Lindsey Graham, the Republican senator, Alan Greenspan, the former chairman of the US Federal Reserve, and James Baker, Ronald Reagan’s second Treasury secretary, are in favour. Ben Bernanke, current Fed chairman, and an administration of liberal Democrats are against. What is dividing them? “Nationalisation” is the answer.
In 1978, Alfred Kahn, an adviser on inflation to President Jimmy Carter, used the word “depression”. So angry was the president that Mr Kahn started to call it “banana” instead. But the recession Mr Kahn foretold happened all the same. The same may well happen with nationalisation. Indeed, it already has: how else is one to describe the actions of the federal government in relation to Fannie Mae, Freddie Mac, AIG and increasingly Citigroup? Is nationalisation not already the big financial banana?
Much of the debate is semantic. But underneath it are at least two big issues. Who bears losses? How does one best restructure banks?
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In those circumstances, the idea of “nationalisation” should be seen as a synonym for “restructuring”. Few believe banks would be best managed by the government indefinitely (though recent performance gives some pause). The advantage of nationalisation, then, is that it would allow restructuring of assets and liabilities into “good” and “bad” banks. The big disadvantages are inherent in organising the takeover and then the restructuring of such complex institutions.
If it is impossible to impose losses on creditors, the state could well own huge banks for a long time before it is able to return them to the market. The largest bank restructuring undertaken by the US, before last year, was that of Continental Illinois, seized in 1984. It was then the seventh largest bank and yet it took a decade. How long might the restructuring and sale of Citigroup take, with its huge global entanglements? What damage to its franchise and operations might be done in the process?
We are painfully learning that the world’s mega-banks are too complex to manage, too big to fail and too hard to restructure. Nobody would wish to start from here. But, as worries in the stock market show, banks must be fixed, in an orderly and systematic way. The stress tests should be tougher than now planned. Recapitalisation must then occur. Call it a banana if you want. But bank restructuring itself must begin.
http://www.ft.com/cms/s/0/f24fc392-082a-11de-8a33-0000779fd2ac.html?nclick_check=1