I’ve been wary of nationalization because, while I think there’s some logic to it, I question the idea of completely wiping out shareholders. Basically, it seems like an action like that could create a domino effect that would send the Dow spiraling out of control.

William M. Issac, somebody who has done this type of thing before with Continental Illinois Bank, explains why all of this talk about taking the banks over should stop immediately…

Let’s begin with the fact that today our 10 largest banking companies hold some two-thirds of the nation’s banking assets, and some are enormously complex. Continental had less than 2% of the nation’s banking assets, and by today’s standards it was a plain-vanilla bank. This is important for three reasons.

First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern. Do we really think that dismantling our largest banks would be helpful? I don’t. […]

Second, for nationalization to work there needs to be a reasonable exit strategy. In the case of Continental, we had scores of options for returning the bank to private hands, including a public offering or a sale to any number of domestic and foreign banks and investor groups.

Today, who has the wherewithal, legal authority, and desire to purchase our largest banks? No one comes to mind, particularly if we rule out foreign groups, which I suspect would not pass muster due to national security concerns about ceding that much power over our economy to foreign powers.

Third, who will run these companies when we dismiss the existing senior managers and board members? We had significant difficulties attracting quality people to Continental even without today’s limits on compensation.

Any way you slice it, this is an incredibly scary situation, but maybe this is why we aren’t hearing the word nationalization out of the Obama administration. They know that it could set off exactly the type of panic we don’t need right now.


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