State-led fixes offer their own hazards

CREATING bad banks may be the only solution to the financial crisis in generations, but the quid pro quo of state-led fixes may be more insular lending and a deglobalisation of finance.

After almost 100 hours of debate, discussion and dinners at this year’s Davos World Economic Forum, many politicians, bankers and economists reckon that the unco-ordinated scramble by states to support national banking systems will now gravitate around ‘good bank/bad bank’ solutions.
The global economy, which the International Monetary Fund (IMF) expects to slow to near zero this year, cannot recover until the financial system is stabilised, according to IMF first deputy John Lipsky.
And this is unlikely to happen, many say, until the bad mortgage and property debts devastating their balance sheets and discouraging them from new lending are removed by governments and placed in so-called bad banks.
Remove the cancer so the rest of the body can live on, so the theory goes.
In effect it allows the remaining good bank to raise new private capital and resume lending to businesses and households without the need for outright nationalisation.
Following Sweden’s lead from its banking crisis of the 1990s, Switzerland adopted this approach last year in an attempt to stabilise its biggest bank, UBS.
The US, under the administration of President Barack Obama, is now widely expected to adopt some form of bad bank approach in the coming weeks, assuming it can solve the thorny issue of how to price the toxic assets.
‘There is no cookie-cutter approach that should be applied absolutely through every situation,’ said Mark Carney, the governor of the Bank of Canada.
Financier George Soros said he favoured a variation he called a good bank – keeping existing bank capital together, with the bad assets in a bad bank and creating a new bank with the good assets.
Alan Blinder, the former vice-chairman of the Federal Reserve in the mid 1990s, said there were many different types of bad bank model, but it seemed almost certain new US treasury secretary Tim Geithner would choose one version of it.
– Nampa-Reuters