I've been surprised by the UK banks. In contrast to their American cousins, banks here have been noticeably quiet about the need for a generous tax payer financed bail out.
I wonder why? Perhaps, our banks have already quiet received assurances from the government that when the time comes, the taxpayer will be there for them. Both the government and the banking sector have good reason to keep quiet. A bailout will be extremely contentious and won't be an easy sell.
However, silence is the last thing we need right now. Instead, we need a serious debate about the appropriate circumstances when the government should intervene in a failing financial institution. If the Americans have taught us one thing this year, it is that an ad hoc, "take it as it comes" strategy simply doesn't work. The uncertainty about who gets bailed out only makes matters worse.
Nor is it tenable to say "we'll have no bailouts here". The consequences of a full scale bank run is just to horrible to contemplate. Besides, whether we like it or not, governments always come to the rescue of failing banks. The key question is how they bail out the banks.
Since a UK bailout is all but inevitable, here is my simple guidelines for the upcoming financial rescue of our largely insolvent financial system. The overriding idea is that the government should provide financial assistance generously, but brutally punish any bank who dares ask for it.
Principle one - All deposit taking institutions get bailed out. Everything else goes down in flames. So, hedge funds, SIVs, and the rest of the shadow banking system should understand that there are no government guarantees. They are on their own.
Principle two - Any deposit taking institution that asks for emergency liquidity should provide high quality collateral and pay an above market interest rate for any cash. If, in the opinion of the Bank of England, the bank would have difficulty paying the penal rate, the government should immediately nationalize the troubled institution.
Principle three - The shareholders of all nationalized financial institutions get wiped out. The value of shareholder equity goes to zero.
Principle four - The board of directors, the CEO and the CFO of any nationalized firm are fired immediately without compensation.
Principle five - The assets of all nationalized firms are sold only where the maximum value to the taxpayer can be reasonably assured. In some cases, this might mean holding onto assets for a very long time.
Principle six - Banks are nationalized before their net worth is zero. Every bank must keep a minimum capital adequacy ratio of 2 percent. Any bank falling below this threshold is immediately nationalized.
Principle seven - The head of the FSA is automatically fired if any bank fails with assets greater than 0.5 percent of total UK bank assets.
I hate speculating about the future of particular institutions. Bank failure is a nasty business. Judging by press reports this weekend, the UK government might need to think about a coherent bank resolution strategy very quickly.
The failures could start coming thick and fast.