Bad Bank Bonanza Buried

I'm not a government economist, but I could have told you six months ago "bad bank" was a busted idea. Any price that the government pays to buy toxic crap from banks is either going to A) ensure the banks go under because the price is too low or B) a complete waste of taxpayer money because these toxic assets will continue to decrease in value until they are worthless, because nobody's going to buy them back from the government because...they are worthless.

The real problem is not that the government isn't smart enough to figure out what the magic price is where A doesn't happen and B doesn't happen. It's the simple friggin' fact that this magic price does not exist.

There are plenty of prices where B will happen, i.e. anything near or above the market value of fecal matter sandwiches and urine flavored lemonade. There are plenty of prices where A will happen, i.e. any price that a market investor would say "I'm not paying that much for your fecal matter feast here, bucko."

In fact, I'll argue that any price good enough to prevent A from happening is automatically going to cause B to happen. Ergo, there's no solution to the bad bank problem: Any price the government pays banks for toxic crap that doesn't cause them to go bankrupt is automatically going to be a massive loss to the taxpayer due to the definition of the problem itself. Nobody is willing to buy these things in the open market. If nobody's willing to buy them, then these toxic derivatives are by definition worthless.

Now, I came up with this in about ten minutes. Luckily, the Obama guys have much smarter dudes who came to the same conclusion at some point in the last couple days.

The Obama administration’s wide-ranging plan to stabilize the financial system no longer includes creating a "bad bank" but will still contain measures to buy up toxic assets from financial institutions, according to a source familiar with the plan.

In addition, funding for the bank-rescue plan is unlikely to exceed the $350 billion currently available under the TARP, this source said.

“They have to have enough to calm the markets, but there might not be as many details as previously thought,” he said.

A Treasury Department source said the plan was essentially complete with only minor “tweaks” being applied. The plan will be presented to members of Congress this evening, according to sources.

Bad bank wasn't viable six months ago, it's not viable now, and it's far too late for it to ever be viable. What replaces it? I expect some nice, happy-sounding legerdemain involving Fannie and Freddie, scrapping mark-to-market accounting, and maybe a mortgage czar or something craptastic like that.

Not any real solution, but the banks will love it.

Right up until they collapse.