Bernanke looks to create 'bad banks'

Federal Reserve Chairman Ben Bernanke speaks to an audience at the London School of Economics.

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SCOTT JAGOW: Today, Fed Chairman Ben Bernanke gave a speech at the London School of Economics. He said Obama's stimulus plan will give a "significant boost" to the economy. But it won't be enough.

He wants the government to give banks -- brace yourself -- more money, and to help homeowners in trouble.

Bernanke also brought us back to the toxic assets burning a hole in bank balance sheets. For that problem, he thinks we should create "bad banks." You'd think we've had enough of those. But Ashley Milne-Tyte explains what Bernanke means.


ASHLEY MILNE-TYTE: When the government started pumping money into banks back in October, it left it up to the institutions to save themselves. By creating bad banks the government will be taking matters into its own hands.

Erik Benrud teaches finance at Drexel University.

ERIK BENRUD: Well, in this case, they would actually be creating entities that would be distinct from the original banks. And they would just simply be buying assets that they would put into a portfolio and presumably try to manage.

Financial firms could sell their dodgy securities to the government's bad banks. They'd be paid with a combination of shares in the bad banks and cash. And there's the risk for you and I. At least some of that cash would be taxpayer money.

Dennis Logue is an emeritus professor at Dartmouth's Tuck School of Business. He says some of the assets, like rotten credit card loans, aren't ever going to make money. But if all goes well, others will appreciate in value and could turn a profit for the government. Either way, he says, creating bad banks will ultimately help ordinary Americans.

DENNIS LOGUE: Meanwhile, you leave the regular bank intact and the role of the senior managers in the regular --- in the good bank -- is to go out and make loans and figure out which companies they deal with can be helped, which consumers they deal with that can be helped.

He says the government's bad banks could turn out to be not so bad after all. They could let financial institutions get back to their regular jobs and get the economy's wheels turning again.

In New York, I'm Ashley Milne-Tyte for Marketplace.

About the author

Ashley Milne-Tyte is the host of a podcast about women in the workplace called The Broad Experience.

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