated for the financial safety of the US.  We need smaller, well regulated banks, not a gigantic $700B one.

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#3) On January 31, 2009 at 7:01 PM, Assetman (< 20) wrote:

Robert is on the right track.  We should be backing good banks not bad banks.  See my blog post at for a correlation of banks loan growth record and their profitability.  The correlation is almost perfect.  The profitable banks grew their loans in the fourth quarter and the unprofitable banks didn't.  It's time to admit that the big hodgepodge banks can't ever succeed.  They need to be nationalized and the piecessold off as soon as possible.  Put the money behind winners, not losers

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#4) On January 31, 2009 at 9:52 PM, StockSpreadsheet (67.65) wrote:

We don't need to create a new bank with TARP money.  There are a lot of banks out there that have refused TARP money, saying they don't need it.  I did a blog post on this recently entitled "Who Should Get the TARP Money".  The link is here:

A list of some banks refusing TARP money is here:

In short, I said that we should give the TARP money to the healthy banks so that they can buy up the assets, (branch offices, etc.), of the current "bad" banks such as Citigroup.  This way, we can downsize the "bad" banks, (so they don't have the ability to wreck so much havoc on our system in the future), and increase the size of the banks that have shown they know how to responsibly allocate money.  Then we could let what remains of the scoundrel banks fail, taking all the bad managers with them.   This might serve as a disincentive to any future scoundrels that want to play fast and loose with their money, (and ours), and hope fur a government bailout when the whole mess comes crashing down on their heads.

My two cents.


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