This is a post I wrote last week on naked capitalism.

In any banking crisis, the central question always is: which financial institutions now operating are insolvent, how can we identify them and remove them from the system, and how can we recapitalize the remaining institutions in a way that restores confidence to the system generally? Therefore, any response by policy makers must address three separate issues:

The large bonuses at AIG have sparked yet another wave of revulsion amongst American taxpeayers. And rightfully so. This company has cost taxpayers $170 billion and counting and yet the bonuses of the same individuals complicit in the losses is still to be paid due to contractual obligation. While Ben Bernanke, Larry Summers and others have expressed their contempt for this state of affairs, I suspect there will be consequences down the line.

Gillian Tett has written in the Financial Times that the Obama Administration is no talking to the Swedes directly about their solution to the credit crisis, suggesting a openness to potential banking crisis solutions. Next week, Bo Lundgren, now head of the Swedish debt office, but formerly a Deputy Finance Minister under Carl Bildt, is scheduled to meet with American officials in Washington. For those of us who see positives in the Swedish crisis solution, this is positive news.

From Justin Fox of Time Magazine:
 
FDIC chairman Sheila Bair doesn’t think a full government takeover of Citigroup and other multinational financial institutions is practical or even possible. Here are her reasons, as summarized by Pete Davis:
1. The legal authority to take over large banks does not currently extend to multinational financial conglomerates;
2. The FDIC lacks the funding to conduct [...]

This is the name of a speech made by Kansas City Fed CEO Thomas Hoenig which is creating quite a stir. He makes the following points in his speech:

Beim was a Professor back when I was at Columbia, although I don’t remember being in any of classes. Before he was a Professor, he worked as an Investment Banker at First Boston and Dillon Read, two white shoe firms that are now defunct, absorbed into Credit Suisse and UBS.

Banks do not have enough tangible common equity to make the grade on Tim Geithner’s stress tests. That means the government will have to step in and bail them out. I will call this creeping nationalization.

Paul Miller of FBR Capital Markets does a good job of explaining the issues at hand here in this video via Bloomberg. The long and short is that banks do not have enough common equity. They are not going to get funds from the capital markets to top that equity up. That means the government will have to step in and dilute common shareholders with taxpayers’ funds — a reality we have seen with Citigroup but that is coming to a bank near you.

A massive $61.7 billion loss for AIG – that is the quarterly loss for the insurance giant, a record for the world. That comes to a loss of $465 $465,000 every minute of every day in that quarter. The full-year loss comes in over $100 billion.

Nevertheless, the U.S. Government sees AIG as a systemically-important company due to its involvement in the Credit Default Swaps market. Therefore, it has decided to up the ante and continue providing this company with tens of billions more in liquidity.

As I have indicated in a previous post, bailouts are the worst of all potential policy responses. These are large sums that I believe the American people will not support. Either Americans are an incredibly docile lot or we are about to see a sea change in taxpayers’ attitude.

Read below for the details of the losses and bailout.

The big news other than GDP falling off a cliff is the confirmation that the Obama Administration is going to bail out Citigroup for a third time.  The market reaction this morning was quite negative, causing index futures to sell off even before the GDP number hit the tape.  Citigroup itself dropped as much as [...]

Since everyone seems to be talking about nationalization and pointing to Sweden as a model for the future, one should ask whether Sweden actually nationalized anything. No one is talking about outright Hugo Chavez-style expropriation here. The only nationalization I see is what was done in the case of AIG and we know where that led.

I certainly believe the knee-jerk reaction against the ‘N’ word, as Barry Ritholtz calls it, is overwrought and have suggested we dub it pre-privatization. After all, didn’t the word recession come into existence for similar reasons — fear of the ‘D’ word depression.

Back in August, I pointed to Sweden as a model as well. You can read the post, “The Swedish banking crisis response – a model for the future?.” But, the Peterson Institute also has a fine post by Anders Aslund on what really happened in Sweden and it was not nationalization.

Here’s a bit of what he had to say: