Time for the Government to Stop Subsidizing Shareholders of Insolvent Banks

That is what Andrew Rosenfield argues for in this extremely cogently argued piece, and I agree with him. He makes a number of points about the bailout that I hadn’t heard before.

Rosenfield ends the article with the following sage words:

The present practice of subsidizing shareholders and debt holders of large insolvent bank holding companies is unprecedented, improper, and unwise. It is time to take strong capitalist action — and that requires wiping out the existing owners of the insolvent banks and giving the system much needed new equity capital, which, at this time, can come only from the government.

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  1. David Pearson says:

    It’s time for FDIC to tell bank shareholders they have no equity and they are now ‘out’. And then turn things over to the bondholders. And if the bondholders can’t make it work, shut the bank down.

    The sooner, the better. Time’s a wastin’.

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  2. jonathan says:

    It seems the Tim G agrees. Not only the stress test but imagine if a bank doesn’t attract private investors to take their garbage or if investors require the government to take the risk … that bank will not survive. It’s politically impossible to agree to pump unknown tens or hundreds of billions into these entities, especially without any assurance that will work and while leaving the current managers and equity owners in place. The stimulus bill is so huge, can anyone imagine giving a blank check to the banks in that light?

    But at the same time, we can’t nationalize the banks without also engaging in messy political warfare – and having to work out terms, etc. that could be very costly. Better to go this route and let them fail the two tests.

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  3. Josekin says:

    I’ve received the following quote a few times as part of a forward message. Not sure of its authenticity (who can verify…?), but “new equity can only come from the government” sounds awfully like the end of the passage. Of course it ignore the fact that eventually the government will return the role of creditor to the banks… anyway:

    “Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable.

    The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

    Karl Marx, Das Kapital, 1867

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  4. Don the libertarian Democrat says:

    The only real moral hazard the banks and shareholders fear is nationalization. As well, the current arrangement merely continues the relationship between the financial sector and government that got us into this mess. Since that’s what’s been going on since September, I’m a little worried that people are just figuring this out. It indicates a serious misunderstanding of how our system works.

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  5. Phileas Fogg says:

    I tried to verify that quote after being forwarded it.
    I failed.

    Google gave me this


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  6. Jeff says:

    The only thing I wish he would have added is a plan to break up the biggest banks into smaller units after seizure, to ensure that they will no longer be too big to fail.

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  7. kevin says:

    I’m just not sure this is ever a good idea:

    “The government then can install a new CEO of its choice, along with senior executive management.”

    The implications are frightening. The economics of executive attraction and retention are replaced by political interest.

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  8. Ron Force says:

    #3–The purported quote from Marx has not been found in any of Marx’s writings. Just another Internet hoax.

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