Sorting out the bad banks from the good

By Justin Fox | February 24, 2009 | +

I’ve got an article on bank nationalization and the like up on TIME.com. My column for the magazine is going to be an outgrowth of it, so any editorial suggestions will be accepted gratefully (if not necessarily followed).

Related Topics: Wall Street & Markets

@TIMEBusiness

Latest on Business

Airlines May 22, 2012

Senate Approves Hike in Airline Security Fees

(WASHINGTON) — A Democratic-controlled Senate panel Tuesday approved a $2.50 increase in airline security fees that would double the per-passenger fee for those taking nonstop flights.
From our Partners
Why Greece Isn't Leaving the Eurozone YetSlate

Weird-Mart: Tales of the Bizarre from the Walmart AislesDaily Finance
Tech Bubble Death Watch: The Facebook IPOHuff Post Business
Wall Street & Markets May 22, 2012

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

plukasiak

given that the U.S. banking system was effectively nationalized on Oct. 13, when then Treasury Secretary Henry Paulson called the heads of the country’s nine biggest banks into his office and told them they couldn’t leave the room before agreeing to sell shares to the government.
_
um, given that there are thousands of banks smaller than the top nine, saying that “the US banking system was effectively nationalized” as of Oct 13 is a gross distortion/exaggeration
_
but I think the whole premise here is wrong (or at best confusing/deceptive), because when people talk about “nationalizing the banks”, they are talking about “taking them over” in the way that WaMu and IndyMac were. In other words, we’re not talking about ownership, but liquidation of assets, with not just stockholders, but bondholders, losing out.
_
bryanfromhouston

What pluk said.
-
But there is a problem with “For the moment, determining the health of banks remains a government judgment call.”
-
Justin, the government already has a system in place to make those judgment calls. It still goes back to:
.
Why haven’t you guys mentioned Title 12, Sec. 18310 or PCA (prompt corrective action)?????
.
http://www.huffingtonpost.com/william-k-black/why-is-geithner-continuin_b_169234.html
.
The problem for the markets isn’t that our banks are insolvent it is that they have no idea what is going to happen tomorrow with the insolvent banks. If they knew they were going to take the big hit, then they could just take the big hit. Soon after private capital would begin flowing back into the money. We know anecodotally, empirically and historically that this is the case. Yeah, New York city is decimated to 3rd world status, but hey, capitalism without risk is like a hamburger with no beef!
.
Further, it extremely important for folks to be made aware that valuations of a banks assets isi an extremely difficult process. Banks don’t just stop operating….these things are dynamic. Sort of like trying to navigate a plane while it is making inflight course corrections.
Justin Fox

@plukasiak: My sense is that the people in Washington talking about nationalization all mean Sweden-style nationalization, in which shareholders are wiped out but creditors aren’t and the bank isn’t liquidated.

@bryanfromhouston: Thanks for that link. I will post on it later.