4/20/2009 – Intelligent Investing with Steve Forbes (click here for video)

“Steve Forbes: You proposed, a few weeks ago, nationalizing some of the banks. Do you feel that is still going to happen before this over?

Nouriel Roubini: Oh, I think some of them will have to be taken over. I mean, I proposed these from a market-friendly point of view. Nobody is in favor of medium- or long-term ownership of financial institutions by the government. But in my view, paradoxically, the temporary nationalization is a more market-friendly solution, because you know, if you don’t do it, then you end up with zombie banks, and the fiscal costs are going to be large.

That’s why, you know, fiscal conservatives have been in favor of it. That is why people like Lindsay Graham, conservative Republican from Carolina, is in favor. That’s why Alan Greenspan, high priest of laissez-faire capitalism, has said we may have to nationalize some banks. We will have to do it carefully, choose only the ones that are really beyond pale, that even if you give time, time is not going to heal their wounds.

We’ll see. But I think, in some cases, that might be the appropriate thing. And if it is not market-friendly–take IndyMac, [which] was taken over middle of last year, cleaned up, separated. And now, the bunch of investors, George Soros and John Paulson [and] others, we bought it back and privatized it. It took six months. [It] does not have to take three years if you do it right.”

“Steve Forbes: What is your feeling about the latest Geithner plan?

Nouriel Roubini: My view of it is, actually, that it can work for dealing with the toxic assets of banks that are solvent, because even after you do this stress test and you do a triage within solvent, insolvent. With the insolvent ones, you cannot apply the Geithner plan because the losses are so big that if you apply [that] to them, they are underwater. You have to take them over.

But even with a solvent one, you have to still separate good and bad assets. Now there are five different ways of doing them. We do not have time to go into each detail. Each one of them has merits and some flaws. These ones are among the five different ways in which you can separate good and bad assets of solvent banks–is not the worst. There [are] some design issues, some flaws in which the way the design can be fixed. In my view, all in all, it is actually a reasonable plan.”

Peter Boone, Simon Johnson, and James Kwak at The Baseline Scenario are out with their revised economic outlook.  It is well worth a read.  We do find one quote about the financial sector to be disturbing to us:

“The core problem is that large segments of the financial sector are insolvent, or that many market participants believe that large segments of the financial sector are insolvent.”

Well, which is it?  The two ARE NOT equivalent.  The banks can pay their debts or they cannot. It seems even the wise men at Baseline are confused about whether the problem is one of perceptions or reality. The government’s efforts to manipulate perceptions by manipulating information releases will ultimately fail to turn us around (without major pain) if in fact, “large segments of the financial sector are insolvent”.  If, however, the  insolvency of the sector is only an incorrect, overly-pessimistic perception of the public that can be set aright by our benevolent government slowly “leading” us into the light of day thru careful propaganda, then their efforts will ultimately be successful.

We think the situation is real insolvency and not perception.

“If we lie to the people and they believe us, all will be well.”   We think only the most naive don’t already know it, but since we have seen the suckers move markets on ignorance in the past, it may help to let experts, like Bill Black, a former senior bank regulator responsible for helping wind down the S&L crisis in the late 80′s tell us all again:  the Geithner bank stress tests are a sham.  The Treasury controls the outcome of the tests and insolvent banks will not be identified…unless the bank is not “playing ball” with the Obama administration.