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Bank Stocks Leading Rally as 'Bad Bank' Bailout Gains Steam

The financial sector is leading today's Wall Street rally so far as the idea of creating a "bad bank" gains steam in Washington.

Under a "bad bank" scenario, the federal government would buy toxic assets of financial institutions at deeply discounted rates, cleaning up the balance sheets of the banks and quarantining all the toxic assets -- such as valueless mortgage-backed securities -- in one big federal government de facto bank.

This is an extension of the original TARP plan -- the Troubled Asset part of it -- but Treasury Secretary Hank Paulson abandoned this idea two weeks into it and began investing taxpayer money directly into the banks, propping them up but leaving the toxic assets on the books.

New Treasury Secretary Tim Geithner talked about the creation of a bad bank in his recent confirmation hearing.

On the one hand, the bad-bank scenario would create one massive, nationalized uber-bank that has the worst balance sheet in the world. That's bad.

On the other hand, the federal government -- read, taxpayers -- would be buying these toxic assets at next to nothing. Presumably, when the economy stabilizes, these assets will regain some of their value, so when the feds sell them back into the private sector, taxpayers will realize a profit. That's good.

Wall Street is banking, so to speak, that Washington will create this bad bank, or aggregator bank, as it's being called. (Possible names: First Worst Bank In the World, Toxic Trust, Crazy Tim's Banco de Loco.)

In response, shares of financials are soaring this morning: Goldman Sachs is up 8 percent, American Express is up 5 percent, Bank of America is up 17 percent; even troubled Citigroup is up 20 percent.

-- Frank Ahrens
The Ticker is Twittering!

By Frank Ahrens  |  January 28, 2009; 10:45 AM ET
Categories:  The Ticker  | Tags: American Express, Bank of America, Citi, Geither, Goldman Sachs, Paulson, bad bank  
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