[Marxism] Richardson andl Roubini: 'Nationalize the Banks! We're all Swedes Now'

[Ralph Johansen <mdriscollrj@xxxxxxxxxxx>]

*Nationalize the Banks! We're all Swedes Now*

By Matthew Richardson and Nouriel Roubini
Washington Post
Sunday, February 15, 2009; B03

The U.S. banking system is close to being insolvent, and unless we want 
to become like Japan in the 1990s -- or the United States in the 1930s 
-- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of 
the world's financial capital, we feel downright blasphemous proposing 
an all-out government takeover of the banking system. But the U.S. 
financial system has reached such a dangerous tipping point that little 
choice remains. And while Treasury Secretary Timothy Geithner's recent 
plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 
trillion it involves is just the beginning of the problem. Another $7 
trillion -- including commercial real estate loans, consumer credit-card 
debt and high-yield bonds and leveraged loans -- is at risk of losing 
much of its value. Then there are trillions more in high-grade corporate 
bonds and loans and jumbo prime mortgages, whose worth will also drop 
precipitously as the recession deepens and more firms and households 
default on their loans and mortgages.

Last year we predicted that losses by U.S. financial institutions would 
hit $1 trillion and possibly go as high as $2 trillion. We were accused 
of exaggerating. But since then, write-downs by U.S. banks have passed 
the $1 trillion mark, and now institutions such as the International 
Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.

But if you think that $2 trillion is high, consider our latest estimates 
at the financial Web site RGE Monitor: They suggest that total losses on 
loans made by U.S. banks and the fall in the market value of the assets 
they are holding will reach about $3.6 trillion. The U.S. banking sector 
is exposed to half that figure, or $1.8 trillion. Even with the original 
federal bailout funds from last fall, the capital backing the banks' 
assets was only $1.4 trillion, leaving the U.S. banking system about 
$400 billion in the hole.

Two important parts of Geithner's plan are "stress testing" banks by 
poring over their books to separate viable institutions from bankrupt 
ones and establishing an investment fund with private and public money 
to purchase bad assets. These are necessary steps toward a healthy 
financial sector.

But unfortunately, the plan won't solve our financial woes, because it 
assumes that the system is solvent. If implemented fairly for current 
taxpayers (i.e., no more freebies in the form of underpriced equity, 
preferred shares, loan guarantees or insurance on assets), it will just 
confirm how bad things really are.

Nationalization is the only option that would permit us to solve the 
problem of toxic assets in an orderly fashion and finally allow lending 
to resume. Of course, the economy would still stink, but the death 
spiral we are in would end.

Nationalization -- call it "receivership" if that sounds more palatable 
-- won't be easy, but here is a set of principles for the government to 
go by:

First -- and this is by far the toughest step -- determine which banks 
are insolvent. Geithner's stress test would be helpful here. The 
government should start with the big banks that have outside debt, and 
it should determine which are solvent and which aren't in one fell 
swoop, to avoid panic. Otherwise, bringing down one big bank will start 
an immediate run on the equity and long-term debt of the others. It will 
be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity 
holders will be wiped out, and long-term debt holders will have claims 
only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good 
ones and bad ones. The bad assets would be valued at current (albeit 
depressed) values. Again, as in Geithner's plan, private capital could 
purchase a fraction of those bad assets. As for the good assets, they 
would go private again, either through an IPO or a sale to a strategic 
buyer.

The proceeds from both these bad and good assets would first go to 
depositors and then to debt-holders, with some possible sharing with the 
government to cover administrative costs. If the depositors are paid off 
in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The 
assets could be held to maturity or eventually sold off with the gains 
and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new 
banks capitalized by good assets. Insolvent, too-big-to-fail banks would 
be broken up into smaller pieces less likely to threaten the whole 
financial system. Regulatory reforms would also be instituted to reduce 
the chances of costly future crises.

Nationalizing banks is not without precedent. In 1992, the Swedish 
government took over its insolvent banks, cleaned them up and 
reprivatized them. Obviously, the Swedish system was much smaller than 
the U.S. system. Moreover, some of the current U.S. financial 
institutions are significantly larger and more complex, making analysis 
difficult. And today's global capital markets make gaming the system 
easier than in 1992. But we believe that, if applied correctly, the 
Swedish solution will work here.

Sweden's restructuring agency was not an out-of-control bureaucracy; it 
delegated all the details of the cleanup to private bankers and managers 
hired by the government. The process was remarkably smooth.

Basically, we're all Swedes now. We have used all our bullets, and the 
boogeyman is still coming. Let's pull out the bazooka and be done with it.

/Matthew Richardson and Nouriel Roubini, professors at New York 
University's Stern School of Business, contributed to the upcoming book 
"Restoring Financial Stability: How to Repair a Failed System."/

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