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Good nationalization or bad nationalization?

Why is the Obama administration hesitating to seize big, insolvent banks when it’s already throwing about two, smaller insolvent banks a week into conservatorships?

Just allow the Federal Deposit Insurance Corp. to do its job. The FDIC protects depositors, disposes of the bad loans and other assets that wiped out the bank’s capital, and then sells the remaining assets back to private owners.

Remember last summer, when the FDIC seized IndyMac Federal Bank, the Los Angeles lender that wrecked itself with subprime mortgages?

After six months of spiffing up the balance sheet the government is selling IndyMac to a group of investors led by Steve Mnuchin of Dune Capital Management, and that includes billionaire hedge fund operators George Soros and John Paulson.

That’s good nationalization. It’s not socialism. It’s how the banking system is supposed to work.

It gets rid of insolvent banks, which are like the living dead, just withering away with no money to lend and no hope of attracting new capital, or at least new private capital.

Bad nationalization occurs when the government tries to prop up failed banks the way it has been doing it since Congress was stampeded into passing the bailout bill last October.

Most of that money went to the nation’s 20 biggest banks, some of which were insolvent before the government invested in them and are still insolvent after the government gave them billions of dollars our money.

Wall Street Journal and New York Times reported today that Citigroup has a new deal for the president: Convert $45 billion worth of preferred shares the government obtained through the Bush bank bailout into common shares.

That would leave the government holding a whopping a 40% stake in Citi and make the American taxpayer a full-fledged partner in its disastrous management.

It’s an open-ended commitment that invites Obama to pour even more federal money into a potentially failed enterprise with no assurance it will be enough to restore the bank to financial health.

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