The right solution to the banking crisis–temporary nationalization–finally seems to be taking hold among those who have the power to implement it.
Over the weekend, Senator Lindsey Graham said he favoured nationalization because he didn’t want to throw good money after bad. Yesterday, Obama seemed to suggest that he now favours a more “bite the bullet” approach than the one used in Japan (and, thereby, the one his own Tim Geithner is planning). And now Alan Greenspan has jumped on the bandwagon.
(OK, Greenspan doesn’t have the power to implement this solution, but he used to).
Importantly, Greenspan also suggested that bondholders should take a hit–which they should. In typical Greenspan fashion, he didn’t say this directly. He said we need to protect “senior” bondholders. Which means we can go ahead and hose the junior ones.
This is exactly the right plan. As the idea takes hold, it will be interesting to see whether Tim Geithner continues to press forward with his bad solution or just caves and changes horses again.
“It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”
Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.
“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”
Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.
The former Fed chairman said temporary government ownership would “allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”
But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.
“You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”