I have opposed bank nationalisation in any circumstances, and have asked authorities to work with the banks to recapitalise themselves through private money rather than public. I find it bizarre that Mr Paulson is going to require US banks to take public share capital when some of them have not asked for it and do not need it.He himself expresses his distaste for the policy. He should follow his instincts.
A bank can boost its capital in many ways. It can raise new share capital from existing shareholders or from new shareholders. It can sell assets or businesses accumulated within these large groups. It could pay its high earners a lot less for a year or two to keep more of the cash. It can cut its dividend payments to shareholders. It can reduce the numbers of employees, sell branches, increase the amount of fee earning business it does or otherwise boost its profits and cashflow. I do not believe for one moment that the banks of the world have done all these things as much as they might where they need stronger balance sheets.
In the UK it is unclear why the government wants to allow the merger of Lloyds with HBOS. That just adds more risk to taxpayers, as Lloyds could go it alone like Barclays without the merger. It is unclear how much of the extra capital proposed for RBS and HBOS is now a regulatory requirement, and why the regulatory requirement should suddenly have increased. If ever there were a time for the government and Regulator to be working quietly behind the scenes with these two banks to ask them to raise more capital through any of the ways open to them over a realistic time period, this was it.
At a time when governments are correctly preaching to banks that they should not borrow too much and be overextended, they should be ensuring that governments themselves do not become similarly overextended and over borrowed. There are limits to what the US and UK taxpayers can afford. Giving banks too easy an access to public money is not a good idea. What we need is tough regulation, in private , to get the weaker banks into shape. If some of them need loans and gurantees to tide them over until they have raised more money privately, so be it. That is what a Central Bank is for , as lender of last resort. The taxpayer should always take full security for loans, and charge a fee for guarantees. That would be a much better way forward than requiring all main banks to take taxpayers money, or encouraging mergers which then leave a large bank that needs taxpayer support.