The debate over nationalizing some of the nation's largest financial institutions has taken on the aura of a heavyweight championship boxing match, with top contenders Nouriel Roubini and Bill Gross having at each other in the media (albeit in a very gentlemanly way).
Gross, chief investment officer of PIMCO, the world's biggest bond fund, and Roubini, the New York University economics professor who predicted much of today's economic crisis back in 2006 (earning the sobriquet "Dr. Doom" along the way) have come out in recent days on the opposite sides of the nationalization spectrum.
Gross recently wrote on his blog that if you "thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do." Roubini is arguing that "taking them over, cleaning them up and selling the good assets back to the private sector" is the way to go especially as de facto nationalizations of Citigroup and A.I.G. have already happened.
Roubini is not advocating anything permanent with regards to the government taking over failed institutions, rather a temporary solution with the goal of getting whatever good assets are left back into private hands as soon as possible.
Although Gross accepts the idea that common shareholders will suffer from further capital injections into banks, "to go further, however, and 'haircut' senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk," he wrote. "In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions."
Rather than nationalization, "the goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets," Gross said. "Outright nationalization and haircutting of creditors will do just the opposite."
According to Roubini, it's only the government's cash injections and the Fed's various lending facilities which are supporting the system, without which every "major US bank would already be fully insolvent today."
Roubini believes that nationalization represents just one aspect which must be addressed. Further actions involve
1. Aggressive credit growth incentive for banks and financial institutions to stop the collective action coordination problem leading them to contract credit to even creditworthy households and firms.
2. Use of proper and constructive credit forbearance (on capital adequacy ratios, on mark-to-market marks, on rating agencies destructive lagged downgrades).
3. Across the board reduction of the face/principal value of mortgage debt and other consumer debt for insolvent households.