by Marc Lichtenfeld, Senior Analyst & Healthcare Specialist, Smart Profits Report

Dear Smart Profits Report Reader,

It wasn’t too long ago that a bad bank just meant one with long lines, rude tellers and high fees. But times are changing and the definition today is completely different.

These days, the Obama Administration is putting together a plan to set up a so-called “bad bank” to clean up the many toxic loans eating through the American financial system. Doing this would effectively remove those loans from individual financial institutions’ balance sheets… and put them in the hands of the U.S. government instead.

Similar to the Resolution Trust Company that bought and disposed of failed savings and loans companies during the 1980s crisis, what the Obama administration hopes to do is put banks back in the position where they feel comfortable lending again. And once consumers are able to acquire loans, they’ll start spending and the economy can start growing once again.

It sounds like a solid idea, and if it works, some financial stocks could rebound.

So what should investors do?

The answer is: not a darned thing.

When A Bad Bank is Just A Bad Bank, And A Crisis Is Just A Crisis

While it’s true that crisis often brings opportunity, that doesn’t mean that you should blindly throw money at every catastrophe you hear of. Good investors understand both the risks and rewards of any venture they go into. In fact, the best investors focus more on the risk part of the equation than the reward.

And this is one crisis that bears careful scrutiny. Because right now, it’s impossible to understand the full risk in investing in the financial sector.