The Moral Hazard Of A 'Bad Bank'


As we’ve been telling you, the government is about to create a ‘bad bank’ to soak up toxic assets. But the person getting soaked, may be you!

When word of a ‘bad bank’ plan first hit the Street earlier in the week, it was greeted with great enthusiasm. Investors bid the financials much higher on a belief that the initiative would quickly restore health to the financial system.

In fact, financial sector's health has been the biggest hurdle for the market, fueling unease about stock performance in January, which is traditionally seen as a guide to the year's prospects.

It seemed investors felt a great weight had been lifted. And not just off the financials but off the entire market.

That’s right, the ‘bad bank’ fueled euphoria well beyond financials – all the major indexes nearly erased year to date losses. Investors speculated the ‘bad bank’ would drive both consumer and business spending, and motivate investors.

But the bloom is coming off the rose and now skepticism about the plan is starting to grow. According to Paul Miller, FBR Capital Markets head of financial services the plan is “just a lot of noise.”

Billionaire investor George Soros says the plan is little more than a Band-Aid.

And Barry Ritholtz, CEO and director of research at Fusion IQ calls the plan “an obscene taxpayer giveaway.” He’s furious that the government would consider purging toxic assets from bank balance sheets without punishing the management.

“It will encourage more of the same,” he says.

Instead “nationalize the banks, Ritholtz proclaims. “Wipe out the debt. Wipe out the shareholders. Get rid of management, Then spinout the clean bank that’s well capitalized with no debt.”

Ritholtz has quite a controversial plan and it really gets the Fast Money traders going. Want to see what we mean. Watch the video above!

And don't miss Barry's Ritholtz’ new book "Bailout Nation: How Easy Money Corrupted Wall Street & Shook The World Economy" out everywhere February 18th.

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