Good Bank, Bad Bank All Adds Up to Nationalization
January 23rd, 2009Via: Reuters:
Whether it’s called good bank/bad bank, troubled asset relief or some new acronym, the United States appears to be on a course that will lead to the effective nationalization of some of the largest U.S. lenders.
Investors have little confidence in the banks’ ability to pull themselves out of the credit mess and are growing frustrated with a government response seen as haphazard. This is putting pressure on President Barack Obama to come up with a bolder plan.
His economic team has dropped strong hints that an idea to buy up bad assets, which was proposed but then discarded under former President George W. Bush, may soon be resurrected.
While the word “nationalization” is rarely uttered in official public discussion, the end result may be the same. By carving out the bad assets that are blocking the normal flow of credit and then pumping taxpayer money into the remaining healthy part, the public’s stake in these institutions may exceed private holdings.
“It’s really a question of semantics and what you call nationalization,” said Kenneth Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund. “The banking system can’t stand on its own at the moment and it needs to be cleaned up and recapitalized.”
At issue is the same problem that has been plaguing financial firms and the economy for well over a year. Lax lending standards left banks with too many souring loans and insufficient capital to cover them.
A series of government efforts to clean up the mess have fallen short, as evidenced by banks such as Citigroup and Bank of America coming back to government coffers for more money, in return for partial public ownership.
Goldman Sachs economist Jan Hatzius has estimated that total credit losses may exceed $2 trillion globally, and banks have so far recognized less than half that much.
