FT readers interview Roubini

Nouriel Roubini
Nouriel Roubini

There’s a lengthy and fascinating Q&A session between Financial Times readers and Nouriel Roubini posted at the FT site.

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How long will be before we can tell if the US and UK governments’ plans to rescue the banks prove effective or not? If they don’t when do you think lending will recover to near-normal levels?
Canh Humphries, Beckenham

[Roubini]: There are three basic approaches to a clean-up of the banking system: recapitalization together with purchase by a bad bank of toxic assets; recapitalization together with guarantees – after a first loss – of the bad assets; outright government takeover (call it nationalization) of insolvent banks to be cleaned after takeover and then resold to the private sector.

Of the three options the first two have serious flaws: in the bad bank model the government may overpay for the bad assets as the true value of them is uncertain; even in the guarantee model there can be such implicit over-payment (or over-guarantee that is not properly priced).

In the bad bank model the government has the additional problem of having to manage all the bad assets it purchased.

Thus, paradoxically nationalization may be a more market friendly solution: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer; it can resolve the problem of government managing the bad assets by reselling most of the assets and liabilities of the bank to new private shareholders after a clean-up of the bank.

This “nationalization” approach was the one successfully taken by Sweden while the current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze.


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Comments (1)

  1. Submitted by Brian Simon on 02/13/2009 - 11:47 am.

    Today’s Washington Post has an op-ed by Roubini and one of his colleagues furthering the argument for nationalizing banks.

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