Rescue the Banks not the Bankers and Shareholders 

Nationalization of the insolvent banks is the only solution to the financial crisis 

Visit our Website 

www.dsausa.org

The new plan to rescue the banks follows the same 

logic as the Bush-Paulson plan: throw taxpayer dollars at 

the problem to put off nationalizing financial institutions. 

Treasury Secretary Timothy Geithner’s vague proposal re- 

lies on another huge infusion of federal equity into 

“healthy” banks and a massive government insurance pro- 

gram to underwrite a “private market” for financial insti- 

tutions’ toxic assets. This plan is the same “lemon social- 

ism” –  socialization of the mega-losses of private finan- 

cial institutions –  that the Bush Administration put in place. 

Financial institutions such as Bank of America and 

Citigroup have already been de facto nationalized by the 

infusion of taxpayer equity whose value swamps that of 

these firms’ market equity. So far, the Obama administra- 

tion plans to continue the Bush administration’s policy of 

receiving only bond-like “warrants” instead of voting stock 

that would provide majority control.  These insolvent “zom- 

bie banks,” as  economist Paul Krugman calls them, are 

only “living” as private entities because of the endless in- 

fusion of government funds – funds that continue failing 

to offset the declining value of the banks’ toxic assets. 

The banks gladly take the government equity and use 

it to shore up their deteriorating balance sheets rather than 

to engage in renewed lending. Healthier banks reward their 

managers and their stockholders but refuse to lend because 

they fear a further deterioration of the toxic assets on their 

balance sheets. Despite prior massive federal aid to finan- 

cial institutions failing to unlock the frozen credit markets, 

the Geithner plan proposes to waste $1 trillion more in 

equity infusions and insurance guarantees to avoid  de jure 

nationalization – and without getting much new lending! 

They argue that the federal government can create a 

private market for the toxic assets where none exists now. 

Geithner’s plan is so vague precisely because he knows 

what is to come: spending hundreds of billions of taxpayer 

dollars to subsidize private purchasers of the assets (as pri- 

vate offerings on their own will not meet  banks’ asking 

prices). Or the Federal Reserve and TARP will write “in- 

surance” guaranteeing a high floor price to investors who 

buy the toxic assets.  In other words, the federal govern- 

ment will create a “free market” by guaranteeing private 

investors against any sharp decline in the value of the toxic 

assets they purchase. And this is supposed to be the capi- 

talism that rewards successful risk and penalizes failed risk? 

But why are so many of our financial institutions de 

facto insolvent? Massive losses in the value of exotic fi- 

nancial instruments and other assets carried on balance 

sheets have left banks and shadow financial institutions 

such as hedge funds and private mortgage lenders owing 

their depositors more than they are worth. These institu- 

tions relied on exotic economic models that assumed that 

housing prices were extremely unlikely to fall in value. 

They became overleveraged with  “collateralized debt ob- 

ligations” (the bundling of risky and less-risky mortgage- 

backed securities) that the burst housing bubble transformed 

into non-marketable, valueless assets. As the economy de- 

clined, fear of similar securitized debt instruments spread 

to other forms of credit, including auto loans and credit 

cards, exacerbating the banks’ unwillingness to lend. 

Hence, Geithner also calls for an $800 billion expansion 

of the Fed’s Asset-Backed Securities Loan Facility in or- 

der to recreate a private market for such debt. 

The only rational means to restore the value of these 

toxic assets is to provide immediate federal relief to 

homeowners facing foreclosure or struggling to pay mort- 

gages for homes whose market value is now far less than 

the value of the mortgage. As in the Great Depression, re- 

lief will come to the housing market only if the federal 

government creates a Home Loan Corporation with the 

power to renegotiate the terms of distressed mortgages – 

by  both  lowering the value of the mortgage (with the fed- 

eral authority splitting the loss in equity with the banks 

and mortgage companies) and refinancing the adjusted loan 

at an affordable market rate. The Obama plan devotes $75 

billion for incentives to mortgage-servicers to engage in a 

voluntary  “mortgage readjustment” program. But the plan 

does not require servicers to renegotiate distressed loans, 

and many financial institutions will still prefer forclosure 

over accepting lower mortgage payments. 

Widespread foreclosures can only be avoided if Con- 

gress passes legislation giving bankruptcy courts the power 

to restructure “distressed mortgages.” If judges reset the 

mortgage to the property’s current value and reset the in- 

terest rate to the current rate, most homeowners would avoid 

foreclosure. Homeowners unable to pay a restructured 

mortgage should be allowed to rent (from the bank) for at 

least a 10-year period. Such measures will provide a floor 

under housing prices and keep families in their homes. 

Normally, the negative balance sheets of major finan- 

cial institutions would lead the Federal Deposit Insurance 

Company to take them over in order to “unwind” their bal-

ance sheets of the valueless assets (whose deteriorating 

value precludes lending, as the banks do not have enough 

assets to securely meet their obligations to their deposi- 

tors). Thus, as with the Savings and Loan crisis of the early 

1980s (when toxic commercial mortgages choked off the 

home mortgage market), the FDIC should take over the 

insolvent banks and other financial institutions, seize their 

presently valueless assets, and place them into a Resolu- 

tion Trust Company (RTC), leading to restructured banks 

with asset sheets that would support more lending. 

Once the sickly financial firm had regained its health, 

the FDIC could either re-sell it to private investors or the 

government itself could choose to run the bank. (There is 

no reason to believe that publicly-hired managers could 

make any worse decisions than did our vaunted private fi- 

nancial wizards!) When and if the housing market recov- 

ered, so would the value of the toxic assets. Then the RTC 

could sell the toxic assets to private investors without the 

expensive guarantees, with the proceeds repaying a por- 

tion of the banks’ bailout cost. 

As the Swedish experience of the early 1990s  (and 

the disastrous Japanese delay in eventually nationalizing 

much of their insolvent financial sector in the late 1990s) 

proves, the only way to work a financial system out of a 

calamitous period of speculative hyper-leveraging is to re- 

work the banks’ balance sheets by a careful public process 

of  “unwinding.” That is, rather than continually paying 

inflated prices for “toxic assets” that cannot be sold on a 

truly private market, the government should simply take 

those assets off the books of distressed financial institu- 

tions  so that their balance sheets can be restored to health. 

Rather than re-selling all the restructured nationalized 

banks to private investors, the government should main- 

tain full ownership of at least one major bank. Such a bank 

could provide benchmarks, setting standards for investment 

in community housing, alternative energy development, and 

infrastructure that private banks would have to match. 

The crisis brought on by unrestrained financial de- 

regulation demonstrates that absent public regulatory re- 

straint, finance capital will engage in irresponsible acts of 

speculation during financial booms and resort to exces- 

sively conservative lending practices during financial busts. 

Bank deregulation has been a 30-year joint project of Re- 

publican monetarists and Democratic neoliberals. It started 

with the Carter administration’s deregulation of the Sav- 

ings and Loans; accelerated under Reagan’s gutting of the 

entire government regulatory apparatus; and culminated 

in the Clinton administration’s abolition of the Glass- 

Steagall Act’s separation of commercial banks from invest- 

ment firms (so the very banks that invest in risky financial 

instruments marketed these instruments to clients!). It was 

Lawrence Summers who convinced President Clinton not 

to allow the Commodity Futures Trading Corporation to 

create and regulate an open, transparent market for credit- 

default swaps (insurance against defaults). The unraveling 

of this unregulated, non-transparent $60 trillion market still 

might bring the global financial system to total collapse. 

Thus, if the federal government is to restore a sane 

credit system – a must for any productive economy – it 

should not only engage in the fiscally prudent step of na- 

tionalizing and restructuring insolvent financial institutions 

(the least costly path  for the public treasury); the Obama 

administration must also recreate a vibrant and effective 

regulatory system for domestic financial institutions and 

cooperate with other states, in both the advanced indus- 

trial and developing worlds, to build a global financial regu- 

latory system that prioritizes investment in productive en- 

terprise over  speculative efforts to make money on money. 

The race to the bottom of global neoliberal capitalism 

is the other half of the story behind this economic crisis. 

Productive workers across the globe are no longer paid 

wages sufficient to purchase the aggregate goods and ser- 

vices they produce. The result: the Western working class 

went heavily into debt, particularly by borrowing massively 

against inflated home equity values, temporarily forestall- 

ing this impending global crisis of overproduction and un- 

der-consumption. And the exploited working classes of 

China and Southeast Asia subsidized Western living stan- 

dards, while their governments “managed” the market so 

as to run massive trade surpluses and invested them not in 

domestic needs but in Treasury bonds and private equity. 

Restoration of a stable global economic system will 

require raising the floor on global living standards and 

working conditions and creating global regulatory institu- 

tions that insure that investment and trade benefit the work- 

ing people of the world. The era of deregulatory free-mar- 

ket mania is crashing down upon us. Only by reviving the 

capacity of democratic governments to regulate the 

economy so that it serves people’s needs rather than the 

speculative desires of corporate elites will we ever recover 

from the current global economic nightmare. 

Change the USA. Join the DSA! 

􏰀Yes, I want to join DSA; enclosed are my dues of: 

􏰀Supporting $65 􏰀Introductory $35 

 􏰀Low Income $20 􏰀Student $20 

(Dues include subscription to Democratic Left) 

􏰀Send me more information about DSA! 

Name___________________________________ 

Address________________________________ 

City______________State_______Zip________ 

Email___________________________________ 

Send to DSA: 75 Maiden Lane, #505, NY, NY 10038