*Thinking the unthinkable

The drumbeat to nationalize the banking system is definitely picking up. Nouriel Roubini and Robert Shiller said on Bloomberg Television today that there's really no other choice, that the banks are too far gone. Now, it must be said that these guys have been doomsdayers for some time - especially Roubini – but within the past week or so the mention of nationalization no longer provokes a look of disbelief. It’s in the air.

Roubini - I think you have to eventually nationalize US banks. Even the biggest ones are insolvent. The kind of approach of guarantees, providing money, good-bad assets is not going to work.

Shiller - I would avoid using the word nationalization. We have another term called bridge bank, and the way it works is that the failed bank is taken over for a while and then it's sold again to the public. So why don't we change the way we handle bridge banks? Let's make them stay on longer - for years rather than just a few months.

As if these assessments weren’t bad enough, Roubini added that "even if you do everything right, it's going to get ugly. What we have to avoid is a near-depression." Shiller says the key is restoring confidence. Otherwise, he adds, "we're going to be in a situation where once you stop the fiscal stimulus, we're going to come right back down."

But wait, there's more. Both Shiller and Roubini are in Davos, where other Gloomy Guses were delivering some not-so-encouraging news during an evening session. Niall Ferguson, author of “The Ascent of Money: A Financial History of the World,” said the financial crisis was bound to happen, in part, as a result of “stupidity” by so many. As reported by the NYT's Andrew Ross Sorkin, "he also suggested that we are about to enter what he calls a 'global lost decade.' It will be worst in the United States, he said, marking 'the twilight of the American hegemony.'" After all that, posts Sorkin, "most people in the room needed a drink."

But seriously folks, is nationalization really in the cards? So far, the Obama folks are steering clear of the word, focusing instead on setting up a "bad bank" that presumably would handle all the junk still on the books of major banks. Other options include de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority. From the NYT:

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.” “I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers. Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.

*Influential blogger Barry Ritholtz joins the chorus during an appearance tonight on CNBC:

--Temporarily Nationalize the Banks: We know they are insolvent, and cannot survive without taxpayer money. Spending a 150% of their market cap for an 8% share is absurd. Wipe out the debt, liquidate bad common holders, fire the Board and management, appoint new competent, risk sensitive management. They have 6 months to spin out a 10% stake in each of their holdings, followed by the rest within 5 years (10 at most).

--Taxpayer owned: Once nationalized, that 10% spin out of the components parts would be in the form of prefered to taxpayers! For BAC, you would spin out Bank of America, Merrill Lynch, Countrywide, plus the “B/A Toxic Holdings I & II” For Citi, it would be Travelers, Citi, Smith Barney, Citi Toxic 1 & 2, etc.

--Now Recapitalize: With the toxic waste off of the books, you can easily recapitalize the banks. Give the old creditors a “sweetheart” deal — they get a 10% stake also, but only if they buy a matching amount in the new bank.

--Align Compensation with Long Term Profitability: Stop rewarding traders for short term gains despite long term losses. Stop paying taxpayer monies out as dividends. Bonuses must be a function of the long term health of the company — not monthly violatility.