In The Blogs

Dancing

| Sat Jan. 24, 2009 10:01 AM PST

DANCING....Joe Nocera writes today that the original idea behind TARP was right all along: the government needs to buy up toxic assets from distressed banks if we want to get the banking system working again. This idea has gained so much currency in so much of the financial community, he says, "It's pretty much unanimous."

But then, a thousand words into his piece, he suddenly says that the S&L crisis of the 80s is the right model to emulate:

The S.& L.'s were — no question about it — nationalized. The bad assets were stripped out, and handed over to the Resolution Trust Corporation, which was charged with selling them off....What is particularly appealing about an R.T.C.-type approach is that the government doesn't have to value the assets right away, which has always been the sticking point with the toxic assets on the banks' books. It can simply take control of them, and then figure out ways to sell them off over time....But to carry out this kind of program, the government has to be in control of insolvent banks. This also has to be faced squarely.

What a bait and switch! This isn't TARP. This is Swedish-style nationalization. Nocera just wants to erect a massive rhetorical edifice around the idea to make it sound like that's only a minor side effect.

Come on, Joe. If the defining characteristic of all the good plans for dealing with the banking crisis is, as you say, that "they don't dance around the issue," then don't dance. The headline on your column shouldn't have been, "First Bailout Formula Had It Right." It should have been, "Time to Nationalize."

Advertisement

Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

Submitted by Sidewinder (not verified) on Sat Jan. 24, 2009 10:39 AM PST.

Gee, Kev - the prospect of natinalization seems to have you pretty nervous.

I've got nothing against the profit motive, when it serves the people. But when it doesn't, to paraphrase Reagan, then "it IS the problem", and it is time to put offending institutions into government hands, where the people can have some degree of control over how the institutions are run and run-amok profit-motive can be taken out of the picture.

Submitted by JamesM (not verified) on Sat Jan. 24, 2009 10:51 AM PST.

That would be communism. Free market theory requires us to prop up failed capitalists with free government cash. Where do you think the adjective free comes from?

Submitted by Kevin Drum on Sat Jan. 24, 2009 10:53 AM PST.

Sidewinder: I'm not criticizing nationalization in this post. I'm criticizing Nocera.

Nationalization may well be the best alternative we have. I'm increasingly coming to that conclusion myself. But hell yes, it makes me nervous. Anyone who's not nervous about it just isn't paying attention. This is not something to be done lightly.

Submitted by JamesM (not verified) on Sat Jan. 24, 2009 11:00 AM PST.

BTW, what's on the docket in terms of new regulation. I'm assuming nationalization, golden parachutes, and massive bailouts aren't supposed to be long term solutions. Is the big scary prospect of easy government money supposed to scare bankers and investors toward smarter decisions?

Submitted by Petey (not verified) on Sat Jan. 24, 2009 12:10 PM PST.

"I'm not criticizing nationalization in this post. I'm criticizing Nocera."

And well you should. Nocera's piece is emblematic of the confused state of the discourse.

We should appoint Paul Krugman and Felix Salmon as co-caesars of fixing the global economy and be done with it.

Submitted by Anonymous (not verified) on Sat Jan. 24, 2009 12:27 PM PST.

The irrational mobs just wanted to shoot the bankers.

But no. We were told:
a) buy the bad assets
b) buy stock in the banks
c) take the banks over.

It's time to realize the mob was right.

Submitted by dbeach (not verified) on Sat Jan. 24, 2009 12:50 PM PST.

I don't actually think nationalization will be required for most banks. But a fair amount of shareholder pain is going to be required.

Let's say a bank has $1B face value of mortgages with a market value of 50 cents on the dollar. The government could pay the full $1B (or something less, say 90 cents on the dollar) for that paper, but then take $500M (the difference between market value and what they paid) in equity. This way, the bank gets recapitalized and cleans up its balance sheet, while the government, which can afford to wait, sells off the paper over time (possibly after writing down the principal on some of the mortgages to reduce foreclosures).

The only issue with this plan is that some of the banks may actually be insolvent right now, in which case the $500M in equity would be enough to give the government control of the firm, thereby nationalizing it. But I don't think this will be the case for most banks, though unfortunately that may be the case with the two largest, Citi and BofA. If that happens, the government can still sell off the "good bank" portion of those firms in chunks, either to other banks or as new issues (IPOs), fairly quickly; once their toxic waste has been removed they'll be attractive to investors.

I agree that we want to avoid the situation where we have the government running the day-to-day operations of big banks for an extended period. But I don't see any particular reason to fear a scenario like the RTC. That worked well; this one would just be 10-20 times bigger.

Submitted by ferg (not verified) on Sat Jan. 24, 2009 12:51 PM PST.

This idea has gained so much currency in so much of the financial community, he says, "It's pretty much unanimous."

Umm. That's a pretty strong argument that the idea is a horrible giveaway to the "financial community."

Submitted by GA-Sen Watcher (not verified) on Sat Jan. 24, 2009 1:10 PM PST.

As long as the underwater debt gets written down, I would prefer it be done by the executive, through incentives if possible or regulation if necessary.

Also, no bank should be too big to fail, so the antitrust safeguards against consolidation which were systematically disabled since 1980 need to be replaced, all at once, as a matter of national security.

Submitted by Pat (not verified) on Sat Jan. 24, 2009 1:34 PM PST.

Nationalization and "good bank-bad bank" just means that taxpayers have taken on liability for all the toxic assets. I bet support on Wall Street for that is "pretty much unanimous." But why again should I and my kids support that?

Submitted by g. powell (not verified) on Sat Jan. 24, 2009 2:34 PM PST.

Thank you, Kevin, for pointing out how bad Nocera's piece was today. It left me totally confused about what he was trying to say. The Times obviously needs some help editing its business pages.

And Pat above is correct, the taxpayer is being asked to take on liability for all toxic assets. But the reason Pat should support it is because Pat and kids will probably suffer in the depression that will likely occur if we do nothing.

The bargin, however, should be that management and shareholders at these banks lose everything before govt money is ponied up. In fact, I think the govt should go after the bonuses of the bankers who caused these problems. It's only fair and addresses the moral hazard issues. I'm sure some legal way to do this can be thought up. Start with John Thain.

Submitted by beb (not verified) on Sat Jan. 24, 2009 6:24 PM PST.

I'm with anonymous above. The solution to the banking problem is to shoot all the bankers. (And let God sort them out.)

Every part of this whole banking" problem" stems from bankers making bad decisions. No one of them has been punished for losing their shareholders money. The first step in reforming Wall Street is to send the crooks to jail. That will remind the few remaining bankers so be better persons.

Submitted by Sam Jackson (not verified) on Sat Jan. 24, 2009 8:05 PM PST.

There is a potential benefit in nationalization. We could put in some sensible policies to guide these banks and sensible people in senior management.
I have no doubt they hired a lot of very smart people at these banks. But clearly, they weren't driven by good policy; The entire herd of lemming went right off the cliff. So we need some new leadership and government may be a good place to look.

Submitted by Sidewinder (not verified) on Sun Jan. 25, 2009 7:27 AM PST.

Why you nervous Kev? You think nationalized banks are going to be run any WORSE than they've been run for the last 10 years?

They may have different top executives (we should certainly hope so) & they may be removed from the requirement of showing ever-increasing profits quarter after quarter, forever, and their top exec may not be able to spend 1.5 mill of taxpayers money on office redecoration - but none of these are bad things. (and, yes, I know I'm spouting vague generalities & conflating bank & brokerage misdeeds.)

But if Federally-run banks were to, oh, fer example, go back to being safe places for people to deposit money, get loans, & make modest returns on savings, would that be such a bad thing?

Submitted by Aaron (not verified) on Sun Jan. 25, 2009 2:40 PM PST.

Nationalization has already taken place; we have already nationalized the losses of banks.

These halfway measures makes me more nervous than actually finishing the job would.

Submitted by Sam Simple (not verified) on Sun Jan. 25, 2009 6:54 PM PST.

We aren't in a "credit crisis", we are in an insolvency crisis.

Half of the banks are insolvent - their liabilities exceed their assets. To buy the bad assets and keep them open is like keeping a corpse hooked to a life support system. The patient is already dead.

Close them and sell the assets - just like the RTC did in the 1980s. Call it nationalization if you want - the game is over.

Submitted by John N. Winn (not verified) on Mon Jan. 26, 2009 2:38 AM PST.

Contrary to Nocera’s assertion, in the S&L crisis of the 80s the S&Ls were not “nationalized”. They were first bankrupted under normal bankruptcy laws and liquidated. The RTC was the buyer of last resort of the liquidated assets, typically foreclosed real estate holdings in depressed TX/LA/OK markets. The RTC was definitely not a sucker lender of last resort against overvalued collateral, like the Fed is now with its “cash-for-trash” discount window; nor was the RTC a stockholder of last resort to a failing, zombie “going-concern” institution.

“Nationalization” so far has meant “stockholder of last resort” and current discussions are merely about whether that singular stockholder will have any voting power or any control rights whatsoever. TARP I capital infusions without voting power were described in the press as “nationalization” to euphemize the fact that they were a no-strings-attached government dole to welfare queens with an egregious sense of entitlement. Current discussions of “nationalization” are identical euphemisms, this time with the super welfare queens being required, like other such queens, to meet some de minimus conditions for continued support.

An RTC solution is needed. But, the necessity of bankruptcy for it to work is what no one wants to discuss.

Submitted by Dee (not verified) on Mon Jan. 26, 2009 4:39 AM PST.

Like it or not, taxpayers are already on the hook for everything the government does from this point out. If we would have addressed the toxic assets 6 months ago, I think we would be in a different place right now -- actually we would have more bank failures but at least all the garbage would be out in the open and we could start to move forward. The RTC model is the way to go and I would rather see us spending money on getting these bad assets off the bank books and then give the good banks a chance to recover than keep pumping up their capital reserves. By the way, banks loan money off deposits, not capital injections. So this myth that banks should be lending b/c they got all of this government money ignores how banks operate. They are hoarding the money because their reserves are out of whack to their outstanding loans (bad loans). To me, RTC will force bankruptcies that should have happened a long time ago. But the good banks will survive and thrive eventually. Just my opinion.

I will never buy a device

Submitted by tiffany jewelry (not verified) on Fri Aug. 14, 2009 7:15 AM PDT.

I will never buy a device that allows a company to push deletes to stuff I have. If I pay for something, I want to be in control. Nagware on our PC's, popup ads in the browsers, locked cellphones. Enough of all this crap.

nike shoes Club brings

Submitted by Anonymous (not verified) on Fri Sep. 18, 2009 5:48 PM PDT.

nike shoes Club brings together the volunteers of the Heritage Center Museum Print NIKE SHOES Shop to share ideas and suggestions concerning the jordan sneakers educational demonstration. We meet jordan sneakers monthly to provide a gathering place for people with an interest in letterpress printing, to schedule volunteers to operate the Print Shop, and to provide a place for anyone interested in learning about letterpress printing or developing the cheap jordans skills to become a volunteer in the Museum Print cheap jordans Shop.