Scotch on a Train

Part 3.

If we can’t figure out prices at which to buy “bad” assets from the financial institutions so that we can create a “bad bank” (joke is so tempting…must resist), and if the unpredictable dilution and intermittent government action is not helping people settle on a value or establish solvency, then what can be done to sort out the banks so they can get back to lending?

A brief aside, or spur, here.  The financial institutions are not lending because they are trying to build up capital to make everyone think they are solvent and trustworthy.  They want to keep every dollar they can.  Further, given the sorry state of things, who can they trust?  (Whoa!  I know I’ve seen that station before.)

Also, I try to use the term financial institution because there are many players in this mess that are not technically banks, although many of them have converted into banks recently in order to get more federal assistance.

Back to the main line.  In the view of the Cowboy, the solution is probably going to involve nationalization.  Contrary to stereotypes, the Cowboy is not a bettin’ man, so I won’t put money on it.  And these things are very hard to predict.  But still, nationalization allows the government to set a price, clean up the books, create the “bad bank” and get on with business.  Moral hazard is not as big an issue anymore since the shareholders are wiped out.  Taxpayers are not suffering for the sake of shareholders in a failed institution.

As soon as the clean-up is finished, the financial institutions are sold to the public and the proceeds go back to government coffers.  The goal is to keep it short and sweet.

Thesis 3: Why do you nationalize?

  1. To arbitrarily set a price without inducing moral hazard.
  2. To re-establish trust.
  3. To avoid unpredictable dilution.

There is still some moral hazard.  Failing banks will fight to keep from being nationalized in order to protect management and shareholders.  But this seems to be a fight we want; they should want to avoid nationalization.  Regulators just need to ensure there’s no funny business.  Easier said than done; but doable.

Predictability, openness, clarity.

A bit of good water, yes.  Ice, absolutely not.

(to be continued)

Published in: on February 28, 2009 at 22:51  Comments Off on Scotch on a Train  
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