How to deal with toxic assets? It depends on the next election date.

Dirk Nitzsche of City University Cass Business School makes an interesting point when interviwed on BBC World Business Report on April 21.

In Germany and in the UK:

• A bank can set up a fully owned subsidiary "bad bank" where it can move its toxic or illiquid assets.
• The bank has to pay what's effectively an insurance premium to the government, which underwrites the value of the assets in the bad bank.
• The government may have to pay the for value of the toxic assets that it has underwitten, but only if the bank "makes a claim" for the insurance it has bought from the government.
• The government has to pay nothing until the "claim" is made, which could be years from now.

In the US things are very different and more straightforward: The government, via a public-private partnership, is spending money to buy the toxic assets right now.

Question: Why are the German and British systems so convoluted and the American system so much simpler?

Answer: In Germany and in the UK there will be elections in less then one year. The system of "insurance" for toxic assets moves the government expenditure to after the election date. Or, in other words, off the balance sheet of the current government.

This is obviously not a problem in the States, where presidential elections are due in four years.

It's ironic that the German and the British government are themselves using financial wizardry to take care of their own interest first and of the economy second.