A Cure for Banks' Hangover: Debt Insurance?

(MoneyWatch)  While the Obama administration is moving full-tilt toward a new $825 billion rescue plan, a post mortem on the last one shows that over half of it was flushed away without accomplishing anything - other than decorating John Thain's office at Merrill Lynch. Lending didn't increase, and banks remain as nervous about their bad debts as a serial credit card abuser.

Gregory Case, CEO of Aon Corp., the world's largest insurance broker, suggests another approach. Why not let the federal government provide the banks with insurance against their potentially toxic assets such as subprime loans and risky mortgages?

As Case points out, insurance spreads risk over time, thus preventing all these troubled assets from overloading the market at once and creating a bigger crisis. With panic subsiding, many of these loans might see a partial recovery.

The model for this type of insurance already exists in the Nuclear Industries Indemnity Act of 1957, which was designed to protect big electric companies from a China Syndrome-type meltdown that could have cost billions.

In the midst of a financial meltdown, it might be time to consider a similar solution.