So here’s my guess as to endgame for the ‘bad bank’ plan:
1. Banks, backed by the federal reserve, will buy some of the crummier so-called toxic assets – CDO’s backed by (worthless) mortgages, (wildly overinflated) lease agreements, (defaulted) credit card debt, and other juicy bits.
2. They’ll pair these assets with something looking a lot more like gold – say, treasuries – and then they’ll put them into a trust corporation.
3. The trust will then be securitized and sold as ‘government-backed high-yield assets’ or somesuch. It’ll look like a combination of gold and government-insured, high-yield assets.
4. Investors (including pension funds, state agencies, as well as more interesting investment companies), tired of losing their pants on the stock market and short on private equity deals, will take a big fat bite at this newly shiny apple.
5. Everyone declares victory and hopes that the ‘real’ economy picks up.
Oh, until the assets are suddenly revealed to be really worthless, and another giant wheelbarrow of public funds will be forced to back them, insurance-style.
Comments
So this is what it would have felt like in 1998, if I had understood what was going on?
Not exactly – the alternative future where I am wrong (and where it looks more like 1998) is where prices bounce back after wacky, panic-like activity. So that many of, say, LTCM’s positions actually weren’t as crappy as they were when they were forced to come to terms with them.
I don’t know what it means that the good scenario is 1998. The bad scenario that I would suggest is more likely is that banks try to get cute and re-bury their trash.