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Sunday, May 17, 2009

Geithner's Folly: Huffington Press 3/1/09

President Obama took a huge political risk in his budget by proposing to put another $750 billion at Geithner's disposal to save the banks. Before the banking system is returned to health, we will need this much money and more. But if that money is dripped out in modest increments, as has been the pattern to date, the banks will only continue their slow bleed.

Eventually, the administration will get around to nationalizing the big banks, because it has no choice. Officials can prettify this reality by calling it a receivership or a conservatorship. But the exercise, done properly, will entail shutting down Citi in its present form, getting the bad assets off the bank's books, sharing the loss with Citi's creditors, breaking up Citi, and getting a sound bank functioning again.

The government may well need to do this with one or more other large banks, including Bank of America. And it can't achieve this by proxy using existing management. Civil servants accountable to the public need to run the operation. The Treasury has no such mission and no such staff. Only the Federal Deposit Insurance Corporation has hands-on experience taking over, cleaning out, and running failed banks. The mission will need to be entrusted either to the FDIC or to a new agency created for the purpose. If the government needs to hire more people, plenty of Wall Street veterans are looking for work. With different masters and different motives, their technical competence is more than adequate.

The government can either act quickly, the way the Swedes did when they faced a similar financial collapse; or the government can belatedly take banks over after delaying and trying half-measures, the way the Japanese did it. The Swedish economy got back on track and the banking system was returned to private ownership in fairly short order. The Japanese economy bled for a decade.

Why is Geithner dithering? Because he is asking the wrong question. The question he is posing is: how can the government save Citigroup? The right question is: how can the government rebuild the banking system?

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