The following post highlights these stocks: Goldman Sachs (GS), Berkshire Hathaway? (BRK.A), Wells Fargo (WFC), KeyCorp (KEY) and Comerica (CMA).

The central problem to the "bad bank" solution is highlighted in this morning's New York Times http://www.nytimes.com/2009/02/02/business/economy/02value.html?_r=1. Consider the following situation:

"The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S&P estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults.

"But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets. The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A."

The idea of the "bad bank" is that this new government backed entity will buy up all these bad assets from the financial system and hold them for a long time, possibly until maturity. This would then free the bank that currently holds it to make new loans and get the economy moving again.

This example shows that despite all the write-downs so far, there are many, many more to come. The current owner is clearly being delusional, perhaps almost to the point of morally (perhaps not legally) committing securities fraud in telling its investors its book value, if its book value is in part based on a valuation of $0.97 for this asset.

These are close to "zero-down" second mortgages we are talking about here. When a second mortgage goes bad, it really goes bad -- most of the time resulting in a total loss.