The case for nationalizing Citigroup and Bank of America, and getting Robert Reich a fact checker

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A couple of commenters have pointed me to Robert Reich’s list of “Criteria for TARP II.” Nos. 3-6 seem the most important:

3. Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.

4. Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.

5. Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulant assertions, and on balance sheets that hid the true extent of these banks’ risks and liabilities.

6. Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable lenders, they should return the money.

Okay, all somewhat hard to execute, but I get where Reich is headed with them, and generally share at least his sentiments on 3 through 5. But then he writes something that makes me wonder if he’s been paying any attention at all over the past few months:

You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning. At least then we’d find out what was on their balance sheets, because they’d have no choice but to sell off some of their junk, even at fire-sale prices (believe me, if the price is low enough, there are investors around the world who will buy them); they’d have to negotiate with their creditors and pay some of them off; many of their CEOs would be fired and directors replaced, which they should have been already; and most of their shareholders would be wiped out, which is unfortunate for them but, hey, they took the risk. In other words, these provisions would force the banks to clean up their balance sheets.

Because of the danger of bank runs, banks don’t go into Chapter 11 bankruptcy. They get taken over and wound down or sold by the FDIC. Lehman Brothers went into Chapter 11 because there is no FDIC for investment banks, and the messy result is widely agreed to have escalated the financial crisis to a new and global-economy-threatening level. So Reich’s exit scenario is impossible, and taxpayers are on the hook here no matter what.

The issue now is not really whether the government ought to impose new conditions that will force more banks into deeper trouble, it’s whether it should bite the bullet and simply nationalize the banks that pose the greatest risk. The government-appointed receiver or conservator or whatever he or she would be called could conceivably then impose the conditions Reich outlines, although I would think the much higher priority ought to be forcing the fire sale of troubled assets that Reich thinks would happen in his imaginary bankruptcy.

Felix Salmon makes the non-imaginary case today for nationalizing Citigroup and Bank of America, Brad DeLong has been on the topic for a while, and I highly recommend Steve Randy Waldman’s more general September post, Real capitalists nationalize. As for Reich, his heart seems to be in the right place, and like a lot of people I’ve moved closer to his worldview over the past year or two. But his troubled relationship with facts—as documented by Jonathan Rauch in his classic takedown of Reich’s memoir of his time as Labor Secretary—continues to amaze.

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