Matthew Yglesias » The European Way

Sep 29th, 2008 at 9:37 am

The European Way

Europe is seeing its share of financial system problems, but governments over there seem to be looking to nationalizations as the solution, rather than having governments overpay for bad assets:

“[T]the Belgian, Dutch and Luxembourg governments announced Sunday a partial nationalization of the Belgian-Dutch financial conglomerate Fortis, involving a combined injection of 11.2 billion euros, or $16.1 billion, from the three governments, which took a 49 percent stake.”
“Meanwhile, the British Treasury on Monday confirmed that it had seized the lender Bradford & Bingley — the third British bank to tumble this year — after no private buyers emerged.”
“Separately, the Icelandic government said that it had taken control of Glitnir, one of the largest lenders in the country, after it encountered liquidity difficulties.”

The transatlantic contrast will, perhaps, provide some lessons for the future. Meanwhile, here’s Nouriel Roubini on why recapitalization through takeovers is preferable to buying toxic (sorry, “troubled”) assets.

Comments
19

19 Responses to “The European Way”

Braden Says:
September 29th, 2008 at 9:48 am
The Brits seized Northern Rock earlier in the year, but it didn’t solve the overall problem. I assume that seizing B&B will also not actually address the underlying, systemic problem. Nationalization, as practiced by the Europeans so far, is primarily defensive. Your Swedish example is much more radical (complete restructuring of the sector).

Roubini is right when you’re facing a crisis that can be solved by targeting individual banks. However, this crisis seems a lot different than previous bank failures. Every major financial institution appears to be exposed to a certain extent through these complex derivatives. This means institutions that, for the most part, are profitable, cannot receive credit because other banks are uncertain over their exposure to these securities.

Of course, Paulson has no clue how large this problem really is, so the bailout could be a big waste of money, but I do think it’s wrong to suggest that case-by-case nationalization is the solution.
DKE Says:
September 29th, 2008 at 9:56 am
Thanks for the links, MY. Please advise: In the Roubini article, I believe the end of paragraph one should read, “government assumption of bank liabilities”. This makes more sense and is how it reads in paragraph two.
T-Rock Says:
September 29th, 2008 at 10:11 am
If nationalization isn’t “overpaying for bad assets”, I don’t know what is. State owned banks are always a drag on governments.
Duncan Kinder Says:
September 29th, 2008 at 10:17 am
The transatlantic contrast will, perhaps, provide some lessons for the future.

Free market fundamentalists are incapable of learning lessons.

for them: Government = bad; free enterprise system = good. End of discussion.
BruceMcF Says:
September 29th, 2008 at 10:17 am
The question is, how to structure the government recapitalization in the US so that its not portrayed as nationalization. If the government stake is non-voting Preferred shares with limits on firm behavior if they do not meet the dividend (most senior shares, so no other dividends, executive pay limits, M&A activity requires approval of Public Trustee) … I reckon that would not be “nationalization”.

Long term, of course, the finance sector will need business, which means promoting an actual expansion on the productive side of the economy … there’d be a lot of finance sector work to be done in building a New Energy Economy, f’rinstance … but short term, having allowed so many institutions limited to investment grade securities to buy speculative junk by assuming away serious systemic risks, some form of recapitalization is required.

And the two possibilities are buy the assets at inflated prices (otherwise its not recapitalization) or buy some form of equity stake.

The Dodd plan tries to hide from the nationalization label by hiding the purchase of the equity stake in warrants that are exercised once disposal or maturity of the assets reveals that, yes indeed, the assets were bought at inflated prices.
mpowell Says:
September 29th, 2008 at 10:26 am
I would be willing to trade control over the firms for simple equity. The important thing is that current shareholders are punished and the American taxpayers get the best deals possible. Temporary rules today are not going to translate into solutions for the executive pay problem, so why make a big deal out of it?
JSB Says:
September 29th, 2008 at 10:33 am
Roubini’s argument is about why nationalization is preferable to asset purchases in a generic crisis. He’s probably right about generic banking crises. But we’re not talking about a generic financial crisis here – we’re talking about the one that we’re actually in. And our current crisis has a much bigger component of systemic price opacity then most. The semi-nationalization of Fortis makes sense because that bank had a capitalization problem. To the extent that the liquidity crisis in the United States is about price transparency rather than capitalization, nationalization won’t help much. And Paulson and Bernanke are arguing that it is very much a price transparency problem. As such, any argument that we should focus on nationalization in this crisis, in order to be credible, needs to address the Paulson/Bernanke argument that we first and foremost need to establish prices for mortgage-related assets.
Walker Says:
September 29th, 2008 at 11:43 am
I will vote for whomever puts Roubini in charge of the Fed and/or Treasury, even if it is a moldy bran muffin.
Arnold Evans Says:
September 29th, 2008 at 11:50 am
According to Krugman, this “price transparency” stuff was a rationalization arrived at after the $700-billion-with-no-oversight plan had already been concocted and distributed.

Congress should authorize $100 billion, if necessary, to prevent the supposed total global meltdown/great depression 2.0 until the end of this presidential term. Then, to the degree there is a problem it can be studied and an efficient, cost-effective, negotiated solution can be put forth early next year.

And of course, this should not pass unless _more_ Republicans vote for it than Democrats.

The Congressional Democrats are just suckers, Obama included, for falling for this.

If congress had done absolutely nothing, possibly there was a chance a financial disruption could have grown to have a substantial impact the non-financial sectors of the economy.

Keeping our eye on the ball, if the aim was to prevent any financial sector disruption from having a substantial impact on the non-financial economy, there were cheaper, less drastic and more effective ways to do that.

The aim has always been to hand money to the financial sector with all risk being taken by the government.
pragmatic idealist Says:
September 29th, 2008 at 12:09 pm
I’m a CPA who was a CFO for decades. I read economic books for pleasure. When I hear “Hayek” I think of the Vienna Austrian economic school rather than Salma.

The point is, I am better informed than most people but this bailout is WAY out of my league. The question for me is who do I trust that can actually comprehend what is going on?

Roubini is the flavor of the month. Even with a vested interest, Warren Buffett is number one on my list. Larry Summers and Richard Rubin are also up there. The people I trust are for this plan and thus I am for it.
Vivisfugue Says:
September 29th, 2008 at 4:57 pm
When I hear “Hayek” I think of the Vienna Austrian economic school rather than Salma.

Prag my friend, it’s time to take nice long long looooooong vacation and tour the beaches of Mexico, the Caribbean, and/or Brazil while the weather’s still nice.
Ann Observer Says:
October 15th, 2008 at 5:24 pm
Recapitalization seems to be nationalization with all the drawbacks:
e.g. governments having to cover the mistakes of a few with the money they have taken in taxes from the many i.e. us.
and none of the advantages:
e.g. having some say in preventing this from occuring again
Perhaps a better defintion is:
Nationalize the debt, privatize the gain. Except the gain appears to have been illusory.
What it adds up to is a huge robbery of the poor to pay the rich – a massive redistribution of wealth.
Of course many free-market-can-do-no-wrong types think “redistribution of wealth” means socialism/communism etc. and must therefore be evil, but apparently this only applies when the transfer is from rich to poor.
When it goes from poor to rich, it is of course capitalism and therefore perfectly acceptable.
viagra Says:
March 1st, 2009 at 6:05 am
viagra
It is the coolest site,keep so!
viagra Says:
March 11th, 2009 at 4:59 am
It is the coolest site,keep so!
zyban Says:
March 12th, 2009 at 11:58 pm
Very interesting site. Hope it will always be alive!
xanax Says:
March 14th, 2009 at 5:45 am
Excellent site. It was pleasant to me.
xanax
tramadol Says:
March 22nd, 2009 at 6:25 am
tramadol
Very interesting site. Hope it will always be alive!
viagra brand Says:
April 3rd, 2009 at 4:24 am
Excellent site. It was pleasant to me.
cheap brand pfizer viagra
divkjyvpa Says:
April 19th, 2009 at 10:06 pm
zvAFxp vquqoaaqrpey, [url=http://hyjxjoeeeijw.com/]hyjxjoeeeijw[/url], [link=http://nqygnnyuwrlx.com/]nqygnnyuwrlx[/link], http://febfdkzbddmz.com/

Matt Yglesias

The European Way

19 Responses to “The European Way”

Blogroll