Nationalization Gets a New, Serious Look

Posted by Kendall Harmon

Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.

Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”

Read it all.

Filed under: * Economics, PoliticsEconomyCredit MarketsThe Credit Freeze Crisis of Fall 2008/The Recession of 2007--The September 2008 Proposed Henry Paulson 700 Billion Bailout PackagePolitics in GeneralOffice of the PresidentPresident Barack Obama

10 Comments
Posted January 26, 2009 at 5:03 pm [Printer Friendly] [Print w/ comments]



1. Sick & Tired of Nuance wrote:

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments.

Er…wasn’t that what T.A.R.P. was supposed to do?  Didn’t congress rush through a $350 Billion bailout for that very reason?

Here is an idea…take all the money back that was distributed to the banks already.  Use that money to do what the T.A.R.P. was supposed to do in the first place.  As far as I can tell, the banks just took the money and ran.

January 26, 6:40 pm | [comment link]
2. Sherri2 wrote:

We got a press release today from a regional (half the state) bank on its grim fourth quarter and they mention that they borrowed a large sum from the fed. They’re not *using* it though, just holding it to keep themselves capitalized. So TARP was, apparently, a total failure. I’d be glad if someone could convincingly tell me otherwise.

January 26, 6:55 pm | [comment link]
3. Br. Michael wrote:

On the plus side it was a joint Democratic/Rebublican effort.

January 26, 7:46 pm | [comment link]
4. TACit wrote:

I read somewhere yesterday, probably a link from NRO, that when Sweden endured a bad recession in about 1990 they set up a ‘bad bank’ to handle the toxic assets - a bank, not an arm of government - and Germany is looking at following this plan.  For the US government, unfortunately for us taxpayers, there are too many potential up-sides to the government acting as a bank for me to hope the new Administration would follow the Swedish route, the main benefit being control, which the all-Democrat executive and legislative branches now in place desperately crave.
It is also disheartening to read still more about actions or merely advice by players like Larry Summers.  Hardly anyone has taken notice that in the 1990s Brooksley Born, also a financial regulator and a lawyer, rather bravely advised her government that CDO’s were in real danger of getting out of hand and crashing the banking system - and the triumvirate of Greenspan, Rubin and Summers confronted and opposed her.  It’s clear in hindsight that these financiers and their colleagues always strove for NO regulation, a stance which is obviously completely counter to the interests of citizens and taxpayers.  Yet these selfish, irresponsible players continue to be the focus, as if they are the only players capable of introducing solutions to the problems they created.  They themselves are  the problem.

January 26, 7:57 pm | [comment link]
5. Jim of Lapeer wrote:

But at least the new guy that heads up the effort knows how to do his taxes.  If this is change, count me out.

January 26, 8:14 pm | [comment link]
6. Br. Michael wrote:

5, Jim don’t be harsh.  Anyone can forget to pay $35,000 in taxes.  It could happen to anyone.  But with a President and Congress of your own party:  Not to worry.  Did say it could happen to anyone?  And I am so glad that he JUST happened to discover it now to minimize the interest and penalties.

January 26, 8:50 pm | [comment link]
7. Nikolaus wrote:

DISCLAIMER:  I happen to work for one of these institutions. 

To a great extent the government already runs the banks.  Imagine your worst boss.  He’s always looking over your shoulder, second guesses every move you make.  Always presumes that you are wrong.  He is a bona fide, card carrying idiot.  The worst part is that Daddy owns the place so Sonnyboy is heir apparent and thus youre boss by Divine Right. 

Now multiple that by 10 and you have a vague clue about governmental regulation.  The system has problems but further governmental involvement IS NOT a solution.  If you really want to destroy American capitalism, bring in the government.

January 26, 10:54 pm | [comment link]
8. John Wilkins wrote:

#7 - that’s ridiculous.  The government didn’t invent MBS or credit swaps.  By your account, they weren’t smart enough to do so.  Or to regulate then when they should have.

January 27, 1:47 am | [comment link]
9. Byzantine wrote:

The government didn’t invent MBS or credit swaps.  By your account, they weren’t smart enough to do so.  Or to regulate then when they should have.

The market has already regulated MBS’s and credit swaps by determining that they aren’t worth much more than the paper they’re printed on.  Government intervention is what prevents the tranches from being unwound and the assets valued appropriately.

January 27, 11:20 am | [comment link]
10. Billy wrote:

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”
And guess who was the main one telling the Asians this in the 1990s.  Robert Rubin, then Sec of the Treasury and now one of the major supporters of the bailout program.  How the worm turns!

January 27, 5:12 pm | [comment link]
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