All of the Above?

by publius

A big part of the intra-liberal debate over the Geithner plan is whether or not to nationalize the banks.  But is it really an either/or question?  Could we do both the Geithner plan AND nationalization simultaneously?  Nouriel Roubini seems to think so:

“I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.

In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.

Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.

I'll confess I'm on entirely clear on whether he thinks this will happen, or simply that it should happen (his subsequent blog post sounds more like the latter).  For what it's worth (which is very little), I haven't seen anything confirming, or even suggesting, that stress tests will be used in this manner.  But I'm happy to be corrected.

But this strategy does mesh nicely with the administration's efforts to obtain wider authority to take over financial firms.

Comments

[J. Michael Neal]

They would be complementary. In fact, one thought that I've had (prompted by someone, somewhere) is that a part of Geithner's plan is a trick. Invite the insolvent banks in. Then, when the bids on their stuff aren't high enough to get their heads above water, you have evidence that nationalization is needed.

It's tough to read, because there are a lot of things that would be desirable for them to do, but undesirable for them to talk about, for the reasons Bernanke laid out at the hearing today when talking about publicizing who came to the discount window. What they've been saying could easily mean that that this is the final plan. However, they'd be saying exactly the same thing if nationalization was in the works. So, I don't know what their plans are.

[OCSteve]

But this strategy does mesh nicely with the administration's efforts to obtain wider authority to take over financial firms.

I’m not clear on whether you believe this wider authority to take over (non-bank) financial firms is a good thing. Personally, it scares the crap out of me that we’re actually considering giving the Feds wider authority to “take over” private companies.

Gives new meaning the RR’s “nine most terrifying words in the English language”…

[Anarch]

Personally, it scares the crap out of me that we’re actually considering giving the Feds wider authority to “take over” private companies.

If those "private companies" are insolvent banks, then the Feds have been doing that for decades.

[TJ]

I’m not clear on whether you believe this wider authority to take over (non-bank) financial firms is a good thing. Personally, it scares the crap out of me that we’re actually considering giving the Feds wider authority to “take over” private companies.

Not doing that is fine by me, as long as they get zero money.

[TJ]

I’m not clear on whether you believe this wider authority to take over (non-bank) financial firms is a good thing. Personally, it scares the crap out of me that we’re actually considering giving the Feds wider authority to “take over” private companies.

Or conversely, explain to me the logic where companies that the government owns 80% of, like AIG, haven't been taken over by the government.

[von]

I don't get the excite on the left to nationalize banks. First, we nationalize, we own. Second, I have no confidence that nationalization won't require/involve a series of sweetheart deals that are better avoided. Third, there's no evidence that Treasury or the Fed will actually do a good job of running the banks.

It seems that nationalization should be an absolute last resort. We're not there yet.

[TJ]

I don't get the excite on the left to nationalize banks. First, we nationalize, we own. Second, I have no confidence that nationalization won't require/involve a series of sweetheart deals that are better avoided. Third, there's no evidence that Treasury or the Fed will actually do a good job of running the banks.

We should already own BofA and probably Citi outright, based on the money we gave them. And if the Fed or Treasury can run the banks without ruining the global economy (with or without sweetheart deals) I for one will count myself ahead in the game.

[TheWesson]

J Michael Neal said:
They would be complementary. In fact, one thought that I've had (prompted by someone, somewhere) is that a part of Geithner's plan is a trick. Invite the insolvent banks in. Then, when the bids on their stuff aren't high enough to get their heads above water, you have evidence that nationalization is needed.

Yes, if you look at the math, the Geithner plan gets banks paid (1 + N) times the market worth of bad assets.

N is not indefinitely large; maybe 0.5 or so - less than 1.0.

Therefore banks that are far underwater can't be saved in this plan, but banks that are almost not bankrupt can be saved.

For example, Indymac's toxic asset portfolio apparently ended up being worth 30% (at market) of what they needed it to be worth to be solvent. Overpay them by 1.5x and they would've been at 45% - still not nearly enough!

So it seems the Geithner plan comes with a built-in 'triage'. In fact, triage may be the whole point of it.

Admittedly there are plenty of other ways it could get messed up ... self-dealing or banks finding some excuse to not participate ... but it DOES result in a sort of price discovery inasmuch as it sets an firm upper bound on asset market worth - the market thinks the assets are worth somewhat less than the Geithner price for sure, and the Geithner price is not indefinitely high.

Sorry if I said this before, I think it's an interesting idea ... built-in triage.

[Pithlord]

I agree with von. Nationalization is an immensely costly option. If that's where we have to go, it will interfere with a whole lot of progressive priorities.

But there's a part of the left that is just about resentment -- as there is a part of the right.

[TheWesson]

The point of nationalization is that it stops the bleeding.

When the government seizes a bank, the bank goes from an unknown state to a known state - the books are opened, the debtors get a haircut and/or are guaranteed ... etc etc

Alternately, an unseized but government supported bank screws up the marketplace, maintains the uncertainty, and continues bleeding government money.

Furthermore, there exists bad incentives for the management of a zombie bank - tunneling and looting.

If you're a purist and just arguing for "bank failure" as opposed to "nationalization" I suppose I can respect that.

But no matter what, "it's going to cost a lot of money".

Trillions of dollars of wealth don't disappear without it costing a lot of people a lot of money.

[Pithlord]

Will nationalization really bring certainty? Who is going to decide who gets what haircut if the Bankruptcy Code doesn't? Presumably, the Administration and Congress. After much lobbying.

Then who decides who the nationalized bank lends to and on what basis? The Adminstration and Congress. After much lobbying.

How does nationalization eliminate the incentives for tunnelling and looting?

If nationalization is necessary, then it's necessary -- but the more of it there is, the less chance there is for improving schools and health care.