Douglas J. Elliott The Brookings Institution April 21, 2009
Bank Nationalization: A Survival Manual
Prominent voices call for the nationalization of the weakest major U.S. banks, although advocates of that step are still in a distinct minority. In my view, nationalization should only be a last resort measure, as has historically been the case. (The government has frequently taken over smaller banks, but on only rare occasions has it taken over one of the largest banks in the country.) However, such a nationalization could happen in the current crisis, either because we reach the stage of last resorts or because the anger and desperation of the public creates a political consensus for this drastic action.1
Nationalization of a major banking group would be extremely complicated, so we need to be prepared in case it occurs. This paper presents a “survival manual,” with suggestions for minimizing the damage from nationalization. Examining the practical issues should also make clear why nationalization is a choice to be avoided, if possible.
There are many definitions of “nationalization.” Here it will refer to a federal takeover of a bank where the government takes full, or nearly full, ownership and chooses to actively play the role of controlling shareholder.
This paper is designed around 15 essential steps to minimize the damage to taxpayers and the country in the event of a nationalization. These are:
Step 1: Step 2: Step 3: Step 4: Step 5: Step 6: Step 7: Step 8: Step 9a: Step 9b: Step 10: Step 11: Step 12: Step 13: Step 14:
Decide the criteria for nationalization, including the legal authority to use Determine which large banks meet these criteria Choose when to act Calculate the size of the hole to be filled and ensure funds are available Decide how to allocate the losses between taxpayers, shareholders, and creditors Design a preliminary exit strategy Create an ownership structure for the government’s stakes Line up a few key managers Announce the nationalization(s) Shore up confidence in the rest of the banks Create a sound financial base; institute a good bank/bad bank structure Make the necessary managerial changes Announce a new strategic plan Implement the new plan Sell the government’s stake over time
Please see “Bank Nationalization: What is it? Should we do it?” for a comprehensive overview.