Avoiding Moral Hazard

Let’s hope this article from the Brits is more than speculation:

Fed eyes Nordic-style nationalisation of US banks

Apparently Fed officials have been consulting with their Scandanavian central banking counterparts to learn how the Nordics were able to save their own economies through seizing some of their domestic banks in the early 1990s.

Unlike Bear’s bailout, which looks like it is giving equity holders $10/share and Bear management a seat at the table, the Scandanavian efforts “purged” management and ensured equity golfers received nothing.

While perhaps further failures can be avoided recent speculation of losses approaching 1 trillion makes such an optimistic scenario unlikely. It seems the fed is pragmatically asking what to do “when” rather than “if” another shoe drops.

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