Bad Banks to Buy Toxic Assets

The concept of a bad bank is that of an institution set up to buy “toxic assets” from banks and take them off their balance sheet, thus freeing up capital to be loaned out.  Toxic assets include mortgages and other assets, such as mortgage backed securities, that the bank is unable to sell because there are no willing buyers of them.  These generally include mortgages on properties in depreciating markets, sub-prime loans, home equity loans, and second loans from “piggy back” mortgages. 

The value of these mortgages has become a major issue.  They have value, but no one can really set a value on them because there is no market for them.  Banks are forced to write off the value of them and this has a major impact on their profitability.  Its one reason they are hoarding the TARP money.  I think the plan is to use the TARP cash to offset future write off’s of the value of the mortgage assets.