This idea is not gonna happen.
A lot of ink is being spilled (or digitally rendered at any rate) over this idea. However the main issues with the bad bank idea, in the US or the UK, are here:
1 - It is very expensive. In the US they are talking $4 trillion. I don't think the bond markets have the appetite for that and neither to taxpayers. Even Magical Obama is not going to get that rammed through Congress.
2 - It will bankrupt all the banks. Yup, rather a key point. Bad bank gives prices to the assets that are currently without valuation. Set too low and then all banks will be bankrupted by mark to market accounting rules. Changing accounting rules is a dumb option of the first order - that would destroy all Western stock markets as all market confidence was removed.
3 - There is the Insurance scheme invented for AIG and Bank of America, also copied by Gordon Brown. This is less effective, but much less costly and allows Banks to remain in private hands. The force of inertia is strong with this one.
So, no doubt you will read many column inches about bad banks etc in the near future and how they are going to save the world or not; don't bother it is a theoretical cul-de-sac.
As I said before, what we really need is a 'bad country' to step up to the plate. Currently best candidates are Japan, UK and US; but I have a hunch a vote in the UN might go against Iran.
