I've been reading, almost daily, Krugman and Matt Yglesis's various criticisms of the Obama bank plan and started out supporting nationalization as described by Krugman: take over the bad banks, get rid of current stakeholders (shareholders and bondholders), divide into good and bad assets, and sell what you can. In a purely hypothetical world, it seems to be a simple, elegant solution that would put the whole problem behind us quickly.
But we don't live in a hypothetical world. What would zeroing out the shareholders really do? As others have pointed out, we know that many bank employees own their company stocks. As do pension funds. As do millions of individual investors. And what are the repurcussions of wiping out the holdings of foreign governments, some of whom we depend on for financing our national debt?
It is apparent from the latest from treasury that the government is going to wind up owning a much larger interest in the banking system. Why not just use this interest (or the existing government/taxpaper interest) and existing regulatory power to require the imposition of new management and divesture of assets without wiping out the shareholders? Even the Wall Street Journal has been calling for such measures:
href="http://online.wsj.com/article/SB123543683662554607.html
Here's another idea: Inject another round of public capital if need be, but also replace the board and the management. Give the new managers a mandate to sell Citi's various parts, many of which are viable, profitable businesses. Declare publicly that this is merely a temporary process and that the Treasury's goal is to restore Citi to a healthy (albeit smaller) private bank as rapidly as possible. Citi's equity holders would be diluted at best, but its depositors would be protected, and the conglomerate would finally be on the path to earning itself and taxpayers out of those bad assets. Oh, and have President Obama declare publicly that he'll fight any more Congressional acts of political vengeance against banks.
Every big bank is a separate case, and most won't require such a drastic resolution. The larger policy goal is to help the financial system to burn down its bad debt while its profitable parts earn their way back to better health. The Administration has proposed policy tools toward this end, but it needs to stop the ad hoc crisis management and get on with the task.
and there is some evidence the Obama administration is moving towards this (although not at all quickly enough) (From the current TPM):
Citigroup CEO Vikram Pandit on a recent phone call with a senior government official, pleading for time before the government pushes out top management: "Don't give up on us. Give us a chance to execute."
Yes, I realize that this means that the existing shareholders would get a share of any profits from reselling the banks assets, and the tax payers would not get as much of a payback as they would with 100 percent nationalization. But perhaps avoiding the collateral damages of wiping out the existing proprietary interest in the banks would balance that loss. I also understand that some of the banks are already insolvent, and the market's belief that government assistence is propping up their stock value (although the vultures shorting these stocks en masse are simulteanously driving their values lower)
The bottom line is that I don't think Obama has gone stupid on this issue, and I don't think he has been hypnotized by the wall street crowd. He's got to be aware of the chorus of cries for nationalization. If he isn't doing it, I chose to believe that he has a good reason for doing so. I'd like to see, however, the SEC come out with another moratorium on short-selling bank stocks until the sector is on its feet -- hate to see the vultures making millions, and increasing the cost of recapitalization for the taxpayers