Baseline Scenario on US Banks

With AIB and BOI share prices having quadrupled over the past few months thanks to increased hopes of a NAMA-based bailout from the taxpayer, it is interesting to note the similiarities with how the situation has developed in the US, as outlined in this piece by the Baseline Scenario guys.   On why the administration has not shut down insolvent banks, Johnson and Kwak write:

One reason is that taking over banks has somehow been redefined as “nationalization,” with the images it conjures up of forced confiscation of property. Yet there are no guns involved here. Ordinarily, when an investor puts a large amount of new capital into a bank, it gets some measure of control in return. Yet Treasury has bent over backward to minimize its voting shares, beginning with the initial round of recapitalizations and continuing through the latest Citigroup bailout in February.

Perhaps after fighting off charges of “socialism” from the McCain campaign, the Obama administration is wary of any steps that could be described as nationalization. And so instead of insisting on its well-understood duty to shut down failing banks for the public good, it has tied its hands by taking this option off the table.

4 replies on “Baseline Scenario on US Banks”

Karl, well done for exposing specious arguments on relative access to funding.

The important comparisons relate to governance and speed of divestiture under the competing models. It seems to me that the former is getting far too little attention, but its possible I’m missing much of the debate.

It is interesting to note that Simon Johnson has made a dramatic shift to coming to support nationalisation. Here he is back in January: At least for Irish case, I see a lot of sense in his initial position.

The key point in Johnson and Kwak’s piece is that the bogeyman term “nationalization” has been cleverly used by banking interests in the United States to make decisive resolution action politically difficult there.

Johnson and Kwak argue that this term has traditionally not been used, and should continue not to be used, to describe the standard practice of government financial regulators who take contol of any insolvent banks “remove “bad assets” from their balance sheets, inject fresh capital, and put them bank into the private sector.”

In Ireland, the term “nationalization” does not have the same negative connotations as in the US. But that makes it even more important here not to use the term for a resolution process for insolvent banks which is not considered complete until private equity is back in the bank, normally within months if not much sooner. That is not nationalization as conventionally understood in Ireland.

The Johnson article follows from many other economists in the past few weeks calling for a cleaner resolution of the banking mess (Roubini in the WSJ this week, Blinder in the NYT a few weeks ago, etc), along with contributions from central bankers this week such as Hoenig, Weber and Papademos.
My own modest contribution last week in the SBP can be found on
(there are some points/flaws I’d clarify or elucidate if I had were to write it again, while there are some points I’d like to make more clear, but can’t, at least not in public).

I wouldn’t frame the policy challenge in terms of NAMA vs. nationalisation. We need to get down more to the nitty gritty of what banks ought to be doing.
Of course, if the debate is failing to do that, it is because it is very hard to answer those questions. Especially for non bankers. And in the absence of any long term view as to where we want the economy to be in 5 years’ time, given a realistic view of the constraints (talk of green shoots these days strikes me as utopic).
Instead it is easier to peddle overly general arguments in favour of NAMA, nationalisation, or some other pet project.

The SBP article goes part the way of Johnson and Kwak… I see they say…
“Although insured depositors are protected, uninsured creditors such as bondholders are not; how much they get depends on what the FDIC can sell the assets for”.
“Bondholders, who took some risk for modest expected returns, lose some of their money.”
What does that translate into in Ireland?
There is a need for more inventive, prospective and realistic talk.

@ Patrick
Yes the bogeyman term “nationalization” has been cleverly used

@ John
I didn’t read Simon Johnson as supporting nationalisation as opposed to asset buy backs or privatisation (he is beyond this debate).
What he has to say is more prudent and subtle (unusually so for him) than just outright state control (which is a fait accompli anyway for an ever larger chunk of America’s 8000+ banks).

Again, we need to move beyond generalities to concrete and realisable policies.
It is easy to have an ideological bent. But not many people have had the (hard) experience of nationalising a bank. One that has is Bill Isaac.
He’s the only person in America who has ever had to nationalise a large bank and hold it a few years (CI, over 20 years ago during the Savings and Loan crisis of the 1980s).
Listen to Bill here…

As for David Murphy’s “Access to Funds for Nationalised Banks”, such comments from journalists, and lawyer-politicians, are strange. But could be re-interpreted kindly. It is by no means a central issue. Better topics to spend time on.

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