Now you see it.
The Treasury Department appears to be backing away from the idea of creating a "bad bank" that would take on the (other) banks' toxic assets.
So how do you save the banks? Senator Charles Schumer says government insurance for the toxic assets is becoming "a favorite choice." In other words, the banks pay the government a bit of money, and if those toxic assets lose value, the government covers some of the losses.
One problem with the bad bank idea was that government would have to figure out what to pay for those toxic assets. But the insurance idea has the same difficulty. Sure you don't have to price the assets, instead you get the equivalent problem of pricing the insurance.
The folks at Baseline Scenario write:
The only "benefits" of an insurance arrangement are: (a) it's much less obvious that the government is giving bank shareholders a gift; and (b) the way Citi and B of A were structured, it wouldn't require a lot of cash from Treasury (and hence from Congress), because most of the guarantee was provided by the Fed.
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