Daily Dose: Nationalize the Too Big to Fail Banks?

I have not posted on this topic for a few days as nothing of substance has been reported.  Today, however, Bloomberg has a good update on the continuing debate within the Obama Administration on what to do.

The good news is that the importance of the matter is clear.  Bloomberg quotes Obama saying, “You’ve got a banking system that is close to a meltdown, and we’ve got to figure out how to intelligently get credit flowing again”.

The bad news is that there seems to be little progress in determining the final plan, which is due to be announced next week.  While reports last week seemed to favor the “bad bank” idea (off-loading all the toxic assets onto a new bank that would be run by the government) the huge issue of valuing the assets seems to be derailing the process.

I’ve posted on this problem in the past, but the summary is that if the assets are valued too high then the taxpayer pays too much and the banks are rewarded.  If the assets are valued too low then healthy banks can also be wiped out when they have to mark their assets to the market.  Nationalizing the banks would solve the problem but is strongly opposed by the financial services industry.

A number of sources have linked to this post today in Naked Capitalism which is very critical of the emerging Obama plan.  Below is a quote, but the entire post is well worth reading.

The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

This lack of progress on a set of problems that economists have been publicly analyzing for weeks is discouraging.  As new Treasury Secretary Geithner himself has remarked, the only thing that we have over the Japanese in the 1990s is a fast response to the problem.  Speed is of the essence.

As reported in today’s WSJ,

If there is one thing U.S. Treasury Secretary Timothy Geithner learned from watching Japan sink into a decade-long economic quagmire, it’s this: Don’t dither.

Still, he noted, pain is inevitable. “Japan had a huge bubble beforehand,” he said. “And it was going to be a wrenching, protracted adjustment process no matter what.”

The WSJ article did provide me with a new piece of information: Geither was an assistant financial attaché in the US Embassy in Japan when the Japanese stock market collapsed.  He personally saw the beginning of and studied Japan’s “Lost Decade”.  He is also drawing strong parallels between that period and now.  He better put that experience to use quickly or the Japan Scenario may become reality.


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