Monday, February 16, 2009

Pre-privatization / Nationalization / Receivership

InfectiousGreed makes an interesting point on the importance of language in the raging debate for / against nationalization. CalculatedRisk was the first I saw proposing the word "pre-privatization".

Prof. Nouriel Roubini explains why nationalization may be needed and uses the word "receivership". Basically his company's estimates "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."

Slightly less sanguine Martin Wolf opines "The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic."

Finally Andrew M. Rosenfield, the CEO of Guggenheim Investment Advisors concludes his Forbes commentary Why We're not Socialsits with "The present practice of subsidizing shareholders and debt holders of large insolvent bank holding companies is unprecedented, improper and unwise. It is time to take strong capitalist action--and that requires wiping out the existing owners of the insolvent banks and giving the system much needed new equity capital, which, at this time, can come only from the government."

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