This is the Cato Daily Podcast for Wednesday, August 19th, 2009. I'm Caleb Brown.

Fannie Mae and Freddie Mac are long past due for reform, but what emerges out of the fix may send two beasts

back to wreak havoc in the housing market with taxpayers footing the bill.

Mark Calabria, Director of Financial Regulation Studies at the Cato Institute, comments.

Well, a bad bank, the concept would be is you're going to break any one of the entities

into a good bank, bad bank, and the bad bank is where you basically take all the assets that have lost a lot of their value. You take the damage assets you and so you pull those out and then you hope that what's left is a good bank that is performing assets, that

the loans are okay, and it allows you for a couple of reasons.

I mean, one, if you have all of the delinquent loans,

all the foreclosed loans separately in a bad bank, then that bad bank can spend all of its time

working on resolving those assets, modifications to the loans, foreclosures,

whatever, because there's a whole different skill set in making a loan and keeping that loan current and servicing that loan and dealing with the loan that goes in a foreclosure.

And also, you basically kind of, you know, you're cleaning out, you know, it's sort of like you're getting,

you want to think of it, you're trying to get the cancer basically out of this institution

and so that is the thinking you'll draw that off and then you'll have the good bank over here that you can put back out there

and you know do what it does so it's kind of like you leave your mistakes behind you move forward.

The reason I ask about a bad bank is it seems like that option actually produces two negative consequences, one that Fannie and Freddie could potentially

be put back out there as essentially institutions identical to what they were before the housing meltdown, and two, the public

ends up eating all of the risk that Fannie and Freddie had taken on over all those years.

Both of those outcomes are very real potentialities and problems.

One, I guess with most things, the doubles and the details, and that's why it's important on this. The FDIC in terms of banks, I mean during the savings

the loan crisis particularly weak, the government created all sorts of bad bank, good bank. And it was actually an opportunity to resolve

a lot of the problem.

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