Saturday, February 28, 2009

How to restructure big banks?

Two plans were proposed in the video (source: CNBC)

1. temporarily nationalize banks, separate good assets from bad assets, make quick sale of the bad assets, and get banks' balance sheets clean; then hopefully banks will start lending again.

2. create a new big bank by the government, at the $1 trillion range, and let this big new bank lend to the economy. And it solves the problem of bank's unwillingness to lend in this extremely risk-averse and uncertain period.

My bottom line for solution 1 (Roubini's proposal) is the nationalization has to be temporary and government needs to get out of private business asap.

My bottom line for solution 2 is government can create lending, but it can't be run by bureacrats, an alternative is to hire professional banks from wall street to run the newly created bank. But even so, this newly created bank don't have any existing facilities. And it's hard to imagine how you can quickly put up a new bank, in $1 trillion size.