Sunday, March 8, 2009

The Banks Have Already Failed

To tease out a point that Kevin Drum is getting at here, Richard Shelby's and John McCain's wishcasting to see GM in Chapter 11 and let Citigroup "fail" is just nonresponsive to the current problem. Just look at Citigroup's stock price. Or Bank of America's. Shareholders clearly understand that these banks are at best insolvent or at worst prime candidates for nationalization. They're done. The name "Bank of America" may continue to exist, but those who were expecting dividends or rising stock prices attached to that name won't be seeing any gains any time soon.

The question in either case has little to do with the particular decision to nationalize the banks or "let them fail"; the real question is about what happens next. The banks have depositors and bondholders and probably a host of other folks holding claims against the bank that will want to be repaid. Nationalization or not, dealing with this long line of people is the hard problem to which no elected Republican or Democrat has a particularly good answer.

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