Bank nationalization after December would have led to a generalized crash of asset prices due to massive systemic delevering.

TO BE NOTED: From Inner Workings:

"Why I changed my position on the bank bailout April 20th, 2009
By David Goldman

Last September I opposed TARP, preferring to see the FDIC take over banks that couldn’t get funded in the market place: a short, sharp shock followed by a federal takeover of asset books. In December, though, I opposed bank nationalization after the fact. Why? Because the US government already had committed trillions of dollars to market support, including trillions on the Fed’s balance sheet. The Fed was all in. The credit of the US government was at risk, as I wrote Jan. 19:

Once you start nationalizing banks and admitting that your central bank might be swamped by the size of bad asset problems, bad things happen that you want to avoid. For example: 5-year credit protection on the United Kingdom traded today at LIBOR +125 basis points. That is where Brazil was trading in mid-August, just before things got out of hand. Here’s a better one: five-year credit protection on The United States of America traded today at LIBOR +69 basis points. That is wider than Brazil was trading in May 2007, before the crisis began. The credit quality of the US is now where Brazil — Brazil! — traded prior to the crisis. Given that the Fed is all in, with $1.4 trillion of dubious junk on its balance sheet, this should surprise no-one.

If asset prices crashed BEFORE the Fed made multi-trillion dollar commitments, the Fed could have stepped in with fresh money.

With the bank rally, sovereign credit has recovered:

Ticker	CLIP	Name	5Y Today>	Daily Chg (bp)>	Weekly Chg (bp)>	28 Day Chg (bp)>
USGB	9A3AAA	Utd Sts Amer	40	0	-7	-26
JAPAN	4B818G	Japan	63	-6	-15	-35
DBR	3AB549	Fed Rep Germany	41	1	-3	-20
UKIN	9A17DE	Utd Kdom Gt Britn & Nthn Irlnd	84	-1	-10	-34
FRTR	3I68EE	French Rep	43	0	-3	-21
ITALY	4AB951	Rep Italy	106	-1	-13	-51

Source: Markit Partners

Bank nationalization after December would have led to a generalized crash of asset prices due to massive systemic delevering. The Fed would have been bankrupt. No-one would do business with anyone else without buying insurance against default, and the market for insurance would have collapsed. The system, in short, might have passed the event horizon for a black hole. We were that close.

And that is why, to answer a reader’s question, we throw good money after bad. In fact, we keep the banks afloat to try to turn bad money into sort-of-OK-money. It’s nothing to brag about, but zombie is as good as it gets."