Monday, February 23, 2009

More on the Possible Nationalization of Some Banks

by Bill McBride on 2/23/2009 02:40:00 AM

From Edmund Andrews at the NY Times: As Doubts Grow, U.S. Will Judge Banks’ Stability

The Obama administration will begin taking a hard look at the financial condition of the country’s 20 biggest banks this week to judge whether they could hold up even if the downturn worsens further than policy makers already expect.

These reviews of the banks’ books, known as “stress tests,” are heightening a dilemma for Obama aides about how candid they should be about the health of banks like Citigroup and Bank of America. The tests are expected to take several weeks.
...
The stress tests will use computer-run “what if” situations to estimate what would happen to each bank under Depression-like conditions, with unemployment surging to 10 or 12 percent, for example, or home prices dropping 20 percent further, Treasury and Federal Reserve officials said.

Fed officials emphasized that these hypothetical events were “highly unlikely” to occur.
The Treasury is expected to release more details this week on the stress tests, but unfortunately it still appears they do not plan on releasing the results of the tests - a serious mistake that will probably lead to more rumors and market turmoil.

And from Paul Krugman: Banking on the Brink
The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets.
For the banks that pass the stress tests, releasing the results will be a huge boost to confidence, and for the banks that fail, this gives the administration an out - they will be "shocked, shocked" to find that certain banks are insolvent. And then they can be preprivatized ...

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