Geithner Should Focus On A "Good Bank" Not "Bad Bank"

Treasury Secretary Tim Geithner released his much-anticipated Bank Bailout II. The market hated it - with the Dow crashing down nearly 400 points.

The main thing investors didn't like was the Public-Private Investment Fund, or "bad bank". As envisioned, this part of the plan would use government capital to leverage private capital to buy the legacy loans that have plagued the balance sheets of the nation's banks. The announcement did not answers questions like "how the assets will be priced" and "how they will be taken off the banks' books without further impeding bank capital levels".

It is our view that the Treasury should take the oppositve approach. Instead of funding a "bad bank", they should fund a "good bank."

Many private companies would likely jump at the opportunity to lever the Fed's balance sheet to provide lending to people and businesses who need it, not just buying the old, rotting-corpse loans the banks own.

If the Treasury would approach it this way, it would create a whole new segment of lending for the economy. This would effectivley help stabilize asset prices, which is the root of the problem for the banks. If asset prices stabilize or appreciate, the banks may not even need to sell their loans to function and do their job.

The government seems hell-bent on saving the current banks like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), JP Morgan (NYSE: JPM) and others. These are the same banks that slapped the govenment in the face - taking billions and billions in cash in the first bailout package but holding on to it and not lending it out.

I'm not advocating that these current banks should be crushed, but so much empaisis should not be placed on saving them. The good ones will be safe if asset prices stabilize and rise. This should be the focus. If the Treasury looks at a "good bank" instead of a "bad bank" we could all be in a lot better position.

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