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Bad Bank, Good Plan?

The Government has launched some more crunch-busting policies this week, with Gordon Brown set to create the world’s first Bad Bank for toxic assets.

The latest plan will see the Treasury buy any toxic assets from the UK banks (namely sub-prime mortgages from here and the USA).

The debt would disappear from balance sheets, and the banks should be confident enough to start lending again. Hey-presto, problem solved.

In theory this sounds like a good plan. But in theory Hank Paulson’s own TARP plan made sense. We have seen how unsuccessful that turned out to be and it remains to be seen how Gordon’s latest cunning plan will work.

The Bad Bank of Brown (trademark pending) will spend billions on these non-performing assets, probably making the first ground breaking £37bn bailout look like small change.

If the cunning plan is enacted, and billions of toxic assets are bought, then much thought will have to be given to how they are managed and serviced.

This plan come in the wake of what already looks like a flawed idea of allowing borrowers a two-year mortgage payment holiday. The CML suggests lenders may be unable to fund and meet the new lending targets the Government wants to see due to the costs of the scheme.

Reaction from the lending industry has highlighted how ill thought out this plan was – so is the toxic buy up just another Laurel and Hardy routine from Brown and Darling?

One clue comes in the timing – Brown has announced the Bad Bank of Brown the day before Obama’s inauguration.

He undoubtedly basked in his own glory when the US heralded him as a genius for investing in the banks last time around – is the Bad Bank of Brown just another stunt to get the approval of the most powerful man in the world?

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