'Bad Bank' Regains Favor As Solution for Toxic Debt

Critics say it remains a bad idea, no matter what the name.

“The central reason TARP didn't get off the ground is pricing,” says independent banking analyst Bert Ely, who also says comparisons to the savings-and-loan model are inappropriate.

“It becomes politically controversial. If the price is seen as too high then it’s a taxpayer give away. On the other hand, if prices are seen as too low, banks won’t sell, saying they can't take a hit.”

Ely says the government has already executed a preferable alternative in providing financial aid to major banks such as Citigroup and Bank of America.

Most recently the Treasury and FDIC agreed to “provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans” at Bank of America.

Terms of the agreement provide multi-year guarantees with the government prepared to cover losses and essentially separates these assets from the rest of those at the bank but keeps them on the books. 

“It’s a very good template,” says Ely, usable on a bank-by-bank basis, and doesn’t involve the large bureaucracy that would come with the bad bank entity.

Bair has acknowledged the merits of insurance/guarantee concept, but her comments suggest she favors the off-the-books model, as do a majority of those interviewed for this story.

Banks clearly do, and in the current environment analysts say they we be more willing to take less money on the dollar for their bad assets than last fall, not that they’ll be giving anything away.

At the same time, Congress—which felt burned by Paulson’s change in strategy—will want assurances, if not guarantees, that the government will get a better deal than in the past, and thus avoid more complaints from constituents. The new President will also have to sell the idea to taxpayers.

"He [Obama] will have to say this is going to be aggravating, expensive and painful but we have to do it," says Cooley of NYU. "Without it the whole stimulus plan won't amount to much unless the financial markets start functioning again."

In that context, virtually all agree swift quick action is needed, saying a plan needs to be unveiled in the next couple weeks, and could happen as soon as the end of next week.

“Time is of the essence,” says Scott Talbott, senior VP at the Financial Services Roundtable “The market needs quick and decisive action.”

© 2012 CNBC.com

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