Former FDIC Head: Sorry, But Banks Are Too Big To Nationalize

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William Isaacs, a former head of the FDIC, is annoyed with the chatterers who say that the banking crisis simply requires nationalization and that’s that. In a WSJ op-ed, speaking as someone who’s “done this before”, he argues that nationalization wouldn’t work for us and that the Swedish model is a joke. Basically it boils down to the biggest banks being way too big, with our top 10 institutions controlling some 2/3 of the nation’s banking assets.

He notes

  • Nationalization would be contagious. Once you do it to a few banks, the shorts and speculators would go after the others, forcing the same fate upon all of them.
  • There’s no reasonable exit strategy. There aren’t any obvious buyers, except perhaps foreign money, which would be undesirable for national security reasons.
  • Replacing management would be tough. If you decapitate senior management at so many banks, who has the experience to run institutions of this size and complexity?
  • Sweden, he says, is completely irrelevent, given its size and the fact that it nationalized only after its major bank had collapsed.

His solution: More capital injections until the banks get healthy, a la yesterday’s announcement from the Treasury and the Fed.

 

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