The US banking system is close to becoming insolvent. Treasury Secretary Timothy Geithner's recent stimulus plan of $787 bn does not solve the woes that are plaguing the financial system. In 2008, it was estimated that total losses in the US banking system would hit $1 tn. Since then, write-downs by US financial institutions have increased alarmingly, and now losses are said to be more than $2 tn. Another $7 tn, including commercial real estate loans, consumer credit-card debt and leveraged loans, are at the risk of losing much of their value, according to RGE Monitor, a New York-based financial analysis firm. Then there are trillions of high-yield corporate bonds and jumbo mortgage loans that are set to crash sharply as the recession further intensifies. Bank shareholders have suffered mostly as the stocks tumbled.

So far, the US government has stayed away from acquiring equity stakes and diluting the value held by shareholders. With no end in sight for the US banking crisis, the once unthinkable government ownership of banks is now widely being discussed. There is a growing debate in the US about creating its own `bad bank'. Some economists suggest that the government should purchase all the toxic assets on financial institutions' balance sheets and move them to a so-called bad bank. They argue that creating bad bank is the only viable option for removing toxic assets in an orderly fashion from the system and to allow bank lending freely again.

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