The "Bad" Bank Shifts to the "Aggregator" Bank

Federal financial relief appears to be coming back full circle now that Treasury Secretary Timothy Geithner seems ready to propose the creation of a “bad bank.” Better make that an “aggregator bank.”

The latest twist is that Geithner hopes to get around the complex problem of valuing bad assets that would be bought up by making the “aggregator” bank a kind of public-private entity.

The theory seems to be that by having private participation, a check will be put in place to make sure that taxpayers don’t get stuck with a lot of illiquid, toxic assets that no one wants and would likely be picked up at inflated prices.

Having a private banking component would bring some market discipline to choosing what assets to buy. In theory, that sounds like a good idea. The new bank wouldn’t underpay because banks holding the toxic assets wouldn’t want to part with them too cheaply. Meanwhile, the government won’t be overpaying because a more realistic price would be set before its purchase.

The idea of buying up bad assets isn’t new. The same principle was used by the Resolution Trust Corp. some years back. When he crammed an emergency bailout through last fall, former Treasury Secretary Henry Paulson initially wanted bailout funds to be used to mop up bad assets.

But Paulson screwed up by constantly changing the focus of the bailout to injecting capital into the system and propping up failing banks by buying preferred shares of their stock. Amid the mayhem, Paulson apparently didn’t pay much attention to pricing. Congressional investigators claim that Treasury overpaid by as much as $78 billion for bailout assets. Treasury had invested $254 billion for preferred stock that actually had a market value of $176 billion.

If true, that’s a really big miscalculation and should be a telling lesson for Geithner.

Further details of Geithner’s latest riff on Paulson’s original idea aren’t known. President Barack Obama is delaying the announcement of the bailout revamping until Tuesday as he tries to beat back Republican opposition to his $800 billion plus stimulus package.

The rest of the revamp is said to involve more capital injections, credit to get credit cards, student loans and autos moving again and giving the Federal Deposit Insurance Corp. jurisdiction over large, troubled financial firms.

The last idea sounds good since FDIC Chairwoman Sheila Bair is the just about the only heroine or hero to emerge from this mess so far. And one more thing. The Obama Administration is thinking about renaming TARP (the “Troubled Assets Relief Program”) something else. Too bad. I kinda liked “TARP.”