I think building a whole city as a prison wouldn't work, because it would have the same problems as a normal prison.
Putting a bunch of criminals together in one place doesn't make them change their way of life. Most of the smaller kind of criminals end up even deeper in the criminal scene when they are released from prison.
I don't think that ,with a crimefighting-organisation like Batman-Inc. already being built up, Batman would let this happen in the regular Batman-Continuity.
Although i think that this is a really interresting story for a game.
Why don't they just do something like at the end of zero hour. This way everyone would know what's going on. And they wouldn't create even more confusion with every statement they make. If they wait too long for a step like this, or don't do it at all, we are going to have a mess of storylines, and then i guess we're up for another reboot.
@Jekylhyde14: Isn't that only the way it works in the marvel Universe? In the marvel Universe, if some things are altered in the timeline, it doesn't change this world, but simply creates a different one.
But in the DCU, if there have been some changes in the current timeline, it doesn't mean things that happened before don't matter anymore. They still happened.
It certainly would be easier to just go the marvel way, and create thousands of different worlds, but then it is hard to not confuse people with so many different universes :)