The drumbeat grows louder:
- Seize Citi and Bofa
- Write down assets
- Wipe out shareholders
- Ding junior bondholders…and convert rest to equity
- Protect senior bondholders and customers
- Sell off pieces
- Know you’ve fixed problem once and for all without taking a dime of taxpayer money.
Why are people scared about the idea of nationalization? One reason is that it is a sign of the depth of our problems. A second, more substantive reason is that it seems to point in a bad direction. I certainly do not want the government deciding who deserves credit and who does not, what kind of investments are worthy of financing and what kind are not. That is a big step toward crony capitalism, where the politically connected get the goodies, and economic stagnation awaits the rest of us.
If the government is to intervene in a big way to fix the banking system, “nationalization” is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.
Bankruptcy could become, in effect, a massive bank recapitalization. Essentially, the equity holders are told, “Go away, you have been zeroed out.” The debt holders are told, “Congratulations, you are the new equity holders.” Suddenly, these financial organisations have a lot more equity capital and not a shred of debt! And all done without a penny of taxpayer money!
So get seizing, Timmy!
See Also: Greenspan: Nationalize The Banks