Obama Presidency

Bank Nationalization Isn't the Answer

| by NCPA

Nationalization appears to have worked well during the banking
crisis of the 1980s when the Federal Deposit Insurance Corporation
(FDIC) recapitalized and took control of Continental Illinois Bank,
which was then the country's seventh largest bank. Today, however, our
10 largest banking companies hold some two-thirds of the nation's
banking assets, and some are enormously complex.

Continental had less
than 2 percent of the nation's banking assets, and by today's standards
it was a plain-vanilla bank. This is important for three reasons, says
William Isaac, chairman of the FDIC from 1981-1985, and current
chairman of the Secura Group.

-- Any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically.

-- We
are in the middle of a serious economic downturn where deflation is a
realistic concern; do we really think that dismantling our largest
banks would be helpful.

-- What's more, we won't be able to stop
at nationalizing one or two banks; if we start down that path, the
short sellers and other speculators that the Securities and Exchange
Commission still refuses to re-regulate will target for destruction one
after another of our largest banks.

-- For
nationalization to work there needs to be a reasonable exit strategy;
in the case of Continental, we had scores of options for returning the
bank to private hands, including a public offering or a sale to any
number of domestic and foreign banks and investor groups.

-- Today, who has the wherewithal, legal authority, and desire to purchase our largest banks?

-- No
one comes to mind, particularly if we rule out foreign groups, which
would not pass muster due to national security concerns about ceding
that much power over our economy to foreign powers.

-- Who will run these companies when we dismiss the existing senior managers and board members?

-- We had significant difficulties attracting quality people to Continental even without today's limits on compensation.

Obama administration should declare that nationalization of any major
bank is off the table; that the government stands behind our entire
banking system; and that our banks will continue to receive a nonvoting
form of equity capital, such as convertible preferred stock, from the
government to the extent needed, says Isaac.


Source: William M.
Isaac, "Bank Nationalization Isn't the Answer; Trust me, I've done this
before," Wall Street Journal, February 24, 2009.
For text:online.wsj.com

For more on Economic Issues:www.ncpa.org