Breaking News: Bad Bank By Next Week?

In late breaking news Steve Liesman reveals that the Treasury is moving closer to creating a bad bank.

Liesman suggests the big advances involve how to value the assets and that the government is closing in on a mechanism for doing just that. The general plan involves the government buying so-called bad assets and then holding them to maturity.

Perhaps most important is that the idea of government taking preferred shares in banks is “going out the window.” He explains that the Obama administration does not want to be involved in the nationalization of banks.

And the administration appears to be moving quickly. According to Liesman the bad bank could hit as early as next week.

> Get all the details! Click here for Steve Liesman’s full report

For further insights Fast Money turns to Bill Seidman, the former Chairman of the FDIC who dealt with similar troubles during the S&L Crisis.

Seidman tells the traders that it’s tough to create a bad bank – because “no one can agree on price." In other words Seidman fears lawmakers will quibble over how to assign value. "And what do you do with the assets after you get them," he questions "If the government gets the assets do they just take the loss right there?”

Seidman does, however, support aggressive action. You might remember on January 16th, Seidman explained to the Fast Money audience that instead of creating bad banks he advocates bridge banks, something he did during his tenure. During that time the government seized banks that were insolvent and then, “as soon as possible we sold it back to the private sector.”

However, if the government follows a similar strategy it won’t go well for anyone holding common stock. “If you create a bridge bank shareholders lose everything.”

Strategy Session with the Fast Money Traders

Karen Finerman thinks the devil will be in the details. She’s very curious to learn how the government will price bad assets.

Pete Najarian likes that there’s time for the market to digest the plans. He thinks the news could provide some tailwinds for the banking sector.

Joe Terranova thinks it’s a good thing for the banks. And he reminds that when they did something similar in Sweden there was a pop in bank stocks – but only temporarily -- then they rolled back.

Tim Seymour reminds the panel that Citigroup has already announced plans to do something similar.

The Citigroup Plan

On January 16th Citigroup, told the market that it is, in fact, splitting into two operating units -- in what is known as a "good bank/bad bank" strategy.

Good Bank

Citigroup's core commercial, retail and investment banking worldwide -- the good bank -- will be reorganized as Citicorp and led by Citigroup Chief Executive Vikram Pandit.

Bad Bank

The other unit -- to be called Citi Holdings -- will include brokerage, retail asset management, consumer finance and a pool of risky assets. The bank is considering selling off Citi Holdings assets, or letting them mature.

The retail brokerage assets include its remaining stake in Smith Barney, and Nikko Cordial Securities, as well as Primerica Financial Services.

The bank said it was searching for someone to run Citi Holdings.

Critics of the bank, who argue it had become too big and complex to manage, have demanded a break-up for some time, although most envisioned Citigroup splitting into separately capitalized companies, instead of separate operating units consolidated onto the same balance sheet.

No word yet on whether the government plan to create a bad bank will have any impact on the plans currently on the drawing board at Citi.

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Trader disclosure: On Jan. 27th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AAPL), (BAC), (EEM), (F), (FXI), (VIP); Seymour Is Short (SNE); Seymour's Firm Owns (MBT), (TRC); Finerman's Firm Owns (DNA) & (DNA) Call Spread; Finerman's Firm Owns (MSFT), (UNH); Finerman's Firm Is Short (IYR), (IJR), (IWM), (MDY), (SPY), (ANF), (COF), (USO), (TBT); Terranova Works For (VRTS); Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO; Terranova Owns (XBI), (DIS), (AMGN), (FCX); Terranova Owns (IBM) & (IBM) Call Spread; Najarian Owns (EEM) Call Spread; Najarian Owns (BMY) CAll Spread; Najarian Owns (FCX) & (FCX) Short Calls; Najarian Owns (GE) Put Spread; Najarian Owns (MSFT) & (MSFT) Short Calls; Najarian Owns (MS) & (MS) Short Calls/Put Spread; Najarian Owns (YHOO) Call Spread