According to the FTD, the current government thinking regarding "bad banks" is as follows:
- Sell toxic assets at fair value to SPV
- Government guarantees the fair value, and receives guarantee fee from banks
- If final value falls below estimated fair value, government makes up for the shortfall
- If final value is in excess of fair value, the bank gets the upside (this part is a bit unclear, because it is not explicitly stated; but usually, a guarantee only covers the downside -> if the government were to take up- and downside of an asset transferred at fair value, there would be no need for a guarantee and a guarantee fee, the government would simply take over the asset, and that's that)
If the assets are indeed transferred at "fair value", and the government receives an "appropriate" guarantee fee, that's a reasonable solution.
However, there's an obvious problem: Who will determine the "fair value" and the "appropriate guarantee fee"?
(If the "fair values" are too generous and/or the fee too small, then bank shareholders win and the taxpayer loses out.)