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Gross: Nationalization Would Fail

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  • Gross: Nationalization Would Fail

    FEBRUARY 24, 2009, 9:30 A.M. ET
    Gross: Nationalization Would Fail

    Bond king Bill Gross said in his latest monthly missive that any effort by the U.S. government to nationalize floundering banks wouldn't work, partly because of the number of banks involved.

    "We have 7,500, as well as many (savings and loans) and credit unions, which would have to be flushed into government hands," said Gross, managing director at Pacific Investment Management Co. "Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just stand by and see what nationalizing" Citigroup Inc. or Bank of America Corp. would do.

    Fears that broken U.S. banks might be nationalized have roiled the stock market periodically in the last few months as the government made cash infusions to troubled financial institutions. Investors are worried that nationalizing banks would wipe out or severely dilute their stakes.

    Mr. Gross said Tuesday "The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite."

    He also tackled the question of how bad the nation's financial crisis could get.

    "If the government cannot substitute credit to the same extent that it is disappearing from the private system, then the U.S. and global economies will retreat," the bond maven said.

    "If the economy is viewed as a bathtub filled with water (credit) at two different times with two different levels, then draining it back down to the lower first level might reduce economic activity proportionately. Liquidate debt (credit) to 2003 totals and you just might reduce economic activity to 2003 numbers as well. Whoops! That would mean a 10%+ contraction in the economy with unemployment approaching the teens. Keep that bathtub full!"

    Write to Mike Barris at [email protected]