The most pressing question for the new administration is what to do about the banks, which are again threatening to go off the cliff.
The Journal puts the prospect of nationalization in the lede of its page-one story. The NYT and Bloomberg mentions it too, further down.
The Times point-blank says Obama is “not yet prepared to address” the financial crisis, but the Journal says:
The hours-old administration of President Barack Obama is expected to move swiftly to try to stabilize the financial system by pumping more capital into weakened banks and buying bad assets. Nationalization appears to be a last resort, but other options on the table move the U.S. in that direction
And Bloomberg says this:
While full details of the rescue haven’t been settled yet, people familiar with the deliberations said the package is likely to include a $50 billion-plus program to stem foreclosures, fresh injections of capital into the banks and steps to deal with toxic assets clogging lenders’ balance sheets.
That sure sounds like we’re a little better off than “not yet prepared”, as the Times would have it.
The Journal makes the point that investors are bailing out of financial stocks again because they fear that the new administration is going to take measures that will dilute shareholders’ holdings. A better way to look at it is that the markets have had a “Paulson put” that put a floor under prices because the Bush administration was willing to fork over hundreds of billions of dollars to banks without wiping out their shareholders.
As the Times says:
If policy makers were even remotely honest, analysts said, they would force banks to take huge write-downs and insist on a high price in return for taking bailout money. For practical purposes, that could mean nationalization or partial nationalization for many banks.
And:
William Seidman, a former chairman of the Federal Deposit Insurance Corporation who was closely involved with the bailout of savings-and-loan institutions in the 1990s, said the government should simply take control of the banks it tries to rescue. “When we did things like this, we took the banks over,” Mr. Seidman. “This is a huge, undeserved gift to the present shareholders.”
One big difference between today and the 1990s is that the government back then was seizing entire failed institutions. On paper, at least, the banks in trouble today are still viable.
How are banks viable on paper in ways the ones taken over in the S&L crisis weren’t? The Times doesn’t say. It should have explained that rather than just asserting it. It certainly doesn’t seem that way. Indeed, just four graphs later, the paper says this:
Banks may not want that kind of openness, because accurately valuing the toxic assets could force many to book big losses, admit their insolvency and shut down.
Otherwise, these stories are pretty good at laying out the options awaiting the president. None of them are great.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.