Bad bank, bad idea?

A report on CNBC that the idea of a “bad bank” run by the government to aggregate toxic assets away from the banks’ balance sheets is losing favor has sent the stock market lower. The reason banks and the government cannot come to an aggrement is because no one can figure out how to price this junk.

That fact raises a fundamental question. Clearly, banks must still be carrying assets on their books at elevated prices if they are unwilling to sell to the government to clear their books. This is the dirty little secret everyone knows but few want to discuss: banks around the world are bust, but we’re just not willing to admit it.

The S&P has slipped back toward session lows, down about 2% on the day. EUR/USD has fallen back to 1.2805 and EUR/JPY is below 115.00.