One aspect of forming a national bank is that it will help current bondholders of banks. In a nationalisation scenario, illiquid hard-to-price assets will be moved off the bank balance sheet and warehoused, or quarantined. In effect, this takes these assets off the market and allows for time and improving economies to regain their value. Even if Treasury takes over only one major bank and quarantines that bank’s illiquid asset, it will help support the value of similar assets held at other banks.
Under any other scenario, insolvent or sketchy banks might be forced to sell some of these assets at fire sale prices. Only the government can pull these assets off the market and put a sign on them “Not For Sale.” One can’t help wonder if some of these “don’t nationalise” protestors are hiding their real intention–have the government force troubled banks to sell assets cheap so others can swoop in and make a killing.
Because the government can cheaply quarantine these securities and hold them until their market value returns to some form of reality (not the situation today), bondholders are better protected. Income from these quarantined assets can be used to meet bondholder interest payments, and once they are sold, their increased value may allow for principal return in full. Any forced fire sale makes that impossible.
Allowing banks to value these assets on accrual value or even fair value, as opposed to the current accounting fiction called “mark to market,” would be a major stabilizer for all banks. But so far no one seems to want to make this common sense move.
Today’s stock market drop pulled every bank down, with Citi and BofA being priced now at bankruptcy prices. Almost all of these shares are now in the hands of speculators. Investment owners have long since left the playing field. It got so bad, Treasury had to put out a statement that it intends to keep banks in private hands. Not a good idea if this forces a fire sale of bank assets.
If Treasury does not nationalise, then it must remove these illiquid assets from many large banks in order to protect bondholders in particular. However, after the trillion or so in taxpayer subsidy already, Congress is unlikely to allow more money be spent to “buy” these assets upfront, which seems to be the idea of a bad bank. All that rope has been used up.
The cleanest way is through nationalisation and quarantine of illiquid assets.