Daily Dose: Nationalize the Too Big to Fail Banks?

Today’s entry comes from the Washington Post.  Similar to the NY Times article of the other day, the WaPo covers the choices (all bad) and reinforces the sense of urgency to solve the problem inside the Obama administration.  As has been stated here before, the worst for the financial sector could still be in front of us.  That being said, news of some progress on this front is is being widely credited with today’s market rally.

The health of many banks is getting worse, not better, as the downturn makes it difficult for all kinds of consumers and businesses to pay back money they borrowed from these financial firms. Conservative estimates put bank losses yet to be declared at $1 trillion.

The potential solutions are all untested and risky.

But each proposal is fraught with the risk of undermining the banking system, leaving Obama officials wrestling with how to strike the proper mix of emergency programs funded from the balance of the government’s initial rescue program and any additional money requested from Congress.

Nationalization of the banks seems to be an unpopular option (for good reason).

Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic adviser Lawrence Summers think governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.

Another danger is that by taking over a substantial portion of a bank’s stock and wiping out the investment of the firm’s other shareholders, the government could also precipitate a sell-off across the banking system as investors flee, fearing they could be next.

Nationalization remains the option of last resort. The more popular choice appears to be the “bad bank” option.  The FDIC or some other entity buys all the toxic assets from the banks, which allows them to clean up their balance sheets.  The “vexing” problem remains how to price these assets in a way that does not actually further destroy balance sheets by pricing assets too low while simultaneously not burdening taxpayers with overpriced assets.  The article only briefly mentions what I know to be a very hot topic among my clients: how to do all this without rewarding the managers who got the banks into this mess in the first place.

This program would be highly complex, which demonstrates another problem facing Obama’s team: All of the rescue efforts are difficult to explain to ordinary Americans, who criticize the government for spending too much money to aid financial firms that started the crisis in the first place.

The bailout program “is a public relations nightmare,” one government official said. He added that Obama officials are sure to face criticism for whatever course they take.


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