Roubini vs. Gross: To nationalize or not?

The nationalization discussion is not going away. But then again, no one really though it would. A debate has broken out between super-bear Nouriel Roubini, who in many ways predicted the mess we're in, and PIMCO founder Bill Gross. Roubini states his case in the Washington Post: "The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s--or the United States in the 1930s--the only way to save it is to nationalize it."

He has a four-prong solution. First, establish which banks are solvent. The stress tests are "helpful here." Second, nationalize the insolvent bank, wiping out common shareholders and pushing long-term bond holders to the back of the line. Third, separate the good assets from the bad, writing off the bad and selling the good. Fourth, merge all remaining bad assets into one institution. 

Of course he invokes the Swedish experience as proof that it can work. 

Bill Gross doesn't think much of this. In his most recent commentary, he argues, "Roubini, Dodd and Greenspan haven't thought this one through. The U.S. isn't Sweden, and not just because our blondes aren't au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or Bank of America would do." 

He also takes issue with the idea of forcing creditors and even preferred stock holders to take "haircuts" on their investments. He says this would undermine the financial services firms, like insurers and credit unions. 

So what to make of all this? I maintain that nationalization is a rotten idea. No one wants to wipe out common shareholders, gut creditors and force the government (which lacks the expertise) to manage the biggest U.S. banks. But the issue is whether it is inevitable. The economy certainly isn't giving anyone hope of quick improvement. At some point, the government may have to declare game over rather than continue the wait-see-and-pray approach. At some point, the drip-drip start to feel like torture. 

Receivership is viewed by many as the last resort, but we are getting closer to that--for better or worse. - Jim