The Challenges of "Good Bank", "Bad Bank"

This is a fascinating article from Bloomberg this weekend. I suggest skipping to the section entitled, "Pricing Rotten Assets" through the end. There were many interesting points raised concerning the trade-offs regarding the pricing of all these bad loans.

Here is an excerpt:

“Creative pricing of toxic assets will only postpone the pain, extend the duration of the crisis, and present a bigger bill,” Northern Trust Securities Inc. economist Asha Bangalore said in a Jan. 23 research note.
If the government purchases the security at $85, the future losses and bill to the public purse would be less. The problem is, this price could cause banks to recognize as permanent their losses on other securities. Right now, they claim those losses are temporary.
Such a move would cripple banks’ regulatory capital ratios. Plenty of banks could still fail. In that case, banks and taxpayers both get hit.
Buying the security at the market price of $65 means banks and the financial system immediately face a day of reckoning. While bank balance sheets would get unclogged, many wouldn’t be able to, or willing to, face the losses.

Here is the entire article.