Wheels Turning

February 15, 2009 8:40 a.m.

There was a very odd moment on This Week this morning when Rep. Maxine Waters (D-CA) and Sen. Schumer (D-NY) both said they opposed bank nationalization only to be followed by Sen. Lindsey Graham (R-SC) who said that, painful as it is to contemplate, we need to seriously consider doing so.

Now, I’ve said before that I think the term ‘nationalization’ mainly confuses and obscures the issue. And since Geithner’s speech last week there does seem to be a slow but steady movement in the direction of letting the big insolvent banks fail. But this contrast points to something I’ve been wondering about for a while, which is whether the idea might not end up getting some paradoxical support from more doctrinaire free market types.

The idea has never been to nationalize the banking sector as a matter of on-going national policy. It’s more like a highly structured and customized form of moving these institutions through Chapter 11 bankruptcy. In fact, we have a whole system in place for how this is done by the FDIC.

But as long as you have this unworkable hybrid of keeping notionally solvent banks on taxpayer life support with the pretense that they’re still viable private corporations you end up with government-mandated salary caps and lots of other government intrusions into the running of these business. We’re still working on this story. But recently we we were told that just after receiving its TARP money, one of the mega-banks turned around and sent a whole bunch of stateside jobs to India to cut costs. If and when that comes out I’m sure you going to have a lot of calls to prevent TARP funded banks from doing that too. And why not? Notwithstanding a marginal company’s need to cut costs, why should taxpayers from state X directly underwrite bank Y to put tens of thousands of state X’s residents out of work?

Organized bankruptcy for failed companies is not a radical or left-wing idea. It’s the junction where capitalism and the rule of law meet. Very establishment stuff.

Needless to say, this is hardly the most compelling reason to stop subsidizing failed banks and the failed bankers who run them. The current approach isn’t working. It’s amounting to a massive giveaway of taxpayer dollars. But I suspect this may end up pushing some of these people over the edge too.

Late Update: The whole “retention fee” issue seems very similar to what I was referring to above. In theory at least, there’s a logic to these companies needing to make sure their best employees aren’t poached by competitors. In practice, I’m skeptical there’s such a great market out there for financial services wizards. I know a lot of them. And most are really glad not to have lost their jobs yet. But the whole problem is an artifact of the illogic of propping up the failed banks in the first place. Citi wants to protect the value of its shareholders’ big asset, the company, the institution itself as a value proposition going forward. But that’s something they should have thought of before they let the board and executives drive the company into bankruptcy. It’s not clear to me why taxpayers care if Citi’s best brokers go to Morgan Stanley or some new bank that gets set up from the ruins of one of the failed ones. I’ll admit I’m not sure I have as clear an answer to the idea that foreign banks could poach the best people, etc. So I’ll defer to others who have a better handle on that issue. But you still end up in these unworkable situations. And I suspect it’s a messiness that will lead many free marketeers to decide that biting the bullet is the way to go.

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