Federal Reserve headquarters, Washington DC

The creation of a US "bad bank" as a depository for toxic financial assets, could cost as much as $4 trillion - - the equivalent of nearly 1/3 of US gross domestic product.

President Barack Obama's new administration is looking at ways of restoring confidence to the financial system, as it considers how to use the remaining $350 billion from the $700 billion Troubled Asset Relief Program (TARP), which was launched last October.

Goldman Sachs estimates that it would take up to $4 trillion to buy troubled mortgage and consumer debt. That number could fall if the program were limited to only certain loans or banks, but it could also expand if other asset classes such as commercial real estate loans were included.

"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset,"analysts at the investment bank, wrote in a note to clients.

Economic stimulus, including that planned by the Obama Administration, cannot alone pull the world out of the current tailspin and more needs to be done to fix the underlying causes of the crisis, particularly in the banking sector,IMF Managing Director Dominique Strauss-Kahn said on Monday. Robert Zoellick, President of the World Bank, also said on Monday that pumping government money into the economy was not enough by itself.

The Wall Street Journal says the so-called "bad bank" that would buy up assets could ultimately reach a size of $2 trillion, according to people familiar with the matter.

The central question facing policy makers: How does the government help banks exorcise their bad bets? For many of these assets, there is no current market price. If the government buys the assets for more than they are ultimately worth, taxpayers will take the hit. If the government pays too little, banks will have to record losses on other similar assets, exacerbating the problem.

The Journal says under the concept being discussed, the government "bad bank," possibly run by the FDIC (Federal Deposit Insurance Corporation), would buy only assets banks have already marked down heavily. This could avoid crushing the value of other assets held by banks. It could also potentially sidestep the pricing dilemma because banks have already recognized the low value of the assets being purchased.

The remaining troubled assets -- likely a sizable amount -- would be covered by a type of insurance against future losses. This would apply to mortgages, mortgage-backed securities and other loans that banks are holding until they mature. Banks have probably given these assets an overly optimistic value because they plan to hold them. This would be similar to a structure set up recently to protect Citigroup  and Bank of America, in which the government and the bank would share future losses on a set pool of assets.