Wolf: It's complete baloney. I wouldn't call it nationalization at all. I would call it a bankruptcy process. The government doesn't have to control a bank for very long. If they want, they can control it for three weeks or even a week. If you accept for the moment that the financial sector is undercapitalized-that there isn't enough equity in the system to absorb the losses while still remaining sufficiently healthy to be soundly managed for the interest of shareholders-then take hold over all the institutions that are undercapitalized by some standards. You would then say to the bondholders, starting with the most junior credits on upwards, that a certain proportion of the debt is converted into equity. And you would say to the bondholders, just as you do in a normal bankruptcy, "Congratulations, you now own the bank."
Gluck: But the existing equity holders ...
Wolf: Would be wiped out. But that's what happens in a bankruptcy. If we allow a normal private company to go bankrupt, the shareholders lose their money. This is capitalism. You've got to bear some risk as equity holders. It's true socialism to say the government has an obligation to save the value of equity. The second possible way of doing it, which is closer to nationalization, is to say, "We're not going to wipe out creditors because we think that will create too big a problem for confidence in the financial system." We suppose the government will then have a majority shareholding in many cases. ... If you want to be more radical, you could say-which I rather like, actually-the government could give its shareholding to all the American citizenry. Each American citizen will get a share in the new Citibank, or whatever it might be.
The crucial point only is that, if a bank is undercapitalized and cannot adequately write off bad debt, it will inevitably be unable to reveal the truth on its balance sheet-because the truth will be that it has negative net worth. This will be a zombie bank that can't lend.
Gluck: What are the chances of one of those creative solutions actually being adopted in your view? Will the leadership be there?
Wolf: I actually think they are getting close to it again. The problem is that because the TARP was so incredibly mismanaged, a lot of the credibility of the U.S. government was shot. One thing they can do is put in preference capital, which is, of course, a form of debt, but it's junior debt. If it is the case, as many fear, that the banking system is fundamentally decapitalized, then in the end they're going to have to do one of these things. I would rather they did it sooner than later while the credibility of the government is still solid.
If the American body politic is too ideological or unwilling to spend the money, then it will have a zombie banking system. Sooner or later, that will become intolerable.
Historically, like most foreigners, I've always admired American pragmatism. I'm absolutely sure the U.S. will choose a means of resolving this problem. I wish it were sooner rather than later.
Andrew Gluck, a longtime writer and journalist, is CEO of Advisor Products Inc. (www.advisorproducts.com), a Westbury, N.Y., marketing company serving 1,800 advisory firms. To read a more in-depth report of Andy's interview with Martin Wolf, click here.