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The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.
The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.
Obama and his economic advisers are expected to lay out their policy plan as early as next week. One idea that seems to be gaining traction is setting up an entity to buy troubled assets and hold them until they mature or resell them.
The hope is that once banks get rid of those bad loans, they can attract private investors, get back to the business of lending, and help revive the economy.
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