It looks increasingly likely that a big chunk of the TARP II funds will be used to set up what’s being called an “aggregator” — or “bad” — bank to buy up the bad assets that continue to hobble the balance sheets of private-sector banks. That’s what Hank Paulson and Sheila Bair suggested Friday. Obama officials-in-waiting seem to view the idea favorably.
A Bad Bank is surely better than the piecemeal, unpredictable, and opaque approach of TARP I. But in order that the Bad Bank not turn into another giant taxpayer-financed boondoggle for the benefit of shareholders, creditors, executives, traders, and directors of the banks that got us into this mess in the first place, any Bad Bank purchase of their toxic assets ought to carry conditions similar to the ones I suggested recently for dispensing TARP II funds.
Until the taxpayer-financed Bad Bank has recouped the costs of these purchases through selling the toxic assets in the open market, private-sector banks that benefit from this form of taxpayer relief must (1) refrain from issuing dividends, purchasing other companies, or paying off creditors; (2) compensate their executives, traders, or directors no more than 10 percent of what they received in 2007; (3) be reimbursed by their executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008 — compensation which was, after all, based on false premises and fraudulent assertions, and on balance sheets that hid the true extent of these banks’ risks and liabilities; and (4) commit at least 90 percent of their remaining capital to new bank loans.