Fire-sales of failed bank assets will help the rest survive

I have a theory I’ve just thought of - say you have four basically insolvent banks. You bust one of them and sell off all its assets at fire-sale prices, that is, below their long-term realisable value. You recapitalise the other banks so they can buy these assets at nonsense prices and punish the share and bond holders of the failed bank. The banks that buy the assets have instantly bought profit, that is, they have bought assets that improve their overall asset quality (because they’ve paid so little for them) and their long-term profitability (as the realisable profit from the assets is greater than the cost of recapitalisation).

I realise this is the ‘liquidate, liquidate, liquidate’ scenario writ large, but is it feasible?
(Obviously not in Ireland with the guarantee in place and one of the banks already nationalised, but elsewhere? This seems to be part of the plan for the car companies in the US, why would it not work for the banks?).

Are you setting a lower limit on the firesale prices by restricting losses to the share and bondholders of the failed bank. What if the firesale results in losses to the ordinary retail depositor. This might be the main difference between the car companies and the banks.

Is that like averaging out? Is there so much junk on banks books, i.e., land banks in the arsehole of nowhere that cost millions, apartment blocks that will have to be demolished, that you couldn’t even set the price to zero and hope to make a profit on a lot of this stuff

It might work, but in a constitutional democracy you can’t simply target one bank to the profit of another. Maybe Poland can give it a shot.

I think a more practical way of doing it is to sell off assets to the highest bidder. This would clean out all bank’s balance sheets and would also lead to a highly profitable but highly risky market for junk assets. If you buy a commercial development loan for 10/20c in the euro, it’s probably worth your while whether the developer pays you back or you repossess their property, and provided you are happy to risk the costs involved e.g. litigation, collections, administration etc, it could be a nice money earner.

Another possibility would be selling non performing residential mortgages back to the mortgagor for say 90c in the euro. In certain circumstances, this would give a windfall to the mortgagor, the mortgagee doesn’t have to go through the messy repossession business and the balance sheet is cleaned up. It could be part of such an agreement that in the event of a second default the loan reverts to its full amount. This is debt forgiveness, but at least it would be on a case by case basis and it could also be justified on the basis that the mortgagor is likely to pay more for their own debt than another investor.