Next At Bat, the "Bad Bank"

(MoneyWatch)  Like a torpedo surging forward unseen at high speed, the workings of the "Bad Bank" are about to surface.

Treasury Secretary Timothy Geithner is said to be ready to finally unveil the idea of an entity that would either provide extra insurance for lenders suffering really bad losses or ways to buy toxic assets or both.

It's taken a long time to reach this point. Insome ways it's like a crooked circle. First came the Bush Administration's Troubled Assets Relief Program (TARP), formed last September with the idea of buying up bad assets. But banks badly needed capital and, as originally planned, TARP would have bought asets at inflated prices, in essence ripping taxpayers off.

So came the next level -- pumping capital into banks such as Citigroup. The problem with that, according to blogger Hugo Dixon, is that providing capital in exchange for non-voting preferred shares of stock could not go far enough given the dire straits of banks in general.

So, the U.S., the United Kingdom and Germany seem to be ready to try something else, namely created banks that insurance policy providers. Geithner may add on a TARP-like feature to buy up bad debt and further rid balance sheets of bad assets. In addition, there could be plans to moderate rules on how much capital banks should keep on hand. The problem with the go-go days not long ago was that banks were able to keep lower capital reserves in boom times. The opposite approach is what's needed.

A nasty problem still comes up and it never seems to go away. If you buy up bad assets or provide insurance, how do you value anything? And how do you make sure that the taxpayers don't get fleeced?

The latter is a legimitate concern because if a bailout works, the guys who got you in trouble, namely the bankers, benefit. If the bailout doesn't work, the taxpayers get stuck with the bill.

The whole situation reminds me of a rather confused movie from the early 1990s. Called "Bad Lieutenant," it shared the same first word as the "Bad Bank." In it, detective Harvey Keitel goes through various and painful misadventures and somehow ends up redeemed.

It looks like we will be going through various and painful misadventures. We'll be lucky to be redeemed.