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How Do You Balance A Bad Bank?

My colleague, Charlie Gasparino, reported earlier that the 'bad bank' plan is being stalled by pricing issues and that there is no weekend meeting set between the White House and CEOs.

This caused stocks to drop (they have since recovered a bit) but has revived debate on the floor and trading desks about the merits of the bad bank plan.

Most stock traders continue to support the concept. The thinking is fairly simple:

1) The goal is to get banks lending

2) It will be difficult to get lending going without removing toxic assets

3) On the pricing question, overpricing helps bank capital positions (refer to 1) and the mere act of the government buying assets increases their value.

There are critics of this idea. The basic thinking is:

1) Removing "toxic" assets may not necessarily increase lending

2) What has caused lending to contract is more complicated than just toxic assets. The problems include tightened lending standards, expense structure, and lower asset prices.

3) What to do? Some, including Oppenheimer's Meredith Whitney, advise banks to sell "crown jewel" assets to cover losses, but even here it may not be sufficient to attract private capital for some time.

Despite the concerns, most traders believe that the bad bank still has momentum, and that some of this talk is due to the fact that supporters need some kind of “cover” to pay up for the toxic assets, otherwise they will be attacked for paying too much.

A sense of panic, a sense of urgency, is what is needed to give more impetus.

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