Better than BARF

The banksters are ramping up the talk of a "bad bank" to take the losing bets of the financial system and give them to the US taxpayer. Naturally, the financial system will keep the winning bets. The Bad Asset Repository Fund is a bad idea for a lot of reasons -- the best two of which are that the US taxpayer can't afford the 3-4 trillion dollar tab and no one is going to lend it to us anyway. Forbes has more of the story on BARF.

However, something must be done. The best suggestion I have seen so far is from Karl Derringer at Market Ticker and it runs basically like this (full post):

1. Bring the Credit Default Swap market above-board:
   
• Force contracts to be backed by capital -- if there's no capital, void the contract.
• Require all new CDS contracts to be written against a public exchange.
• Consider prohibition of 'naked' shorting via CDSes. (I would.)
2. Suspend trading of bank stocks for two weeks; send in the bank regulators and mark everything to market. Banks that are insolvent according to Tier Capital rules get "crammed down" and their new owners (current bondholders) decide if current management stays or goes.
3. If a crammed down bank still cannot survive, the FDIC takes over the bank and handles it like the Resolution Trust Corporation of old. This is actually a self-funding bad bank model that has no/minimal asset valuation problems. The taxpayer won't be financing a give-away to the banksters.
4. Offer the second half of the TARP to healthy banks that want it or to spin up new banks. Personally, I wouldn't mind seeing the creation of a few more P2P LendingClub-like organizations.
5. Investigate the fraud and prosecute it vigorously (go Andrew Cuomo!). The financial system is rife with it:
   
• the banks, commercial and "investment"
  
• the rating agencies
• the Fed
• the government: Treasury, FDIC, SEC, OTS, OCC, Congress -- all of them

Derringer's plan:

1. The total cost of this approach to the taxpayer is practically nothing -- stimulus bill rounding error not counting #4, and $350B with it included
   
2. Brings transparency back to the financial markets (mark-to-market), no more 'over-the-counter' CDS contracts
   
3. Punishes management and stockholders of the banks that made bad loans and decisions; gives what is left of the bad banks to its creditors -- exactly what happens to other bankrupt businesses
4. Rewards well-managed banks for their prudence by clearing the way for them to take the bad banks' customers
5. Serves up justice for the people responsible for this mess