My banking career is full of good banks and bad banks, but not in the traditional sense. When my bank in Dallas failed in July 1988 (just after my 30th birthday), the regulators sold the bank to NCNB, the former North Carolina National Bank. Actually, the government created a new entity known as NCNB Texas to hold the good assets which were sold to NCNB and also created a “bad bank” to house the assets that NCNB didn’t want. The intent was to insulate NCNB from further deterioration of the problem assets. The government funded operations at the bad bank to liquidate the assets in an orderly fashion to minimize the loss to the taxpayers. It was seen as a win-win at the time and eventually the bad bank became a privately owned company.
A bad bank structure brought me back to Louisiana when then Premier Bank wanted to spin off its bad assets to a new separately capitalized entity. Premier would have lived on as the good bank and “Florida Street National Bank” would have been the bad bank. Unfortunately or fortunately, the bad bank structure was not finalized, and we all stayed as one bank.
The common aspect of these situations is that the bad assets are removed from the good entity to protect it from further write-downs. It established “the bottom” for the banks, giving investors and regulators confidence in the future of the institutions.
Now, just over 20 years later, the government is looking at another good-bank-bad-bank scenario as a way to clean up the financial system. The idea being floated now is to use some of the TARP funds to capitalize a good bank owned by the government and issue bonds to fund the purchase of bad assets from banks needing to raise cash. This way the banks realize their losses, get their cash, and get on with rebuilding their balance sheets with new loans to creditworthy borrowers.
As with all good ideas, more questions are generated than answers. How much does the government pay for the assets? Will the banks be able to stand the write-downs? How are taxpayers protected? All good questions requiring thoughtful answers without the benefit of a lot of time.
Let’s hope the bad bank will be good for the system.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at firstname.lastname@example.org.)