Sen. Charles Schumer, D-N.Y., said Tuesday that he opposes a "bad bank" model being floated as a way to deal with toxic assets on bank books and instead pushed for a government guarantee of such assets.
In an interview on CNBC, Sen. Schumer said the bad-bank model has too many problems.
"One is the cost," he said. "It's usually expensive. And second, if you have the bad bank where the government has to buy the assets at the price right now, you don't know how to value them. If you value them too high, the banks get a windfall. If you value them too low, you could have the collapse of many, many banks that have not marked their stuff to market."
Sen. Schumer also said it would take too many employees to run a bad bank and that such a bank could be at risk of political interference.
Instead, he said, the Treasury Department should offer loan guarantees on poor assets — similar to the approach the government used to help Citigroup Inc. and Bank of America Corp.
"A much better solution, in my opinion … is not for the government to buy the assets, but rather to guarantee them and guarantee them below an amount the banks now have them on their books," he said. "It's one of the options before the administration, and the guarantee would be done by a third party, so it would be valued as to what the asset would be … in the future."