Is bank nationalization cheaper?

I'm sure you've reading or hearing reports of the $4 trillion bailout.  I still don't know what this figure is supposed to mean, but it is incorrect to respond with something like the following: "that's really expensive, I guess we do need to nationalize the banks."  As one commentator on CR responded (approximately): "If Uncle Sam bails out the banks, who will bail out Uncle Sam?"

Bank nationalization is (possibly) cheaper when the banks have upside profit potential, which is then captured in whole or in part by the government.  But say that banks are in the red by $2 trillion for ever and all eternity.  Taking over the banks simply means that the government picks up these losses as owner.  Government ownership makes it less likely, not more likely, that bank creditors will "take a haircut."

Nationalization isn't going to solve this kind of cost problem. 


What are we trying to accomplish by bailing out banks? More lending? Avoiding the effects of wiping out shareholders and debtholders? Something else?

Nope. First, you wipe out shareholder equity and creditors while you identify illiquid securities and transfer them to warehouse. Cost? Administrative.
Next you recapitalize bank, if necessary.
Third, you sit at the warehouse with a sign out front "call in the spring." If no bids are forthcoming on worst assets, you drag/drop them over to the wastebasket and hit "empty."
The other assets you sell for whatever, and apply the proceeds to paying back taxpayers.
Meanwhile, over at the "good bank," they're making money.

Dumb question:
What about temporarily relaxing bank leverage requirements, say only for banks that are in the hole? Put into law a schedule for re-tightening leverage requirements over the next 4 years. Is that impossible to do, or it won't work?

I think the cheapest and more effective option, at this stage, is to set up "good banks", brand new.

Sounds like a good idea. I've heard many different ideas about how to fix the banks but I am puzzled about something. Everyone seems to agree that the cause of the banking problem was an inability to value risk properly. They never actually say that. They call it greed, or lack of regulations, but that's what it boils down to. What is being down with banks, insurers, and bond rating agencies to see this doesn't happen in future?

I think Jason and Beezer are right.

I agree with Jason that moral hazard is the problem that recommends nationalization as a solution. Beezer offers what sounds like the right process.

It seems to me that the guiding philosophy for all of these interventions should be the following: "Punish those who made poor choices to the maximum extent possible without dragging all the rest of us down with them."

It follows that we should nationalize the banks, wipe out the shareholders and recapitalize. Also, it seems to me that we should be very hesitant to offer foreclosure assistance to consumers, and should only do so when not doing so unduly punishes people who are successfully paying their bills. (e.g. tons of empty houses around me could wipe out the equity in my house, even if I did nothing wrong.)

This approach leaves ideology at the door. The former would be more popular with people on the left than the right. The latter would be more popular with people on the right than the left. But doesn't it make the most sense?

Part of me wonders how much the insertion of ideological viewpoints overcomplicates this problem. Arguments for nationalization are easy to understand and make sense. But the same people making those arguments make much more dubious arguments about the advantages of foreclosure assistance. And vice versa -- right-leaning people invent all kinds of crazy schemes to avoid nationalization, but make simple, straightforward arguments against foreclosure assistance.

Once the banks are made solvent and the situation stabilizes, the government would re-privatize...

How do we know that?

Also, it seems to me that we should be very hesitant to offer foreclosure assistance to consumers

If their terms are reasonable and they're still failing to meet them, sure. Mortgages with unreasonable terms should be reformed to have reasonable terms, regardless of whether bankruptcy or foreclosure is on the horizon or not. (Then, if the borrower doesn't even meet the reformed terms, they should be foreclosed on anyway - with a process that recognizes when a previously-secured loan has become undersecured and responds accordingly, i.e. cramdowns.) It's easy to look down your nose at people with ARMs but they were sold by pretty much outright fraud and, in some cases, kickbacks offered to mortgage brokers who are supposed (by state law) to represent the interests of the borrower, but only got the "incentive" if they sold a sufficiently valuable (to the lender and MBS market) type of mortgage. Toxic loans are toxic, and blaming people fooled into accepting them does not make them less toxic. They need to be reformed - by as much force as necessary - and, if possible, the people who originated and sold them forced to eat the resulting losses. (Better regulation and better consumer education would both be nice to help prevent recurrence. But those don't cost $4 trillion so they get kind of overshadowed. They also don't help clean up the existing mess.)

This means that the securities based on inflated assumptions of profitability of these instruments are going to take large haircuts - possibly around neck level. Well, I guess you should have made sure the business plan wasn't based on fraud and insane assumptions about the behavior of real estate prices before you invested in that security, eh?

I agree with Jason. This issue is not a cost issue. It's about getting banks to lend. I've seen no conclusive evidence that an aggregator bank will allow lending to occur again. The Swedish Model doesn't count because there was nationalization.

"This is a crime that we are even discussing this issue. Nationalizing is the only way to make sure the banks do not triple dip on the U.S. taxpayer."

Funny, I have another, and lot simpler way: stop giving them taxpayer money.

Hi Brian,

I prefer not to have bread lines in America again like in the 1930's. I just went to Menards yesterday, and there were dozens of guys waiting in the 5 degree cold for day jobs. I didn't see that last year.

You are severely underestimating the extent and depth of this crisis, like most of the commentors did on this site for the last year. The crisis is not over. The crisis has not been small, and has the potential to be much, much worse than it has been. Evidence: There has been a very slight thaw in the credit markets in the last week - this is with the promise of a full bailout, billions of tarp money, and a trillion of spending. This has allowed the three month t-bill to go all the way to .26. Whoohoo!

So if we don't bailout, we as a nation will be much, much poorer than if we do bailout, even after spending $2T or more to do this bailout. so we are left with a choice between just giving them money and taking their bad trades and whatever else they decide they do not want, or nationalizing them and selling off parts over the next 18 months. Clearly nationalizing is a better choice for the reason that they will simply give us every bad trade and possibly just losing sides of hedge trades and we cannot tell due to the complexity of the accounting.

We need to either nationalize or give the banks lots of money or go into a depression. The only way to be actually fair to the U.S. taxpayer is to nationalize. Nationalizing is the best way out of this crisis.

If we were to Nationalize the "Too Big to Fail" banks wouldn't that trigger another Lehman Bros. type worldwide panic?

It seems to me that forcing shareholders and bond holders ie huge 401K mutual funds would only hurt many small guys.

More importantly, however, is the negative effect it would have on the confidence of investors to take on any private recaptilization of "any" bank stocks.

Do any of you think Citi and BAC will fall and wipe out the shareholders.

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