Separating the Good Debt From the Toxic

Separate the good debt from the toxic.

Why didn't we just realize this before? All it apparently takes to solve our current economic malaise is just to separate the "good" parts of a company from the "bad," the stuff we like from that which we don't. Like a good farmer, all we have to do is separate the wheat from the chaff.

Bank of America (BAC)  looking weak? Separate its "good" assets from the bad "toxic" debt! American Internatonal Group (AIG) invest in risky mortgages? Separate the "good" investments from the "bad."General Motors (GM) on the brink of bankruptcy? Yep! Separate the "good" car companies parts from the "bad!"

This is the thinking that is now in vogue in Washington. President Obama and Treasury Secretary Tim Geithner have decided that all we gotta do is just get rid of the "bad stuff" from our companies and we can return our economy to health. Of course, like waste from a nuclear reactor, no one really wants to talk about what we do with all this toxic stuff. Where are we going to bury it?

Of course we hear that we'll just package it up and sell it off to investors, or whatever doesn't find any takers, we'll "wind it down." Oh, is that all? Gee, why didn't Goldman Sachs (GS), Citigroup (C), or Ford (F), for that matter, think of it? If it's really all so simple as just removing a decade (or more) of bad decisions from the balance sheet -- while still leaving those who made the bad decisions in the first place in their positions -- don't you think the companies would have done that themselves?

We wouldn't have had to bailout out AIG three times or more; Citibank wouldn't have been suckling at the taxpayer's teat, and the President wouldn't have had to fire Rick Wagoner and dirty up his hands. 

This seemingly "simple" solution will do only one thing: saddle taxpayers with even more debt to pay off while exposing us to runaway losses. If private enterprise was unable to find a willing buyer, what makes the government think it will do any better? The only way that can happen is if they remove the risk associated with it and that can only happen if the taxpayer shoulders more of the burden. 

This is just a wildfire ready to burn, but only waiting for the right tinder to set it off. It will be our children and grandchildren who will be stuck sweeping up the ashes and paying the bill.

Disclosure: I have no financial interest in any of the companies listed in this article.