Nationalisation: terrible but inevitable-James Saft

-- James Saft is a Reuters columnist. The opinions expressed are his own --

By James Saft

LONDON (Reuters) - Nationalisation of weak banks in Britain and the United States may be preferable to current plans for insurance and soft "bad banks" schemes which risk being swamped by future losses as assets, especially real estate, continue to crater.

An insurance programme, getting banks to identify their riskiest assets to the government which will insure them for a fee, is one of the main planks of a UK plan to bail out banks unveiled this week.

Both Citigroup (C.N) and Bank of America (BAC.N) have already received loss protection arrangements from the government. The betting is now that the United States will opt for some sort of a "bad bank" aggregator which will buy up doubtful assets from banks, with the emphasis on keeping as many as possible operating as publicly traded entities which, once shorn of their bad debts, would be viable and would lend.

Both plans keep banks in private hands, which is desirable, and insurance especially is attractive because it has a relatively low upfront cost. But both, and especially insurance, run a real risk of being too small and, by definition, only ridding the banks of assets that are bad now leaving them to founder on new bad loans later.

Commercial and residential real estate in both countries continues to head south at an alarming rate, with falls of as much as 20 percent or more possible in 2009. Those falls won't be stopped by current lending programmes; it is an ongoing crash that could probably be stopped only by some sort of economy-wide debt writedown which is very unlikely.

That means that we could find ourselves in six or nine months in exactly the same situation, but with banks crippled by a new wave of defaults and with the non-financial economy in a much worse state.

In other words, in order to work a bad bank plan must take into state control the weakest banks and probably needs to err on the side of taking the doubtful down along with the basket cases.