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Why Nationalize In 2016

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by Felix Salmon
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Feb 25 2009 3:51pm EDT

Why Nationalize in 2016?

The key number in Treasury's latest bank bailout plan is 7: that's the number of years that banks will have to repay the government before they get nationalized the preferred stock converts to common equity.

I think it's fair to say that those of us in favor of bank nationalization want nationalization now, when it would be very useful in terms of bringing down the banks' cost of funds and helping to erase the counterparty mistrust which is currently endemic to the system. Nationalization in seven years' time does no good to anybody. Indeed, I fully hope that if any bank were nationalized now, it would have been re-privatized by 2016.

In the meantime, the government's bailout money will be earning a healthy 9% interest rate for we taxpayers -- yet another liability which the banks are going to struggle to be able to meet. Hasn't the government learned its lesson from AIG? Burdening leveraged financial institutions with expensive new debt doesn't help them, it hurts them. Especially when they have no choice in whether or not to accept that burden.

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