Bad doesn't really mean "good" literally, but the word is sometimes used to describe good qualities that have a connotation of danger or toughness to them.  And it is important to remember that the word "bad", when used in this context, inflects to "badder" and "baddest", not to "worse" or "worst."

''Sometimes.  Slang doesn't always follow simple grammatical rules.''

The only people I ever saw who were actually genuinely confused by the notion were SitcomCharacters.  (Who are neither people nor genuine.)

''Cool is the rule, but sometimes bad is bad.''
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Usually the context clues you in on the meaning.  Consider:
* Michael Jackson's music is bad!
* C++?  That's a bad language!

''Sorry, I see no context clues here.  In both cases I would happily substitute "ghastly".''

Then you would be wrong-o.
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See also: TheBaddestEnding
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I recently heard an interview with a professional bull-rider who bragged that he would be riding the "rankest" bulls in the country in upcoming competitions.  Interesting play on words: ''rankest'' simulataneouly meaning "most highly ranked" and "most offensively disgusting".

''That goes back at least as far as Shakespeare. Hamlet refers to a "rank" problem in Denmark.''
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Words are not alone in being used in other than their original sense. Meaning takes on the characteristics of the receivers filtering mechanisms. One may adapt that filtering by way of information about the transmitter, and as to whether the transmission is directed to his reception facility. -- MarkRogers
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cf. LiterallyMeaningFiguratively
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CategoryCommunication, CategoryIdiom