Nationalization of U.S. banks is imminent

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Joe LaVorgna, Chief US Economist, Deutsche Bank Securities

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Joe LaVorgna, Chief US Economist at Deutsche Bank Securities has written a research note as part of the U.S. Daily Economic Notes titled "Falling Short : The government needs to buy toxic assets". It says that ultimately the taxpayer will pay, one way or another, either through greatly diminished job prospects and / or significantly higher taxes down the line. We think the government should do the following - Estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets, which would still return the principle to the taxpayers. So, it's basically saying - either you'll have 20% unemployment, unless you buy toxic assets, not for what they are worth, not for what their market value is, but as much as you can pay.

Joe LaVorgna, who wrote the note talked to Simon Johnson and Adam Davidson, reporters from NPR and said that the bottomline is that someone has to pay for the mess created and there's no escaping that the taxpayer is on the hook.  

The government and the banks have been saying that there's some magical recipe where the government bails out the banks , the banks do better and the taxpayers end up making money. Everyone wins.

Simon Johnson posted the note on his blog and one the readers on his blog paraphrased the note saying, "that sure is a nice global economy you've got there. Be a shame if anything were to happen to it."

Joe LaVorgna has called it a reality check and said that the approach has not been aggressive enough. That there's no point in delaying the pain. He says, "let's just get to it."

Why though can't the taxpayer be made shareholders in the banks? Why weren't the taxpayers made stakeholders in TARP1 and TARP2? This is the nationalization option. Under this option, the government has to tell the banks to recognize their losses and then the government covers the losses and liabilities of the banks. But the government now owns the bank. As much as this option seems like socialism, in this option, the taxpayer has an ownership stake in the banks (instead of an ownership stake in toxic assets) and once the government cleans up the bank and sells it off down the road, the taxpayers will get some of their money back. Besides, this is the traditional way that governments usually fix banks. 

Simon Johnson, formerly Chief Economist at the International Monetary Fund and he warns that there are many practical challenges related to nationalisation of banks and that's why the government doesn't want to talk about this.When Adam Davidson interviewed the Secretary of the Treasury, Timothy Geithner, Geithner refused to use the word "nationalization". In TARP1 and TARP2, the government is not forcing the banks to sell their assets or mark-it-to-market and it has gone out of its way to give banks bailout money without taking control. They've given banks over $240 billion (including $45 billion to Citibank alone) and structured the deal in a special way, specifically designed so it was not a nationalization and when Citibank's troubles got worse, the government had to go through these amazing contortions to help the bank without becoming the owner. 

However, Nouriel Roubini, Professor of Economics at NYU tells CNBC that AIG is already nationalized and it is not a question of whether banks should be nationalized but if the banks should be partially or wholly nationalized. It remains to be seen how the political theater surrounding the economic issues plays out. But the fact that the major banks, including Bank of America and Citibank, are insolvent, is utterly obvious.