The Big Bad Bank Isn't Blowing the House Down

OK, so do you remember that there was going to be a trillion-dollar bank bailout that would have private-equity funds, with government backing, take all those bad real estate assets off the banks' hands. Well, that was a long time ago—like, two months. Now the first part of the big asset purchase plan has fizzled to nothingness. And the whole project seems to be shrinking by the minute. What the heck happened?

I wish I could say that I called this early on. I have looked through old blog entries, convinced that I must have, but the truth is that I did not. What I did say is that banks weren't anywhere nearly as eager to get rid of their "bad" assets as folks thought, and if the government did make sure that banks got more for these dead assets than they were worth, then it really wouldn't be much of a bailout. But I thought some kind of asset swap was a done deal, which meant that the government would ultimately come up with a plan that overpaid for bad assets to help prop up the banks.

The first idea here—that despite all the talk of "zombie banks," cleaning up their balance sheets wasn't all that big a priority for bankers—was right. Banks think that the value of cleaning up their balance sheets is a lot less than that of kicking the can down the road and seeing if all those bad debts might be worth something. The second part, though, that the government was so committed to putting all that debt in the hands of private-equity players or some Resolution Trust-style entity that it would find a way to make the math work, was not. Nobody's giving the banks much of a bonus to sell. Ergo, that trillion-dollar asset swap ain't happening.

Evan Newmark of the Wall Street Journal says that's because we don't need it anymore and is ready to hail Hank Paulson as a "national hero" who saved the economy. Newmark is jumping the gun on this—let's see just what happens with all that distressed debt over the next few quarters (and maybe years)—but he does have a point. If Paulson's plan wasn't enough, and taking over all that bad debt and putting it in a Big Bad Bank was really so pressing, then shouldn't we be dealing with a new wave of bank failures and an economy accelerating toward doom right about now?

This post has been reprinted from Mark Gimein's blog, Chumpchanger.