Zombie Banks Are Devouring Our Public Money with No End in Sight

By Bill Moyers, Bill Moyers Journal. Posted March 4, 2009.

But the question is, as this man stands at the crossroads, as a very young president, will he exert the will to implement what, say, his heart tells him when he gets it?

Moyers: What do you mean crossroads?

Johnson: The crossroads right now is that we could have a society become despondent. People who think that proper reforms, and proper business restructuring, are just romantic notions. And what Obama needs to do now is not talk, he needs to deliver the goods. He needs to deliver the goods plain and simple where people will regain their trust.

Moyers: How do we stop the bleeding?

Johnson: People talk of nationalization. I just call it restructuring. Restructuring is a part of capitalism. That's how the airlines get restructured when they go through bankruptcy. How you might have to deal with the auto industry, how you deal with venture capital projects. Do the same thing with the banks.

Moyers: The economist Dean Baker agrees with you. He says there's a growing consensus among economists like you, that this would be the fairest and most efficient thing to do. Put the banks through the same sort of receivership process that the FDIC, the Federal Deposit Insurance Corporation, uses all the time. Is this, however, nationalization in disguise?

Johnson: Well, I think the notion of nationalization has been a little bit of a PR spin. Restructuring is what you do as capitalist economies to maintain function and continuity. Nationalization invokes the specter of the state seizing the means of production, like Che Guevara is about to take over or something.

Moyers: Exactly what does it mean to nationalize the banks?

Johnson: Well, what I think they need to do is inspect them thoroughly, examine, mark down the assets to a conservative level that protects the taxpayer. See the resulting deficit on the balance sheet, which is the hole.

Then the government injects the capital. People continue to operate the banks. People who continue to work there then perhaps sign new contracts with the government. And the government just becomes the stockholder until such time that they sell the stock back to the market and get paid back a little bit for all the lost support that they're creating for these banks.

Moyers: Haven't we already nationalized some big banks? Washington Mutual, WaMu, Wachovia, which was taken over by Wells Fargo. They transferred control of the assets to new owners, and depositors, like me, didn't even notice that anything happened over the weekend.

Johnson: Well, that's what the process entails. The difference this time, to give the authorities some credit, is that there were people that could take over WaMu. There were people that could take over Wachovia. But now you have four enormous institutions, JP Morgan, Wells Fargo, Citigroup and Bank of America.

I don't know if there's anybody big enough to take them over. Though they could take over pieces. You could break them up and sell the pieces. And that would continue to function. The continuity of function that you described in your banking relationship is vital to preserve.

Moyers: So what's the objection to that from the people you talk to who don't like it?

Johnson: One is people feel the government would make a mess of running things. I actually don't agree with that.

Moyers: Well, FEMA's a pretty unsettling model.

Johnson: Yes, it is. But I would say you could work with Tim Geithner, who's quite a competent man, working with the existing Citibank management, with just a different set of stockholders. The one danger you have, when you keep these banks open, when they're insolvent, is they have a temptation to very risky activity.

Sort of like a quarterback throwing the Hail Mary pass. The losses on an interception accrue to the taxpayers. And the touchdown is kept by the stockholders. So if they take excessive risk in those times they can actually endanger the stockholders further. The plan that Geithner and the White House, the Obama administration, is adopting right now, which I will call intravenous drip capitalization, is one of forbearance. Meaning, don't realize the losses on the balance sheet now. Don't account for everything in a prompt way. Don't truncate the losses, but allow them to go on. And the danger is the ditch could get deeper and deeper.

Moyers: What's the most discouraging thing you've seen about the Obama plan?

Johnson: I think the capital assistance program is warehousing zombie banks and running the risk of the taxpayer over the next one or two years, will experience much larger losses.

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Bill Moyers is the host of Bill Moyers Journal.

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