(email exchange)
Comes down to the fundamentals of banking and public purpose.
Presumably it serves public purpose for banks to have private equity capital as a ‘first loss’ piece to ‘protect’ government from loss due to deposit insurance.
Either it does or it doesn’t suit public purpose to do that at any give point in time.
‘Injecting’ government capital to act as a first loss piece to protect government from loss due to deposit insurance is nonsensical as government is in a first loss position either way.
Nationalizing means government is in a first loss position all the time.
So functionally, if a bank is insolvent due to insufficient (private) capital, and the government wants it to continue as a going concern, all it has to do is continue to insure the liabilities as it currently does, and permit the institution to continue operations desired by government without sufficient private capital ratios.
Government can also set a ‘cost’ for doing this if it’s concerned about private shareholders and uninsured creditors ‘profiting’ for these measures.
Etc.
But at the macro level banking is not viable without government doing job one of sustaining aggregate demand via getting the fiscal balance right. Or at least sufficient to muddle through.
Lending makes no economic sense to a for profit institution with falling asset prices and falling incomes.
So a full payroll tax holiday and a $300 billion no strings attached transfer to the states restores aggregate demand and stabilizes asset prices.
Delinquencies fall and the ‘toxic waste’ turns AAA, as everyone wonders what all the fuss was all about.
And a national service job for anyone willing and able to work that includes health care elevates life to a new level of prosperity which should have been considered normal all along.
>
> On Fri, Jan 23, 2009 at 11:39 PM, Russell wrote:
>
> George Soros, in a comment in today’s Financial Times, “The right and wrong
> way to bail out the banks,” takes issue with the idea of reviving TARP 1.0 in
> new dress and suggests another approach for dealing with the banking crisis:
>
> According to reports in Washington, the Obama administration may be close to
> devoting as much as $100bn of the second tranche of the troubled asset relief
> programme funds to creating an “aggregator bank” that would remove toxic
> securities from the balance sheets of banks. The plan would be to leverage
> this amount up 10-fold, using the Federal Reserve’s balance sheet, so that
> the banking system could be relieved of up to $1,000bn (€770bn, £726bn)
> worth of bad assets…..
>
> [T]his approach harks back to the approach originally taken – but eventually
> abandoned – by Hank Paulson, the former US Treasury secretary. The
> proposal suffers from the same shortcomings: the toxic securities are, by
> definition, hard to value. The introduction of a significant buyer will result, not
> in price discovery, but in price distortion.
>
> Moreover, the securities are not homogeneous, which means that even an
> auction process would leave the aggregator bank with inferior assets through
> adverse selection…..
>
> These measures – if enacted – would provide artificial life support for the
> banks at considerable expense to the taxpayer, but would not put the banks
> in a position to resume lending at competitive rates….
>
> In my view, an equity injection scheme based on realistic valuations, followed
> by a cut in minimum capital requirements for banks, would be much more
> effective in restarting the economy. The downside is that it would require
> significantly more than $1,000bn of new capital. It would involve a good
> bank/bad bank solution, where appropriate. That would heavily dilute existing
> shareholders and risk putting the majority of bank equity into government
> hands.
>
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