The Big Bad Asset Bank

Robert Waldmann

Is proposing toxic sludge inc with a cooler name, while commenting on Krugman.

Krugman writes

Bad bank bafflement

The idea of setting up a “bad bank” or “aggregator bank” to take over the financial system’s troubled assets seems to be gaining steam. So let me go on record as saying that I don’t understand the proposal.

I comment.

I am a fan of the big bad asset bank and I think it can be managed without any risk of giving huge amounts away, if assets are bought with shares in the big bad asset bank (dividends from payments on the underlying assets). I thnk that all mortgage based instruments should be requisitioned for the bank (shares distributed proportional to market prices as of the day before anyone takes this idea seriously)

Now I guess that supporters of the BBAB are not interested in my proposal, since I guess that a huge giveaway is their aim. However, I don’t think that it would be a pointless exercise. If all the suspect assets are put in one entity, you can buy its shares without worrying about adverse selection. If the problem with the funny assets markets is low trading volume making the market price far below the average hold to maturity value, because of adverse selection, then this is the solution.

(Also the Big Bad Asset Bank would be able to reassemble whole mortgages and renegotiate with debtors.)

I’d say the general argument is very simple. If the problem is adverse selection, the solution is mandatory pooling. There is no need for public money.


Josh Marshall and Duncan Black agree with Krugman. I do to, in a way. I agree that all existing Big Bad Asset Bank proposals are based on a desire to trick the public into giving banks money for nothing. My proposal is a way to separate any efficiency gains from pooling from that transfer. I’m sure that no one will be interested in my proposal, since the point of the proposals is to trick the public out of our money. It is a way of trying to call BBAB proponents on their hypocrisy.