Good Bank - Bad Bank: A Clean Break and a Fresh Start


With global financial markets in varying states of disarray, financial institutions and government officials are seeking to stabilize the banking industry and restore the flow of credit. Financial institutions have been plagued by continuing losses from troubled assets on their balance sheets. The application of mark-to-market accounting results in the announcement of new write-downs each quarter. These write-down announcements sap investor confidence in financial institutions and lead to stock price declines and increased volatility. This chain of events continues to overshadow efforts to refocus attention on business prospects. Over the course of 2008, the scope of troubled assets broadened—from subprime mortgage-related assets, to auction rate securities, to derivatives, to commercial real estate related assets. Uncertainty regarding future losses and a market and asset value “bottom” inhibit private investment in financial institutions.....

.....Although federal assistance may be forthcoming, financial institutions may wish to consider independently

implementing the “good bank-bad bank” model, whereby the core financial institution, or good bank, separates off

troubled assets into a newly formed bad bank. Below, we discuss some of the structuring considerations for good

bank-bad bank models and compare and contrast these to asset guarantee models.

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