Here Comes The BARF
February 1st, 2009Via: Forbes:
Why creating a Bad Asset Repository Fund for Wall Street’s toxic assets could make banking even sicker.
First there was TARP. Get ready for BARF.
They haven’t named it that yet, but calling a federal “bad bank” to soak up toxic assets the Bad Asset Repository Fund would be truth in advertising at least. Despite Washington’s renewed enthusiasm for the idea, there is a strong case to be made against it.
The problem boils down to bank profitability, which is depleted, and the industry’s ability and willingness to lend. Offloading the worst assets into an aggregator fund would still leave banks with loan books under pressure from rising defaults. Banks would still be forced to build reserves at a time when their earnings power is reduced, and that earnings power would only shrink more with a smaller asset base.
And there is no way a “bad bank” will induce banks to lend. “Lending standards have tightened dramatically and there is an unavoidable restructuring of risk taking place,” says Meredith Whitney, the Oppenheimer & Co. analyst who was among the first to point out the looming bank crisis. “Such causes money to come out of the system and lending to contract, with or without this ‘bad bank’ structure.”
But facing a mounting banking crisis, federal regulators and the new Obama administration have returned to the original idea of the Troubled Asset Relief Program as one way to solve the credit crisis. New Treasury Secretary Timothy Geithner said this week that a new plan is expected to be announced soon.
Somebody should lay down a TARP to catch all the BARF.