The Problems With Bank Nationalization

For all of you nationalize/don’t nationalize aficionados out there, here are some thoughts from Economics of Contempt on the subject.

The author discusses Thomas Hoenig, the President of the Kansas City Fed, and his suggestions for resolving a seizure of a large bank and its holding company. 

For those of you unfamiliar with Hoenig, he has been with the Fed since 1973 and is one of the earliest critics of the too big to fail conundrum. He started talking about the subject in the 1990′s though his ideas received little attention.

At any rate, the author of Economics of Contempt who is an attorney, finds Hoenig’s arguments that the necessary apparatus to dismantle a bank holding company is already in place to be lacking. I need to add that he does not in any way dismiss Hoenig or his arguments just that he thinks there is still a legal hole that’s difficult to maneuver around.

Since I’m not an attorney, I’ll defer to him but I do find it passably strange that the Congress refuses to address this issue. Though the situation may be now improving, there’s no guarantee that the economy and the banks’ fortunes could take a U-turn. It might be a good thing to have the necessary authority in place in case that happens (I’ll have more to say on this tomorrow).

The final part of the post contains an interesting set of facts:

“I’m also unconvinced by Hoenig’s argument regarding the government’s ability to resolve extremely complex institutions, for which he cites the resolution of Continental Illinois:

At the time of its failure, Continental Illinois had $40 billion in assets and was the nation’s largest commercial and industrial lender. It was the seventh-largest bank in the United States. It had 57 offices in 14 states and 29 foreign countries, a large network of domestic and international relationships, and a separate function for making residential and commercial real estate loans.

 

Citigroup has over $1.9 trillion in assets, which makes it almost 50 times bigger than Continental Illinois by assets. Citigroup also has 2,070 principal subsidiaries, and roughly 12,000 offices in all 50 states and 107 foreign countries. And it took the government 7 years to fully reprivatize Continental Illinois—hardly the model of a successful nationalization.”

Those are sobering numbers. Frankly, I have little faith that we have regulators that could close something like this down without making a number of very bad decisions that would most likely result in some very unpleasant consequences.

The next time someone advocates outright nationalization of the banks or on the other hand defends their size, point them to these numbers. Long term it may be the best argument for the Simon Johnson solution. They probably are just too big.

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