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Kevin Drum thinks it through:
Three things, at least: (1) you have to figure out a widely acceptable way to value the toxic assets on bank balance sheets, (2) you have to set up a fair and consistent test for evaluating bank solvency based on those values, and (3) you need to make sure you have the legal authority to take over a huge, multinational financial conglomerate in an orderly way.The first condition is arguably being satisfied by the pricing mechanism in the Geithner plan. You'll have the market -- or something people are calling "the market" -- valuing assets. The solvency question will be settled -- depending on who you ask -- by the stress tests or the banks proving unable to sell assets at a price investors can accept. As for the legal authority, The Washington Post reports that the administration plans to send legislation to Capitol Hill this week that would "give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document."Conversations with administration officials have left little doubt that the administration hopes the Geithner plan will fix the banking system, or at least go a long way towards doing so. But they've also emphasized that the Geithner plan is the next step in an evolving process -- it simply spends down preexisting TARP money, after all -- rather than the administration's endpoint. And this legislation giving Obama the authority to nationalize is part of that cautious. The White House hopes the Geithner plan will work. But they're making contingency plans for what to do if it doesn't.
