Mr. [Nouriel] Roubini tells me that bank nationalization “is something the partisans would have regarded as anathema a few weeks ago. But when I and others put it in the context of the Swedish approach [of the 1990s] — i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector — it’s clear that it’s temporary. No one’s in favor of a permanent government takeover of the financial system.”
There’s another reason why the concept should appeal to (fiscal) conservatives, he explains. “The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks.”
In any case, Republicans must now temper their reactions, he says. “The kind of government interference in the economy that we saw in the last year of Bush was unprecedented. The central bank — supposed to be the lender of the last resort — became the lender of first and only resort! With our recapitalizing of financial institutions, and massive government intervention in the markets, we’ve already crossed a significant bridge.”
So, will the highest level of government be receptive to the bank-nationalization idea? “I think it will,” Mr. Roubini says, unhesitatingly. “People like Graham and Greenspan have already given their explicit blessing. This gives Obama cover.” And how long will it be before the administration goes in formally for nationalization? “I think that we’re going to see the policy adopted in the next few months . . . in six months or so.”
I’m down with this….so long as it is only for the purposes of liquidation and not operation.
Why is this better than Chapter 11?
Sidney [#2]: The Bankruptcy Code does not apply to banks.
#3 Irenaeus,
So what does it mean when WaMu and Lehman Brothers ‘file for chapter 11 bankruptcy protection’ – as they did recently?
Sidney [#4]: WaMu is a holding company that owned a bank (now part of Chase) and some other firms. Because the holding company is not itself a bank, it is subject to the Bankruptcy Code.
Lehman Brothers is a securities firm, not a depository institution, and thus comes under the Bankruptcy Code.
In sum, the Bankruptcy Code does [i]not[/i] apply to depository institutions (e.g., commercial banks, thrift institutions, and credit unions), insurance companies, and government-sponsored enterprises. It [i]does[/i] apply to a wide range of other financial institutions, including finance companies, securities broker-dealers, and companies that own depository institutions.
Confusing? You bet.
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When the FDIC takes over a failing bank, it can achieve a result like chapter 11 by establishing a “bridge bank” to carry on the failed bank’s business. The failed bank’s shareholders lose their investment and its uninsured creditors normally take a loss—a result broadly similar to chapter 11. The bridge bank operates under FDIC control until the FDIC can find a buyer for it. This is what people mean when they refer to “nationalization.”