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To Nationalization, "Just Say No!"

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With the growing call for nationalization you might be surprised to hear that a former chair of the FDIC says it’s the wrong move.

In Tuesday’s Wall Street Journal Bill Isaac, chairman of the FDIC from 1981-1985 writes, “bank nationalization isn’t the answer. Trust me. I’ve done this before.”

We were so intrigued by his perspective that we invited Isaac to be our guest on Fast Money.

Unlike other pundits you might see on TV or read online, the insights provided by Isaac are clearly different – he's actually walked the walk.

“When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country's seventh largest bank,” he says.

Three major issues emerged as a result

- the bank was forced to shrink dramatically
- they had to come up with a plan to get the bank back into private hands
- they had to find a new, yet highly experienced management team.

In the case of Continental Illinois none of those issues were terribly vexing because on a relative scale – the bank was small.

But, if we nationalize Citigroup and Bank of America (the two firms widely believed to be at the top of the list) the issues mentioned above would be much more trying. And the ripple effect would be dramatic.

In fact, it could create a domino effect, forcing the nationalization of about the top 10 banks.

If that sounds dramatic, Isaac isn't the first person to make that leap. One highly followed analyst, Fox-Pitt Kelton’s David Trone says much the same. "If Citi is nationalized, all bank stocks are likely to get crushed in fear."

In other words nationalizing Citi is a whole different ball of wax and one that’s likely to create more problems than it solves.

What’s the solution?

Isaac says, “The Obama administration should declare that nationalization of any major bank is off the table -- that the government stands behind our entire banking system; and that our banks will continue to receive a nonvoting form of equity capital, such as convertible preferred stock, from the government to the extent needed.”

He adds, “Monday’s joint announcement to this effect by the Federal Reserve, FDIC, the Comptroller of the Currency, and the Treasury is a critical step toward healing our banking system and economy.”


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Trader disclosure: On Feb. 24th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Najarian Owns (MSFT), (PALM); Najarian Owns (GE) Put Spread; Najarian Owns (FCX) & (FCX) Calls; Najarian Owns (GDX) & (GDX) Short Calls; Najarian Owns (HPQ) Calls; Najarian Owns (JPM) & (JPM) Calls; Najarian Owns (MS) & (MS) Short Calls; Najarian Owns (MOS) Call Spread; Najarian Owns (X) Put Spread; Seymour Owns (AAPL), (EEM), (MON), (BAC), (FXI), (VIP), (MS), (SSL) Seymour's Firm Owns (FCX), (COP); Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MS), (TM), (DIS); Terranova Owns (DIS), (FXC), (XBI), (KCE); Terranova Owns (AMGN) & (AMGN) Puts; Terranova Owns (IBM) Call Spread; Terraova Owns Nymex MACI Oil Futures

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