'Bad bank' plan on hold?

The Obama folks are running into snags, CNBC is reporting., which means that the idea of taking all the toxic assets out of the regular banks and putting them into a government-operated "bad bank" might not happen. This is not good news.

Like an earlier auction-based plan conceived by Treasury Secretary Henry Paulson last September, its viability has been undermined by questions about how the assets would be valued. Though all agree that remains a critical hurtle, it is not the only complicating factor. There’s a growing opinion that a one-size-fits all approach is not appropriate and that other measures will need to be included.

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Some are pushing for more use of the combination of guarantees and insurance used by the Fed and the FDIC to “ring fence” bad assets within the institution, without technically removing them from the balance sheet. There’s also a potential bone of contention about what kind of compensation the federal government should get for its assistance. Thus far, it’s been preferred stock and warrants without voting rights. Now there’s growing advocacy of a common-stock approach. The issue is more complicated than it appears because it involves the government’s return (or loss) on investment as well as the issue of moral hazard issue, which could figure into how much support the plan has in Congress.

Meanwhile, analysts say the better-than-expected GDP number would have been worse were it not for the government counting the inventory buildup as growth. As it is, the 3.8 percent decline in the annual rate of growth is the worst showing in a quarter century. Here's an eye-popping number: Employers reduced their corporate investments in computers, office equipment, machinery and other capital goods by an annualized 19.1 percent in the fourth quarter. Here's the NYT story.