Abort, retry, fail ?
Every now and then back in the Dark Ages, I would have to deal with the late, unlamented MS-DOS operating system. It wouldn’t be long, as a rule, before I encountered the message “Abort, Retry, Fail?”
Of these, “retry” sounded the most hopeful so I’d choose it a few times, but I don’t think it ever worked. Usually the best thing was to shut down the machine and start again.
This trilemma struck me when looking at the options for US-based banks, and Citigroup in particular.
Like lots of others, I think the only serious option is “abort”, that is, to take the whole thing into public ownership, sell off what can be sold, and eventually return a drastically cut-down version to private ownership, under much tighter regulation than in the post. There are some big problems along the way, most importantly how to treat the holders of Citi’s debts, but these problems have to be addressed sooner or later.
The alternative, recently advocated by US Senators Shelby and McCain with specific reference to Citigroup is “Fail”. They haven’t spelt out what they mean, and perhaps (as suggested by Calculated Risk) it’s really just a semantic variation on the standard FDIC practice of nationalising failed institutions for which no buyer can be found. It’s worth looking, though, at the idea of closing down the US retail banking operations and repaying the depositors out of FDIC funds, then putting the rest of the group into bankruptcy as was done with Lehman Brothers. Citi has at least $100 billion in insured deposits, so this stage won’t be cheap, and since Bank of America and others would almost certainly fail as well, the FDIC would be up for the best part of $500 billion.
The bigger problems will be the potential for failure to bring down lots of counterparties, and the international operations. In the case of Lehman, the immediate consequence of failure was the collapse of AIG (which had written lots of credit default swaps on Lehmans a few days later). This threatened total collapse of the global financial system, and AIG was expensively rescued.
But the international ramifications are even scarier. Just before it went under, Lehman’s extracted $8 billion from its European operations, to reduce the losses of its US home office. When Iceland looked set to pull the same trick a few weeks later, the UK government invoked the Anti-terrorism, Crime and Security Act against it, to freeze the assets of Icelandic banks and the Icelandic government. A “Fail” policy for Citigroup would present governments around the world with the choice between allowing a Lehman-style expropriation, or seizing what US assets they could at short notice.
After the Lehman debacle, “Fail” is to scary for anyone actually in charge of policy to contemplate. But the Obama administration is still unwilling to go for Abort. As the NYT says, the Treasury is “pursuing a strategy that seeks to avoid either the failure or nationalization of the biggest banks” which is a bit like wishing for a pony that can win the Grand National.
So, every week or so, Geithner and Summers have pressed “Retry”, announcing some variant or other of recapitalization, good bank/bad bank or similar. Perhaps they will keep on doing that until Shutdown brings the whole process to a halt.
. As I note above, the difficulties are far greater with the “Fail” option