(By Salman - iStockAnalyst Writer)President Barack Obama will convene his economic advisers on Wednesday to discuss a bank rescue package, which among others, is expected to include a plan to set up some sort of "bad bank" to repair the battered US banking system.

According to a plan, which is being reviewed by Obama's team, an "aggregator bank" will buy up bad loans and toxic assets from commercial bank's balance sheet in order to bolster confidence in the US banking system. Such a structure will also help in restoring the credit flow to pre- crisis levels. Most of the banks are still reluctant to lend as their balance sheet has been clogged by toxic assets and bad mortgages. Last week, in his speech in London School of Economics, Federal Reserve Chairman Ben Bernanke said, "the presence of these [toxic] assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new and private investment and new lending."

On Wednesday Treasury Secretary-designate Timothy Geithner confirmed that a "bad bank" was under consideration. During a confirmation hearing before the Senate Finance Committee, Geithner said "The good bank/bad bank-type solution has been present at the solution to most financial crises around the world, and it is very important that you look carefully that they are going to be as effective in this context as they have been in some past cases. He added further “It is possible that something there will be part of the solution going forward. But I don't want to today provide any more details about how best we can navigate this position.” He said that more details would be provided in next few weeks by President Obama himself when he unveils the bank rescue package.

Outgoing Treasury Secretary Henry Paulson earlier said “A lot of work has been done on an aggregator bank” and other ways of using the $700 billion financial-rescue fund “to let it go further when it comes to dealing with illiquid assets,” Treasury Secretary Henry Paulson. FDIC Chairman Sheila Bair agreed with the idea and said it might have “some merit.”

"The idea would be to set up a facility, it could be structured as a bank, to capitalize it with some portion of the TARP funds. Financial institutions that wanted to sell assets into the bank could also perhaps take part of their payment as an equity interest in the aggregator bank to provide an additional cushion. With a combination of private equity contributions plus tarp capital, I think you could leverage that into some fairly significant volume to purchase assets,” Bair said.

Richard Berner, chief economist at Morgan Stanley, is of the opinion that the “bad bank” strategy is the “least bad” of all available options.