Why a Big, Bad Bank Might Be Good
Financial Crisis: Talk is growing that we'll need to commit another huge pile of money to help rescue our troubled banking system. If so, and before we commit still more cash, we should look at what's worked in the past.
"The banking industry has plunged to its lowest point since the Great Depression."
"This is the most severe economic dislocation we've had since the 1930s. Few are immune."
"There is no question but this is the worst economic time since the Great Depression."
These are just a few of the comments we culled about the fiscal disaster from our nation's newspapers. Except these quotes didn't come from 2008 or 2009. They came from 1992.
For some, it may be hard to remember. But we had a banking crisis back in the late '80s and early '90s that was in most respects far worse than the one today. It led to the collapse, dissolution or bankruptcy of hundreds of banks and savings and loans.
The concern was the same as now — that ailing S&Ls and commercial banks would go under in such numbers that they would drag the whole economy with them.
But we didn't nationalize the banks. Nor did we just dump money into them. Instead, in 1989, the government created something called the Resolution Trust Corp. Over six years, it bought up bad bank assets, held onto them, repackaged them for sale and finally got rid of them. Weak and tottering S&Ls were closed.
All told, from 1989 to 1995, the RTC folded up 747 S&Ls and sold off a portfolio of assets having a current value of $660 billion.
And doggone if it didn't work. Bad banks closed, and those that survived were healthier for it. Bad assets came off their books, and they went back to doing what they were supposed to do: lending.
Total cost to the public: $231 billion in today's dollars.
Now we're pondering how to spend the second tranche of the $700 billion Troubled Asset Relief Program, or TARP, that was passed last fall. We've spent hundreds of billions to bolster the balance sheets of some 250 U.S. banks.
How that money has been spent is not clear, however, and the banks seem as feeble today as they were in September.
In our opinion, the experience with the RTC is instructive. Sure, we'd rather the government stay out of the private sector. But if it's to be involved, as current politics seem to dictate, it's best to make sure that what it does won't destroy our economy. And it might even help.
President Obama is said to be mulling a plan to create one big "aggregator bank," dubbed the Bad Bank. It would essentially do the same thing as the RTC — buy bad bank assets to get them off the banks' books and, let's hope, get them to lend again.
During this crisis, banks have already posted losses of $500 billion, and the nonpartisan head of the Congressional Budget Office said Tuesday he expects at least $450 billion more in red ink.
To "inject capital" into the banks, as some suggest, won't be enough.
It hasn't seemed to work too well so far. This may be a case where a Bad Bank is good.