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considerable money on the new business. Shutting the unit down would leave the government with the losses, but not the new profits that the network of relationships could bring in.

In theory, both the political and policy issues could be minimized by taking those units with good future prospects, cleaning away the problem assets, and selling the units either individually or in packages. In practice, this is much more difficult and timeconsuming than it may appear. It also loses much of the very substantial synergies that exist from crossselling across different units of the organization, as well as some of the economies of scale that hold down expenses. Even putting that aside, this is not a good environment in which to extract a fair price from potential buyers of financial institutions. The government may not wish to bear the losses from a series of “fire sales” starting soon after taking over the bank.

The attempt to minimize all of these problems would likely lead in practice to a Plan C that looked very much like Plan A, which is why that Plan seems by far the more likely to be implemented. Again, this issue warrants its own paper – the preceding discussion has hardly done full justice to this key question.

Plan D Plan D is a variation of Plan A in which the nationalized bank is broken into smaller banks, perhaps on a regional basis, in order to deal with the concerns about banks that are Too Big to Fail. This theoretical possibility seems unlikely to be chosen. First, the government will be struggling with a massive set of political, financial, and administrative decisions related to the nationalization. It is improbable that they would want to add the breakup of a bank to the list. Second, the brokenup bank is unlikely to be worth as much in pieces as it is as a whole. There are sound economic reasons why bank mergers have created larger and larger entities and these reasons go well beyond capturing the funding benefit of being considered Too Big to Fail. The benefits of crossselling, expense reduction, and risk diversification can be quite significant. Public policy reasons may outweigh these gains, but the government may not wish to inflict the costs directly on the taxpayer by starting with the breakup of its own bank(s). So, again, Plan A seems much more likely to be implemented than the other potential plans.

Timing Issues on Plan A There is a strong consensus among proponents of nationalization of U.S. banks that this should be seen as a temporary receivership/conservatorship, with the banks cleaned up and resold as soon as possible. Unfortunately, if the decision is made to continue to operate while trying to avoid the loss of value from fire sales, the government is likely to be the primary owner for a number of years. Continental Illinois and AIG serve as object lessons here. Continental was nationalized in 1984, but the last of the government stake was not sold until 1991. This was despite a strong bull market during most of the period and a lack of competing offerings from other formerlytroubled financial institutions. When AIG was taken over last year, there was much optimistic talk about the high quality of many of its insurance subsidiaries and the consequent ability to auction them off at good prices. In reality, the auctions have been a real disappointment, in large part because this is a very bad time to try to sell a financial institution.


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