On Feb 11, 2009, at 4:41 PM, Michael Pollak wrote:
> Okay, so you're saying, besides the pure pleasure of kicking them
> hard (which again, I share[FN1]) it's a moral hazard justification?
>
> My question is, isn't that kind of redundant and/or useless?
> Because a negative incentive like that would only makes sense if
> we're going to give them the kind of freedom from regulation where
> they could do this again. But it seems to me, the only way to stop
> this sort of thing is to not trust to incentives for good behavior
> (the Greenspan approach) and erect, as you said, a tightly regulated
> and hugely more transparent banking system, that makes much of this
> behavior illegal and enforces it.
Regulation's nice, but these folks will try very hard to find ways around them. Shooting one in the head now & then is a good backstop.
> Because nationalization would wipe out all the equity holders and
> all or most of the unsecured creditors. In which case at least some
> people who hold bank stock or bonds in the other banks would fear it
> happening to them and would dump them. Triggering a kind of self-
> fulfilling run on the banks of the sort we saw in October. This is
> not a possibility? There's a way to ward it off?
>
> In seems one advantage Sweden was that nationalizing five banks
> meant nationalizing the entire banking system -- all equity and
> unsecured debtholders were hit at once. Nationalizing part of it
> seems more difficult precisely because it could incite these sort of
> runs. But maybe there is data from history that shows this doesn't
> happen or doesn't matter?
We nationalized all kinds of things - including, effectively, Citibank, during the S&L/bank bailout of the early 1990s, and the others survived. Britain has nationalized a couple of banks and the others have survived (so far). This half-assed stuff isn't working.
Doug