Where's the Nationalization vs "Bad Bank Plan" *debate*?!

But the nationalization idea still seems to be stillborn:

(Geithner) discouraged speculation that the plan would include the nationalization of some banks.

"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," he said.

Such sentiments will certainly make Jamie Dimon happy:




Sorry, Jamie, but I'm going to keep on talking about it, just because it solves at a stroke the problem of valuing the bad assets that the government is thinking of buying at an absolutely astonishing cost of $3-4 trillion. It would also help address Larry Summers's concern:

Mr. Summers privately expressed concern last week that spending too much to buy bad assets could cripple the dollar, according to a person who spoke with him.

This is a real concern. If you give the banks trillions of cash dollars in exchange for their toxic assets, there's simply no way of forcing them to keep that money in the USA. Even if they lend it only to US companies -- which is improbable -- those companies will surely take advantage of the strong dollar to buy cheap imports.

Davos Delegates in ‘Denial’ as $25 Trillion of Wealth Vanishes


By A. Craig Copetas and Christine Harper

Jan. 30 (Bloomberg) -- Regret is cheap for some delegates at the World Economic Forum in Davos, Switzerland. Redemption for their role in the worst economic wreck since the Great Depression comes at a steeper cost.

“Nobody in Davos wants to get near a negative like redemption,” said Robert Dilenschneider, chief executive officer of the Dilenschneider Group, a public relations firm in New York. “But the truth is that everyone here is part of the problem, and the public will soon begin demanding a pound of flesh.”

“No banker or businessman wants to take responsibility,” said Dilenschneider, who counts 40 Davos delegates as clients, their identities shielded by confidentiality agreements. “It’s their view that everybody else did something wrong.”

Questions about responsibility, blame and contrition hang in the cold mountain air at the glitzy Alpine resort this week like so much exhaled breath. With $1 trillion of bank losses and $25 trillion of market value gone missing since the start of the financial crisis, there’s much to account for.

“There’s a ‘Great Gatsby’ quality to Davos,” said Niall Ferguson, a professor of history at Harvard University in Cambridge, Massachusetts, referring to the novel by F. Scott Fitzgerald. “When people look back at this gilded age, I’m sure there will be images of the investment bank parties at Davos, just as people looked back at flappers after the 1920s. People are still in denial.”

Ferguson, author of “The Ascent of Money: A Financial History of the World,” and a first-time Davos delegate, said “There’s a sense of ‘let’s have the party anyway,’ and ‘let’s talk about the post-crisis world,’ as though that could be soon.”

(horrendously staggering summary of sums of money involved- snipped)


There is a simple alternative, which can be called “bank rationalization” in order to avoid the “n” word. Under this scenario, the government would take possession of insolvent banks. This is not interference with the market, it is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can’t let them be tied up in bankruptcy proceedings for years.

Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors. First, the shareholders of bankrupt institutions must be forced to eat their losses. However, we may not want to honor all the debts of the banks at 100 cents on the dollar, which has been current practice.

While the government has guaranteed most deposits, it has not guaranteed the bonds and commercial paper of the banks, nor their commitments on credit default swaps (CDS) and other derivative instruments. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy. For example, it could honor bonds at 90 cents on the dollar or only pay off full CDS obligations to those who actually own the bond that was being insured against default.

To force banks to own up to insolvency, bank rationalization can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers.

In short, bank rationalization is both much fairer and better for the economy than the bad bank plan. If only the people who missed the housing bubble can be forced to recognize this fact.