It has already been done. Note.... all figures are from the FDIC and the percentages are based on deposits @ 6/2008. The banking system has about $13 Trillion in assets and $7 Trillion in deposits. Other then a couple of big outliers, deposits are about as good as anything to denote relative size.
Right now, I am going to concentrate on the 50 largest banks that make up over 50% of total deposits.
20% have essentially failed this year. They have either been taken over (IndyMac) or been forced to merge with most of the cleansing that comes with a traditional failure. Wachovia is about 10%, WaMu 5%, with the others (Countrywide, etc) making up the remaining 5%.
Bank of America and Citi together have about 22% of the remaining deposits. The fact that both of these institutions received the original TARP funds, plus an additional round of funds and asset guarantees means they have been de facto nationalized.
I am astounded at the extent to which the public has taken to the Andrew Mellon sentiment of radical liquidation.
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate"
"It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”It sounds about as good as the dieting fads that involve high colonics. Although Mellon's suggestion wasn't deliberately put into effect, the deflationary spiral from 1929 to 1932 liquidated anyone with debt or leverage.
Citi is in the process of liquidating itself -- trying a do it yourself version of good bank/bad bank. BAC will need enough additional capital to effectively become nationalized.
The New York Times is using Roubini's figures of $1.7 Trillion for bank losses. Since Banks have $13 Trillion in assets and Roubini may be including bank like institutions, the total is maybe 12% or 13% of assets.
It is hard to say where we end up, since we don't know how bad the economy will be, how much real estate prices will fall, etc.
I'd like to make the Sheila Bair the villain here. Wachovia and WaMu were essentially Nationalized. However, instead of sucking it up and bearing the costs, the FDIC pushed them into "mergers." They could have been cleaned up and then run as independent entities. Instead, the idea was to protect the FDIC's modest resources, wipe out the stock holders and the bond and debt holders to varying extents, and give the cleansed entities to other mega mega banks.
OK.... Sheila was on a short leash and couldn't do everything she wanted, although she went along with the mergers without much of a whimper.
Take a look at what Wells did to Wachovia:
They have also budgeted another $20 billion in "reserve build" for 2009. This is essentially write downs at the time of purchase plus the tax refunds -- 1/3 of the $60 billion total gives an after tax figure of $40. I would have to look up WB's asset base, but it is probably in the half trillion range, giving them the full Roubini.
However, Wells didn't give themselves the full Roubini -- and no doubt were thinking that any over estimation of WB losses could be used against their own problems.
JPM did something similar with WaMu. However, BAC actually PAID for the problems in Countrywide and Merrill. If Lewis had insisted on letting them go down before picking up the pieces, he wouldn't be sitting in detention with Citi. Whether picking up valuable deposit bases with "de risked" assets will be enough for JPM and WFC remains to be seen.
People will need to be punished to satisfy the public's blood lust. However, the bottom line is that the government has to move assets to their balance sheet or you get a deflationary spiral immediately. It might sound terrifying, but the only outcome that leaves the economy intact involves avoiding liquidation. It's the same debt, it just gets labeled public instead of private. Or gets the benefit of being treated as if it were public (without actually calling it that .... see the GSE's for an example).
The "us/them" meme doesn't work anymore. Everyone hates paying taxes, even the Treasury Secretary. However, the government gets 20% off the top -- so the extent to which the economy doesn't collapse is doubly good for the taxpayer. Plus they get 1/3 of corporate profits. If it works reasonably well, it is for the taxpayer's benefit, not at his expense. If it doesn't, then we get to do over the 30's.