Grouper

Obama's 'Bad Bank' Plan Is a Turning Point

Bad Bank, Bad Idea
I am a modeler, a former banker, and a real estate developer. Modeling is not the issue. Everyone forgot that the fundamentals of the underlying asset are what matters, not the models, risk speads, average default rates, seniority tranche, etc. In the big runnup, deals were done by expert modelers, with no understanding of the underlying asset.

We already have a bad bank. It is called the FDIC. In the 80s, we had a bad bank called the FSLIC. It went bust, so we made the RTC. If the FDIC goes bust, we can make the FDIC Bad Bank. Fundamentally, failed decisons need to result in failure of the institution, not a bailout of the institution though an attempt at removing bad assets via a model created by another expert modeler with no understanding of the underlying asset.

When the FDIC takes over, you wipe out the stockholders, the bondhoders, the preferred, the TARP investment, Warren Buffett (who apparently has lost his touch), the Saudis, Singapore, and everyone else. At the end of the day, the taxpayer still pays, so lets wipe the slate clean, let people who understand underlying assets make the bids, and move on. Otherwise, we will end up like Japan, unable to get out of our own way for the next ten years.