Bad banks bring fine results

(28 Jan) After mincing along for three days, the markets finally got its legs under it on Wednesday and enjoyed a nice run up. Had a nice coincidence of events to provide the catalyst.

First, earnings continue to be underwhelming to a great extent. However, many are being reported not quite as horrible as expected and with some additional top line numbers coming in as the icing on those corporate cakes, that's been helping results.

Next, the Federal reserve Bank says they'll be keeping rates low for some time. They'll also be buying Treasuries and mortgage-backed securities as a way to help free up credit.

Finally, the news that swept all the major banks higher and, with them, most everything else, was the growing perception that a "bad bank" is going to be created.

What's so good about a "bad" bank?

Way back in the dimly remembered market past - which, technically, is anything before today - in the mid 1980s, we had another financial tussle that resulted in the crashing of many savings and loan associations. At the time, the bad assets that had been held by these entities were packaged up by a governmental agency called the Resolution Trust Corporation, RTC. The RTC allowed the banks which had taken over the failed S&Ls to then operate without any of the garbage that was formerly living within the dead S&L. The Feds, ultimately, made money on the deal, depositors were saved and we all lived happily ever after - or until Lehman cratered.

So, the latest bailout gang is rumored to be proposing a similar legal toxic waste dump. Hence, the term, "bad bank." Here, presuming we can get rid of the mark-to-market rules that have had a lot to do with the problem in the first place, the (presumably, good) banks can put these "underperforming assets." This will clean up their balance sheets and put them in a position to be lenders again. Hopefully, they remember how.

This would be a great way to get that 800 pound gorilla off the economy's neck so we can get some more traction in the markets and improve some attitudes.

Don't be surprised if we get some profit-taking in here. Four days of up is almost more than those traders can take without selling something. There are always down days within the ups - it wouldn't indicate we're sliding back to the bad ways.

Even if they do take some profits, the markets appear to be ready to continue their moves back to more appropriate levels...