U.S. again considering ‘toxic asset’ buy

U.S. economic officials say they are exploring creating a government-backed bad bank to take toxic assets off the books of private institutions.

The idea, advocated by Federal Deposit Insurance Corp. Chairman Sheila Bair, would revisit an early proposal floated but then dropped by U.S. Treasury Secretary Henry Paulson to buy billions of dollars of near-worthless mortgage-backed derivative securities from private banks, getting them off their books and luring private capital back into the banking system, The Wall Street Journal reported Saturday.

The willingness to revisit the proposal is coming after earlier bailouts haven’t been effective in persuading banks to start lending again as their share prices drop and losses mount not only from the real-estate investments that sparked the crisis, but also from delinquent car loans, credit-card debt and other consumer debt.

The Journal reported the toxic assets would be put into an aggregator bank, or bad bank, which would be capitalized by the second half of the $700 billion Troubled Asset Relief Program. Bair and the incoming Obama administration reportedly share a belief that the continued presence of the toxic assets on the banks’ books is the root cause of their inability to attract private investors.