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means that the government would have to share the value recovered from the bank through future sales of all or part of the organization.

Step 6: Design a preliminary exit strategy The government should have a general plan for how to exit the banking business before deciding on nationalization. This plan would be a key determinant of a number of other decisions.

There appear to be four broad plans to choose from, with innumerable variations:

Plan A: Keep the bank operating and try to maximize the sale value over time Plan B: Keep the bank in government ownership for the long haul Plan C: Liquidate the bank as quickly as possible: sell any viable pieces quickly and shut down the rest Plan D: Break up the bank into smaller pieces which would continue operating

This topic is another one that deserves its own paper. In brief, I believe that the government would choose Plan A and therefore the rest of the paper will assume this approach is in place. However, it is important to understand the pros and cons of the other potential options.

Plan B It is easy to dismiss Plan B in the real world of American politics and policy. Unlike in Europe, there is no strong constituency that would support the idea of a large generalpurpose federallyowned bank, although we do have some large specialty federal banks, such as the student loan program and the Small Business Administration, not to mention financial institutions like the FHA.

Plan C Plan C is a more realistic possibility than Plan B. However, it seems politically unlikely that the government would choose to create a massive disruption to a major lender in the midst of a credit crunch. As just one example, small businesses, a politically favored group, are particularly vulnerable to the loss of banking relationships. It would be very difficult for many of them to pick up and move to another bank in the middle of a credit crunch, especially as there is a strong subjective element in the decisions of lending officers with regard to businesses of this size, so relationships matter. New loans would also likely come with much tougher terms than those that were set up in the past. It is true that the government’s bank could retain the existing loans while liquidating the unit that provided them, but businesses tend to need an ongoing relationship. For example, they may need some covenants to be waived as they deal with the financial crisis. This is much easier to get from an organization that is looking at a continuing profitable relationship, not just the outcome on this single loan.

From a policy viewpoint, there is also the concern that liquidation would create a massive loss of value from those parts of the bank that are good. For example, new loans being generated today appear to be offering banks very good value as a result of the credit crunch. The banks can choose among the best borrowers and are able to extract better rates and terms than they have for years. Many of the bank’s units may be losing money when results of old and new business are combined, but are in line to make

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