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nationalization, despite its own traumas, than to suffer the death of a thousand cuts. However, this issue appears to be less important than the other potential problems outlined above. It is also hard to know how to balance the harmful effects of continued malaise versus the problems that would result from nationalization.

Restoration of consumer and business confidence may require dramatic action. It is possible that the public will not believe the banking system has been restored until it sees one or more major banks taken over. Historically, nationalization has sent a strong signal, but it is not clear that it is the only way to send a sufficiently strong message.

In my view, the damage caused by waiting is real, but significantly less severe than it was in past financial crises. This reflects the unique characteristics of the present crisis, including the existence and then sudden disappearance of the securitization market, the nature of the complex securities that triggered the initial problems, and a commercial banking system that started with relatively strong levels of capital. It also reflects the earlier actions taken by the Administration and regulators, representing very large resource commitments to restoring the financial sector.

In addition to the overarching timing question just discussed, the government will also want to think through the exact timing of a seizure, which could be affected by other economic or political events, upcoming quarterly financial reports, etc.

Step 4: Calculate the size of the hole to be filled and ensure funds are available The next step is to determine the need for funds to be infused into the bank(s) upon nationalization. The bank needs to be on a sound financial basis as quickly as possible after the nationalization, preferably from the beginning. In order to justify nationalization, the government would need to show that the bank’s capital either is, or will be, very low. Filling the capital bucket back up would therefore require a large infusion. Note that this assumes the government will not simply shut the entire organization down, an outcome that appears very unlikely. Please see Step 6 for further discussion of this point.

Let us take the example of Citigroup, the large bank provoking the most speculation about nationalization. Assume the government declared that Citigroup’s ratio of Tier 1 capital to riskweighted assets on a realistic basis was 2%, one threshold for seizure, and that it restored the ratio to the “wellcapitalized” level of 6%. This would require adding Tier 1 capital equal to 4% of the riskweighted assets, or approximately $40 billion in Citigroup’s case. Given the likelihood of additional large losses and the uncertainties about asset values, the government might wish to bring the ratio back above 10%, requiring at least $80 billion. This is on top of the funds that the government has already invested, and the guarantees it has provided, which are already factored into the capital calculation.

Why run the bank with normal private sector capital ratios when the government owns it and stands behind it? If the government intends to sell the bank, as a whole or in large pieces, it is important to retain a private sector culture as much as possible in order to facilitate the eventual exit by the government. Capital ratios affect many decisions within a bank. Essentially, every activity needs to earn


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