I'm starting to look through the depressingly informative IMF report, paying particular attention to its broader theory of how to properly recapitalize the banks, and I'm seeing a lot of familiar advice. Considering Simon Johnson's articulate and highly circulated critique of the United States' incestuous relationship with the banking elite, I guess I'm a little relieved that the IMF's bank-rescue plan looks pretty similar to what we are doing/are trying to do/are told that we are doing.
Conditions for public infusion of capital should be strict. Viable banks that have insufficient capital should receive capital injections from the government that preferably encourages private capital to bring capital ratios to a level sufficient to regain market confidence ... Compensation packages and the possible replacement of top management should be examined carefully ... Nonviable financial institutions need to be resolved as promptly as possible. Such resolution may entail a merger or possibly an orderly closure as long as it does not endanger system-wide financial stability.
Restructuring may require temporary government ownership. The current inability to attract private money suggests that the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares, even if it means taking majority, or even complete, control of institutions. Temporary government ownership may thus be necessary, but only with the intention of restructuring the institution to return it to the private sector as rapidly as possible.
The Obama administration is notoriously reluctant to resort to absolute government ownership, and for good reason. The IMF report is not going to comment on the political implications of a left-of-center party nationalizing banks in a preternaturally pro-business country. But that last bit sounds pretty familiar, yeah? One more piece of advice:
Cross-border cooperation and consistency is important. Cross-border coordination of the principles underlying public sector decisions to provide capital injections and the conditions for such injections is crucial in order to avoid regulatory arbitrage or competitive distortions.
I think the G20 meeting and Obama's effort to tether other countries to our bailout efforts fits into that category.
So look, this isn't quite an in-your-face-Simon-Johnson! moment. Johnson spent a lot of time talking about how we have to reassess our relationship with Wall Street elites if strategies like the ones listed above even have a chance of succeeding. And maybe we should be a little more bullish on nationalization than even the current political parameters allow. But despite the depressing math of the IMF report, the prescriptive measures give me with a little more confidence that we're on the right track.