“There’s nothing straightforward about it.”

Following on from yesterday’s Emergency General Meeting (EGM) of Anglo Irish Bank, the Irish Times has a number of articles on the nationalisation of the “fundamentally unsound” bank – notably the potential cost of that nationalisation, the major shareholders, and how the taxpayer is now playing banker to property investors. Meanwhile in the US troubled Citigroup is to split in two, “Citicorp and Citi Holdings, to focus its executives’ attention on its stronger remaining businesses while winding down its money-losing operations” [details in the Citigroup statement], which seems to go some way towards what Mick’s diverse podcast guests seemed to agree was the [only?] way forward here [not that Mets fans will be getting any relief – Ed]. But even there, some think Citigroup’s move won’t be enough..

“What we have is a weird, shadow nationalization,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm in Washington. “The government does not want to and should not want to own banks. But if they get forced into that situation, they should resolve that situation. Here, what you have is a huge diversified financial services industry with recognized losses and looming losses in every aspect of its operations. There’s nothing straightforward about it.”

The article suggests the US will need to might create a new ‘bad bank’, something the UK government appears to be considering as Gordon Brown calls on banks to “come clean” about “toxic assets”.

But everyone’s hero, Robert Peston, expects not a ‘bad’ bank for the UK, but “the mother-of-all bank insurance schemes.”

Which is, as the earlier New York Times article points out, what the US has just tried.

The approximately $120 billion aid package on Thursday for Bank of America — including injections of capital and absorbed losses — as well as a $300 billion package in November for Citigroup both represented displays of financial gymnastics aimed at providing capital without appearing to take commanding equity stakes.

Treasury and Fed officials accomplished that trick by structuring the deals like insurance programs for big bundles of the banks’ most toxic assets.

Instead of investing tens of billions of taxpayer dollars in exchange for preferred shares in the banks, which has been the Treasury Department’s approach so far with its capital infusions, the government essentially liberated the banks from some of their most threatening assets.

The trouble with the new approach, analysts say, is that it is likely to conceal the amount of risk that taxpayers are taking on. If the government-guaranteed securities turn out to be worthless, the cost of the insurance would be much higher than if the Treasury Department had simply bailed out the banks with cash in the first place.

And to jump back to the end quote from the NYT article

But a growing number of analysts warned that the approach may be too clever, because it gives policy makers too many ways to conceal true problems at banks and true risks to taxpayers.

“What we have is a weird, shadow nationalization,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm in Washington. “The government does not want to and should not want to own banks. But if they get forced into that situation, they should resolve that situation. Here, what you have is a huge diversified financial services industry with recognized losses and looming losses in every aspect of its operations. There’s nothing straightforward about it.”

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