Nationalize the Too Big to Fail Banks?

Yes, this is becoming a daily topic, but it is a critical one.  The truth is that we remain teetering on the edge of a cliff.  There is a debate on this topic in the NY Times.  George Soros also has an opinion piece in today’s Financial Times.

In the NY Times debate, the clear consensus is that nationalization is a very unpleasant choice, but probably a required one.  Here are concluding statements from 3 of the 4 pundits:

  1. I agree that nationalization of banks is a last resort. But we are at the point of last resorts.
  2. By any measure, nationalizing all or most of the banking system is a dreadful idea. But until someone comes up with something better, and workable, it will keep gathering momentum.
  3. We do know that nationalizing troubled banks would not be a step on the road to socialism – unless one considers the Reagan-Bush Continental Illinois or Savings and Loan policies socialist. It is attractive in that it provides the government with the direct levers to address the most serious financial effects.

Soros also states that while nationalizing banks would be very painful to shareholders, “it would clear the air and restart the economy”.  He goes on to state, however, that political realities are pushing the Obama administration to make the wrong choice and only take the “toxic assets” off their hands.  This burdens taxpayers with all the bad debt, while simultaneously rewarding the banks for their risk taking.

To be clear, as an investor I hope for an effective solution other than nationalization.  A total loss on stock, preferred stock, and bond holdings in some large financials would be extremely painful to me and my clients.  On the other hand, as a taxpayer appalled with the handouts being given to executives whose behavior is borderline criminal as well as a citizen not interested in living through Great Depression II, I am willing to bear the pain of nationalization if that is what it will take.

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