Is Nationalization Contagious? 20 comments
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Those of us in favor of bank nationalization don't want to nationalize all banks, just the massively insolvent ones which are too big to fail. But let's say that the government took over Bank of America (BAC) and/or Citigroup (C), wiping out shareholders and probably preferred stockholders as well. What would happen to JP Morgan Chase (JPM) and Wells Fargo (WFC)? Would their stocks plunge in fear that they, too, might get nationalized, with their stock going to zero? And would such a plunge end up becoming a self-fulfilling prophecy?
I frankly don't know the answer to that question, but it is something for those of us in favor of nationalization to think about. If nationalizing Citigroup would constitute a death sentence for JP Morgan and Wells Fargo, such a decision could involve a great deal of wealth destruction, given that those two banks are worth $140 billion between them.
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It might effect them negatively. That is a worry. It might be argued that they could also be supported to the extent that the implication could be that they would not be allowed to go to zero. I don't know how much that would help them because having an implied guaranteed price floor of, say, $5 for a stock currently at $15 or $20 may not provide that much support. If the price goes below $10, the implied support would have much more effect.
As far as wealth destruction is concerned, another $100B or so seems trivial compared to what has already happened. And thinking about that statement really scares me.
> Why is any bank too big to fail? What would the real results be
> if Bank of America failed? Who would really lose?
The short answer is - all of us.
The banking system needs the confidence of depositors in order to work. If you worry about getting your money out, you won't put it in. And then where would you put it?
The other problem is that the banks provide a vital public service by clearing transactions among individuals, businesses, government, etc. Without this infrastructure, there would be no financial "roads" for cash to flow. It would be like closing down the phone systems and trying to communicate by shouting.
The depositors and financial infrastructure concerns can be guaranteed without saving the corporations, their owners or their investors, but it would be huge undertaking to replace the corporate organizations.
"Saving" too-big-to-fail banks really means having the government guarantee that these vital public services continue. The investors would lose big, but we would still be able to pay for food.
All profits will remain privatized.
This is technically, economically, cognate with Mussolini's "Economic Miracle" - and you know what that was called?
The banking system needs the confidence of depositors in order to work. If you worry about getting your money out, you won't put it in. And then where would you put it?
The other problem is that the banks provide a vital public service by clearing transactions among individuals, businesses, government, etc. Without this infrastructure, there would be no financial "roads" for cash to flow. It would be like closing down the phone systems and trying to communicate by shouting.
I seem to be missing the point here. If a bank fails, doesn't it go into bankruptcy like any other corporation? Won't the bank continue to function? Will they not be getting relief from their debts? The banking system as a whole continues to work as it should but that corporation suffers temporarily. Sure the investors will lose out but that's part of investing.
Can anyone explain that to me?
Nationalization is just a really bad idea. We need to ATTRACT private capital so the need is reduced for government money. However, not many people are willing to pile money into a bank right now knowing that their preferred shares or common will get wiped out just like TPG did with WaMu in 2008.
E.g., so if the bondholder doesn't get paid, they have the right to force liquidation of the company.
If the bank is nationalized, the bondholders would get paid because the government wouldn't want that liquidation (or do they?)
On Jan 23 12:56 PM User 293585 wrote:
> Why shouldn't bond holder lose something in a "nationalization" of
> a bank?
>
> Can anyone explain that to me?
If a bank collapses the trust needed to have a bank is gone. That's why when the FDIC takes over a failed bank, that bank is sold to some one else and no longer exists. I would guess that if a to big to fail were to fail, there are no other banks able to take it over, so that bank is gone, but the money owed by it is also vaporized along with investors. and only deposits are saved. but only because of the FDIC. and banks do a lot more than almost any other company in our economy. And if a really big bank were to fail without a takeover, almost every other bank would start to have bank runs (which depositors come in and withdrawal their money) causing more banks to fail. and if enough banks fail, you could see what happened in the depression could repeat because that was a major cause of it. and a lot of today's problems are because nobody trusts any body else as they don't know if any body is not about to fail also.
I seem to be missing the point here. If a bank fails, doesn't it go into bankruptcy like any other corporation? Won't the bank continue to function? Will they not be getting relief from their debts? The banking system as a whole continues to work as it should but that corporation suffers temporarily. Sure the investors will lose out but that's part of investing.
On Jan 23 10:18 AM Larrysyr wrote:
> On Jan 23 09:47 AM Novice_Trying_to_Learn wrote:
On Jan 23 02:15 PM TPoise wrote:
> The nationalization of ANY major bank would spread instantly throughout
> the financial markets of the world. XLF would be $1/share or less.
>
>
> Nationalization is just a really bad idea. We need to ATTRACT private
> capital so the need is reduced for government money. However, not
> many people are willing to pile money into a bank right now knowing
> that their preferred shares or common will get wiped out just like
> TPG did with WaMu in 2008.
Communism would work just perfectly if you could get everyone to contribute exactly the same and be content with equally exactly the same rewards.
Looks at BCS and RBS- BCS has been crushed without taking a red cent from the British govt. compared to its peers RBS and Lloyds
Shed the dis-ingenuity Mr. Salmon. And advice your fellow "nationalists" of the same. Nationalization of US banks will destroy wealth of epic proportions and put paid to any hopes of investing private capital into the very lifeline of our economy when we most need it.
This kind of stuff never works in half measures and never ever in human history can be controlled precisely as its advocates deem it can.
My other post to your fellow nationalist sets out an alternative which is simple-
1, valuation of assets is central to everything
2. value performing assets on cash flow
3. value non performing assets over a 12 mon time window average of valuations.
4. govt offers both an insurance program for assets as well as a reverse auction buy back of select assets.
We'll be fine in 12 months and "bank nationalism" of your kind will thankfully remain a blogospheric illusion.
On Jan 23 06:01 PM mephistopheles wrote:
> Nice to see the "nationalists" begin to wake up to some of the real
> perils of this kooky scheme.
>
> Communism would work just perfectly if you could get everyone to
> contribute exactly the same and be content with equally exactly the
> same rewards.
>
> Looks at BCS and RBS- BCS has been crushed without taking a red cent
> from the British govt. compared to its peers RBS and Lloyds
>
> Shed the dis-ingenuity Mr. Salmon. And advice your fellow "nationalists"
> of the same. Nationalization of US banks will destroy wealth of epic
> proportions and put paid to any hopes of investing private capital
> into the very lifeline of our economy when we most need it.
>
> This kind of stuff never works in half measures and never ever in
> human history can be controlled precisely as its advocates deem it
> can.
>
> My other post to your fellow nationalist sets out an alternative
> which is simple-
>
> 1, valuation of assets is central to everything
> 2. value performing assets on cash flow
> 3. value non performing assets over a 12 mon time window average
> of valuations.
> 4. govt offers both an insurance program for assets as well as a
> reverse auction buy back of select assets.
>
> We'll be fine in 12 months and "bank nationalism" of your kind will
> thankfully remain a blogospheric illusion.
Banks are in major distress and as another commentator said it would appear that nobody trusts what the bankers are saying, so if private investors are not willing to step up to the plate the buyer of last resort - the taxpayer - will have to take over ownership
By the way, nationalization is tantamount to a collapse, just more costly to the public. As one poster noted, Obama's team is too smart to do either. Distasteful as it is, we will preserve the big three banks for the sake of the economy, which could not endure another psychological blow of this magnitude nor the financial bomb it would set off. Think of it as you like, either a spider web, a cancer, a root rhizome that goes everywhere and is tangled up with hundreds of corporations and businesses. A bankruptcy of such magnitude is like an emt explosion that frys the infrastructure of everything it touches. Look at what Lehman's collapse did to dozens of otherwise innocent corporations and funds. Magnify that by 50 in the case of CITI or BAC.
So grow up people, it's not a Mad Max movie, it's your society and economy as you know it. No fuzzy, grainy black and white newsreels of hobos and soup lines, but a modern day catastrophy that would produce havoc and wealth destruction that would last for years and most likely change world order politics and our own social fabric. Unless that's what you Mad Maxers think we need.
On Jan 23 02:15 PM TPoise wrote:
> The nationalization of ANY major bank would spread instantly throughout
> the financial markets of the world. XLF would be $1/share or less.
>
>
> Nationalization is just a really bad idea. We need to ATTRACT private
> capital so the need is reduced for government money. However, not
> many people are willing to pile money into a bank right now knowing
> that their preferred shares or common will get wiped out just like
> TPG did with WaMu in 2008.
On Jan 24 08:55 AM John Cordes wrote:
> It"s rather amazing to see how many people think that a cataclysm
> is a viable option. It's almost as though there is a perverse vengence
> or subtext of hoped for melt down in which all those who are underserving
> malefactors and the elite will suffer and set the stage for the survivors
> to ascend. Too many movies and armagedon dwellers I think. It's
> a particularly American characteristic perhaps, wipe the slate clean,
> start over, the losers deserve it mentality. I think it's a product
> of social darwinism and a culture that has insufficient experience
> with humanistic philosophies and spiritualism. Not a plug for religion,
> just an observation.
>
> By the way, nationalization is tantamount to a collapse, just more
> costly to the public. As one poster noted, Obama's team is too smart
> to do either. Distasteful as it is, we will preserve the big three
> banks for the sake of the economy, which could not endure another
> psychological blow of this magnitude nor the financial bomb it would
> set off. Think of it as you like, either a spider web, a cancer,
> a root rhizome that goes everywhere and is tangled up with hundreds
> of corporations and businesses. A bankruptcy of such magnitude is
> like an emt explosion that frys the infrastructure of everything
> it touches. Look at what Lehman's collapse did to dozens of otherwise
> innocent corporations and funds. Magnify that by 50 in the case
> of CITI or BAC.
>
> So grow up people, it's not a Mad Max movie, it's your society and
> economy as you know it. No fuzzy, grainy black and white newsreels
> of hobos and soup lines, but a modern day catastrophy that would
> produce havoc and wealth destruction that would last for years and
> most likely change world order politics and our own social fabric.
> Unless that's what you Mad Maxers think we need.
BAC is "well capitalized" under Tier 1 criteria and earned $4 billion in 2008.
Let me put it this way... you might as well wipe out the financial system and every market in existence. The impact would be the same.