Good <---------------------------------------> Bad re-capitalise do overpay through nothing massively for equity bad debts of investment unknown value
On the left-hand side is rescuing banks by the state investing in equity (i.e. buying shares) and potentially acquiring it completely (nationalisation) to later spin-off the good bits back into private ownership (Buiter’s “good bank”) and wind-down the bad bits. This approach has been tested before in Sweden’s banking crisis, and is currently working quite well in the UK.
On the right-hand side is where you overpay the banks massively for bad debts, with no more than a vague promise that you might try recover some of the losses in levies if the losses are too huge, and where you get no stake in the future profits the banks will make thanks to your rescue. I.e. NAMA (or SCAMA?).
“Oh, but do you really want the governments to run a bank?” – Well, do you want the government to (part-)own an existing bank through shares, or do you really prefer the government to have to setup from scratch an agency, complete with political appointments, to directly manage a very big lump of loans and property?
It seems only Green Party members can save us.