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The government would be in a different situation. It is true that it would need to infuse capital into the good bank to make up for taking away assets and therefore capital. (Even toxic assets generally have some value, often substantial, and are likely to be carried on the books at that economic value or greater.) However, it does not need to directly capitalize the bad bank, since it is not intended to be an operating entity with external customers. The “capital” of the unit would effectively just be the government’s willingness to accept that the losses on the bad assets might prove to be greater than the capital it infused into the good bank when the government took on the bad assets. Ultimately, this capital transfer between two units both initially owned by the government is not the core concern. The real question is whether the combined value of the good and bad banks goes up by more than the amount of any capital infusions necessary to implement that restructuring.

Step 11: Make the necessary managerial changes One of the trickier operational steps of the nationalization will be changing the management. The new CEO will hopefully be named on Day One. If not, it should be very soon thereafter. They may come with a core of a few managers that they know well and trust to take some of the key positions or to act as close advisors. However, the CEO will need many more good managers than they will have in their stable to start with. Much like the famous Rumsfeld quote about “going to war with the army you have, not the army you wish you had,” any CEO will end up having to rely to a considerable extent on existing managers at the nationalized bank. In addition to the inability to manage such a massive hiring project as replacing all the existing managers of any importance, there is also a great deal of institutional knowledge inside the heads of the existing managers.

The CEO will need considerable time to get to know his or her key subordinates and to determine their capabilities and weaknesses, including which ones are largely telling the truth and which ones are feeding him or her distortions. The CEO will then determine the top management team, made up of his or her direct reports and perhaps some key second level reports. However, the changes are far from done at that point. Each direct report will need to go through a similar process, unless they remain in a position they already held. In practice, many of the existing managers will remain in place, but know that they are there on sufferance – the CEO or their immediate boss has yet to really decide if they are longterm survivors or not.

As with a merger or takeover, it is agreed by virtually all that fast moves on managerial changes are best. However, it is likely not to be possible to move terribly swiftly except at the very top of the chain of command. Even there, it is possible that there will be a considerably longer vetting process than executives are normally used to, since there will be strong political oversight.

Step 12: Announce a new strategic plan Strategic planning for the newly nationalized bank is likely to be a twostep process. First, some strategy has to be announced very quickly if the intent is to operate differently going forward. There will be a strong tendency to operate on autopilot, moving in the same direction as before, unless there are explicit, coherent directions otherwise. Most likely, the initial strategy announcement would only deal with the most glaring issues to be addressed. For example, Citigroup owns a wide range of foreign


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