Given that everyone agrees that Nouriel Roubini has been amongst the most prescient predictors of the crisis, his op-ed today arguing that nationalization -- "call it 'receivership' if that sounds more palatable," he says -- deserves to be taken seriously. So here's the Roubini plan:
First, and this is by far the toughest step, determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it must determine which are solvent and which aren't in one fell swoop to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.Second, immediately nationalize insolvent institutions. The equity-holders will be wiped out, and long-term debt-holders will have claims only after the depositors and other short-term creditors are paid off.Third, once an institution is taken over, separate its assets into good and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms also would be instituted to reduce the chances of costly future crises.
Oddly, though, I think the most influential idea will be to call nationalization by another name. As others have noted as well, there's a provision in Geithner's plan that allows the government to transform its preferred investments into common equity ownership stakes.To buy the bank, in other words. The theory might well be that if you spend enough time telling people that you won't nationalize that they'll hardly notice when you do. The big difference between that strategy and Roubini's prescription is sequence: The Geithner plan, if you believe it has a nationalization provision, only uses that after everything fails. Roubini uses it before everything else fails.
