The IndyMac Example: Nationalization Works

Branches of the bank formerly known as IndyMac, the largest bank nationalized by the FDIC during the current crisis, reopened today under new management and new ownership. As Pat Garofalo observes, “Even though it cost more than originally estimated, the successful nationalization and re-privatization of IndyMac — the fourth largest bank ever seized by federal regulators — shows that taking over troubled financial institutions, clearing them of their troubled assets, and selling them back to the private sector can be done.”

Nobody should kid themselves about the costs involved. Nationalizing larger institutions wouldn’t be an alternative to the federal government spending a ton of money. But at the same time, avoiding nationalization while keeping zombie institutions afloat isn’t a low-cost alternative to nationalization. And as we’re seeing with the furor over the AIG bonuses, keeping public officials at arm’s length from managing an institution that depends on government support to stay in business hardly succeeds in keeping the institution out of political controversy. All it does is muddy the lines of authority and responsibility, making it difficult to maintain consistent and politically sustainable policies.

Working with very large institutions would not be the same as working with IndyMac. In all likelihood looking at new legislation is a good idea as some kind of new process would need to be set up. Still, this solution remains the best approach. If the administration’s in need of political cover, they can bring nationalization support Doug Holtz-Eakin on board.