Today's news of more money for AIG brings more debate about "nationalization" and from the comments under some the diaries there seems to be some wrong information about "nationalization". In my opinion many of the proposals for "nationalization" are starting sound the same. Even, James Baker's suggestion in today's Financial Times sounds like many left leaning economists. So, I offer this proposal, which is not very profound or ground breaking, as a means of debate and discussion.
One major problem we have with having an intelligent debate about the merits of any proposal is the lack of transparency on the extent of the problem. But here are my thoughts:
- Hold an open auction of a portion of the toxic assets of Citi and AIG immediately. I talked about this yesterday.
- Hold a real stress tests based on real worst-case scenarios. The purpose of the stress test is to determine solvency and not some "future" ability to weather a "severe recession". Publicly disclose the results of tests. This obviously assumes that we want to restore confidence and trust to the markets.
- Form or create a government corporation similar to the Resolution Trust Corporation. We could even talk with other foreign countries about participating in this new entity. This new entity would take over the assets of the banking holding companies that were deemed insolvent.
- This new corporation could offer debt to equity swaps to current bondholders but current shareholders would be wiped out. The new corporation would start liquidating - selling off - profitable divisions/subsidiaries. And even start selling off toxic assets to the highest bidder (if there any).
- Recapitalize the existing bank and slowly start selling this newly cleaned up entity back to private investors. But have an entirely new regulatory system especially requiring banks to stick to the business of banking - accepting deposits and making loans.
Any solution to this financial crisis will be very painful. We need to start meeting this crisis "head on" like Secretary Geithner likes to say. So far, the solutions provided by the Secretary have done nothing to restore confidence and trust to the markets. "Nationalization" or whatever you want to call will be the most fair way for taxpayers and best way to meet this crisis "head on".