Much of the chatter Monday is over stress tests. Rumors are already circulating: Barry Ritholtz over at the Big Picture relays rumors that has Citigroup Inc. (NYSE:C) needing $10 billion and Bank of America Corp. (NYSE:BAC) short a whopping $60 billion. If the latter is true -- and personally I wouldn't believe anything in the next few days unless the sourcing is unimpeachable and even then I'd wonder why it's being leaked -- Ken Lewis is toast. Ritholtz, of course, uses those figures to buttress his continuing argument for nationalization; he takes cheer in the Chrysler LLC bankruptcy as a sign the White House may be finally getting it. The danger in continuing to allow the big banks to stumble along, he argues, is that the crisis will end up as Obama's, not Bush's.
The Chrysler bankruptcy bucked up the nationalization camp, convincing them that Obama wasn't completely passive. And a seizure of one of these big banks is always possible, though fully expect rumors to reinforce specific political positions as the week goes on; lower numbers from the leave-the-banks-alone rump, higher for the nationalization wing. But clearly nothing will happen quickly, at least in terms of ownership: The process is designed, much like that of the car companies, to allow banks every opportunity to work themselves out of their hole, however big that's determined to be. Like the teacher he once was, Obama seems to want to set up tests, give deadlines and then allow institutions to succeed or fail, before acting. Yes, it takes time, which the nationalization crowd hates. And the government occasionally puts its finger on the scale, from setting the terms of the tests to nudging the UAW into an ownership position and squeezing the hedge funds. (Rule of the game: It's OK to fix the game a bit if your side gets the edge.) But it's shrewd because it's viewed as generally fair; and the folks, who get scorched, like the hedge funds, have already been demonized.
Besides the rumors on capital, there's an amazing amount of speculation about personal motivations and bias linked to policy. Summers and Geithner are assumed to be captives of Wall Street (although, in another theory, Summers is continually undercutting Geithner), which mostly means Goldman, Sachs & Co. (NYSE:GS), and they are forcing the White House to take a go-easy position. Ritholtz replays the White House split argument: that Summers and Geithner are opposed by closet nationalizers Rahm Emmanuel and David Axelrod, the latter of which got the upper hand in Chrysler. What these theories of influence and policy miss is that there's a president in the center who seems to be deeply involved and who appears to have a penchant for the long-term play utterly lacking in the previous administration. It would be amazing to think -- and unnerving -- if the bank situation had not been gamed out. That doesn't mean it will work, because gaming out economic reality is roughly how we got here in the first place, but one would imagine the White House has thought out its moves.
Finally, a small observation on the continuing declarations of our economic prophets. On The New York Times op ed page Monday, two highly credentialed economists take up the entire space offering two diametrically opposed views of the crisis and indeed just about everything else. Paul Krugman continues to beat the drum for stimulus and bank seizures, while hearkening back to Japan in the '90s; Allan Meltzer fears inflation from federal spending and warns about the inflationary '70s. Next time you hear an economist argue about getting real, check his party affiliation. - Robert Teitelman
See post from Big Picture
See Krugman's column from The New York Times
See Meltzer's column from The New York Times
Robert Teitelman is the editor in chief of The Deal.
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