For proponents of bank nationalization as a panacea for our problems, it should be pointed out that the FDIC nationalized IndyMac last year. They just sold it (after failing to find any larger banks that would buy it) to a consortium of former Goldman Sachs executives and hedge fund managers (including George Soros). They sold it at an estimated loss of $10.7 billion. The FDIC provided $9 billion in financing to the consortium and agreed to assume 80% of the losses on future (existing) loan defaults. That is what nationalization looks like.
Two points on this:
1. Notice that the FDIC had to go looking for hedge-fund owners and ex-Goldman Sachs execs when they couldn’t find any larger banks to buy out IndyMac. One of the major concerns we keep hearing about Geithner’s plan is that it will enrich hedge fund operators. How is nationalization different?
2. Notice that the taxpayer lost over $10 billion in this transaction and that we had to provide a loan of $9 billion and to assume 80% of the losses on future (existing) loan defaults. Once again, sweetheart financing and the assumption of risk by the taxpayers are key issues that are raised in opposition to Geithner’s plan.
I think it is safe to say that if no banks were able or willing to swallow IndyMac, no banks are going to be able to swallow Wells Fargo, CitiGroup, or Bank of America. Who will buy them back from the government? A: Hedge Fund managers and ex-investment bankers, that’s who. And they’re not going to buy them without sweetheart financing and the assumption of risk for future loan defaults by the taxpayer.
There are good reasons to nationalize the banks and (certainly) to fire current management. But don’t think we can avoid these fundamental realities by nationalizing banks.
Update [2009-3-21 20:57:19 by BooMan]: Jerome Guillet pointed me to an Economist article about hedge-fund manager John Paulson, who made $3.7 billion shorting mortgage products. He’s one of the hedge-fund managers, along with George Soros, who bought IndyMac. Short high, buy low. Few people have profited more directly off our misery, but this is one of the guys the FDIC has to go to to buy off a nationalized bank. I think there is a lesson in there for all of us, and it relates to the futility of trying to punish the bad guys.
