NATIONALIZATION BACK ON THE TABLE?
According to the NY Times, the U.S. government is considering taking even larger stakes in U.S. banks that need more capital:
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the government aid into available capital for a bank — and give the government a large equity stake in return.
While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders who are wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.
Readers of TPC know that we have been an advocate of nationalization/FDIC receivership for some time. The banks’ bondholders must pay for their mistakes. That is the only way we can truly clean up the balance sheets of zombie banks. Naturally, this sort of action would likely lead to a meltdown in bank shares and the market, but in my opinion, the short-term pain is well worth the long-term fix. Every day we put off this eventual action is another day that we waste trying a Japanese style approach that failed there and will ultimately fail here.
