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Why Not Nationalization?

Posted By Barry Ritholtz On February 4, 2009 @ 6:56 am In Bailouts,Corporate Management,Credit,Derivatives,Politics | Comments Disabled

In an otherwise worthwhile commentary called We Can Do Better Than a ‘Bad Bank’ [1], George Soros too easily dismisses the nationalization of insolvent banks:

“It is estimated that an additional $1.5 trillion would be required to adequately recapitalize the banks. Since their total market capitalization has fallen to about $1 trillion, this raises the specter of nationalization, which remains politically and even culturally unpalatable.”

Why not (temporary) nationalization?

If your financial institution is insolvent, if the risk management has destroyed your company, if the management team essentially gutted your bank, then why-oh-why maintain this silly fiction that these are viable entities? Its only going to make the ultimate cost that much greater.

Look, we’ve already nationalized Fannie and Freddie, Bear Stearns and AIG. Can we please stop pouring money into these giant black holes with very little to show for it? (Paying 100%+ of the market cap of a company for 8% of its stock might as well be nothing)

Anyway, here’s some more of Soros commentary:

“The Obama administration should come out of the gate with a comprehensive economic program that has two pillars in addition to a fiscal stimulus package. One would prevent housing prices from overshooting on the downside by making mortgages cheaper and more available and reducing foreclosures to a minimum; the other would enable banks to resume lending by adequately recapitalizing them. It would take several months to implement the program and a further period before it impacts the economy. But in the meantime, people could see that there is a way out, and that would help mitigate the severity of the downturn.

Adequate recapitalization of the banking system now faces two seemingly insuperable obstacles. One is that former Treasury Secretary Henry Paulson has poisoned the well by the arbitrary and ill-considered way he implemented the $700 billion Troubled Asset Relief Program (TARP). As a result, the Obama administration feels it cannot ask Congress for more money at this time. The other is that the hole in the banks’ balance sheets has become much bigger since TARP was introduced. The assets of the banks — real estate, securities, and consumer and commercial loans — have continued to deteriorate, and the market value of bank stocks has continued to decline.”

Good bank or bad, we still have a vastly undercapitalized finacial system. Temporary Nationalization and pre-packaged chapter 11 reorg is the fastest most effective way to deal with what ails the sector: toxic assets and not enough cash.

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Source:
We Can Do Better Than a ‘Bad Bank’ [1]
GEORGE SOROS
WSJ, FEBRUARY 4, 2009

http://online.wsj.com/article/SB123371182830346215.html


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[1] We Can Do Better Than a ‘Bad Bank’: http://online.wsj.com/article/SB123371182830346215.html

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