Where's the Nationalization Debate? 20 comments
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There's a lot of words but less actual news in the NYT's big report today on Tim Geithner and his plan for the US banking system. But one thing does interest me, given the extent to which Warren has been demonized by bank shareholders: financial stocks surged yesterday on the same day as the above photo was taken, with Geithner and Warren looking very friendly indeed.
I do like this quote from Chuck Schumer, which I think sums up the debate quite well:
"None of the solutions are very easy," Mr. Schumer said. "All of these proposals sound very appealing until you start to examine them in detail. And then you find that all of them have problems. The good bank-bad bank idea -- the problem, first and foremost, is how do you value the assets? No one knows how to do that."
But the nationalization idea still seems to be stillborn:
[Geithner] discouraged speculation that the plan would include the nationalization of some banks.
"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," he said.
Such sentiments will certainly make Jamie Dimon happy:
"JPMorgan would be fine if we stopped talking about (the) damn nationalisation of banks ... we've got plenty of capital," Jamie Dimon said, at the annual meeting of the World Economic Forum in Davos, Switzerland.
Sorry, Jamie, but I'm going to keep on talking about it, just because it solves at a stroke the problem of valuing the bad assets that the government is thinking of buying at an absolutely astonishing cost of $3-4 trillion. It would also help address Larry Summers's concern:
Mr. Summers privately expressed concern last week that spending too much to buy bad assets could cripple the dollar, according to a person who spoke with him.
This is a real concern. If you give the banks trillions of cash dollars in exchange for their toxic assets, there's simply no way of forcing them to keep that money in the USA. Even if they lend it only to US companies -- which is improbable -- those companies will surely take advantage of the strong dollar to buy cheap imports.
Nationalization, by contrast, doesn't involve monetizing bad assets, which means it poses much less of a risk to the dollar. I'm glad that Geithner isn't in a mad rush to decide what to do, but I'm less happy that some kind of bad-bank solution seems to be a foregone conclusion at this point, while nationalization has not been properly debated. If you don't want to call it nationalization, fine -- but at least take seriously the idea that the problem can be solved without a huge up-front transfer of government money to the banking sector.
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Were Fannie and Freddie nationalized (their stock still trades, their managers still manage) or had they always been nationalized (due to government charters and guarantees)?
Has a bank been nationalized if the govt. buys up a bunch of their bonds and preferred stock?
Does the FDIC routinely nationalize insolvent commercial banks?
Has a bankrupt business or institution been nationalized when it is placed in receivership by a government court?
As I said - a political buzz word.
Re: Bank Nationalization
Some writers disclose their holdings.
Care to do so?
The 1999 repeal of the Glass-Steagal Act of 1933 allowed commercial and investment banks to merge. That is how losses on the investment side led to a contraction of credit on the commercial side. Thus we again find ourselves in the ridiculous and inevitable position of bailing out investment losses in an attempt to persuade the bank oligopoly to resume commercial lending. Perhaps the long term result is that we will relearn the lessons of our grandparents and restore Glass-Steagal.
On Jan 29 09:30 AM Eskin wrote:
> Yaa definitely something that's been going around, and UK's choice
> to nationalize is definitely not swaying this argument away from
> socialism. Probably one of the most extreme moves so far across the
> battle field, and I'm extremely against government intervention in
> the first place, let alone trying to allocate source through nationalization
> which the government can never do as efficiently as firms. Let the
> banks fail, new ones will prosper that are better.
Repeal of the Glass-Steagal in 1997 was the core cause of the banking debacle.
The second and just as important was the gutting out of the enforcement mechanism layered into the the regulatory system. the result was Bedlam.
Oh When will they ever learn?
The real question is not private vs. government, because we have both and we need both. The real question is what role should the government play and what should be left to the private sector?
There's no single correct or static answer, and that's part of the reason we're seeing such panic and confusion, both in the markets and in world governments.
We can let the banks fail, in terms of wiping out investors (which appears to be happening no matter how many TARPs are thrown at them), but we risk complete financial chaos if we shut down one of these big banks overnight. There's a real public interest in assuring that the banks continue functioning as money centers and making depositors whole, and only governments have the resources to make it happen.
The Federal government has already stepped in to keep the banks running, and has already taken some ownership stake. This partial nationalization will grow fuller as the losses continue to mount.
The only actual questions on the table are what mechanisms the government will use to control the banks and how the losses will be distributed.
I suspect few will be happy with the result, but then why should anyone be happy with this catastrophe?
On Jan 29 09:30 AM Eskin wrote:
> Yaa definitely something that's been going around, and UK's choice
> to nationalize is definitely not swaying this argument away from
> socialism. Probably one of the most extreme moves so far across the
> battle field, and I'm extremely against government intervention in
> the first place, let alone trying to allocate source through nationalization
> which the government can never do as efficiently as firms. Let the
> banks fail, new ones will prosper that are better.
I am trying to get the debate started:
seekingalpha.com/artic...
seekingalpha.com/artic...
I am surprised neither one of these was cited as a related article by SA editors.
On Jan 29 09:51 AM mikeg3 wrote:
> Felix:
> Re: Bank Nationalization
> Some writers disclose their holdings.
> Care to do so?
On Jan 29 09:51 AM mikeg3 wrote:
> Felix:
> Re: Bank Nationalization
> Some writers disclose their holdings.
> Care to do so?
Why? Does it serve the interests of the people of the United States to bail out these financial elites to the tune of $trillions? This is madness. Whose country is it anyways? Remember the French Revolution? If this continues, I see no other way out from under the heel of the "private interests" which, it seems, have the country by the ____.
Just a thought. An early one at that but the people are already mobilizing in France, one of the major countries in the world.
Here is the guts of the bad bank, so called, solution:.
1.Many big banks are failing and a few smaller ones, but the systemic problem is the 'big failing bank" like Citi or BAC..
2.Bad assets.
3.Failing banks will not share the detailed information with their regulator, or the market or the general public. The "facts/truth" on the bad assets, like CUSIP numbers and volumes need to be released. No transparency.In fact, they leak out losses , piecemeal each quarter, as their capital adequacy allows. Tail wagging the dog. As if the smart investor didn't know what they are doing. The regulator is complicit in this piecemeal recognition of losses.
4.Just about no one, will buy these assets. The market has spoken. Only "bottom feeders" will buy this stuff at huge discounts. They want huge returns (30%+)for the risk involved, and they deserve it. Thus, the assets have a low price/value. WHY WOULD THE MIDDLE CLASS AMERICAN TAXPAYER WANT TO BUY THIS JUNK at any price other than what the smart money investors are offering today???.Why make the taxpayer the "chump"
5.The junk assets, at their correct low price, create huge unrecognized losses, which when recognized on their eventual sale will wipe out all the capital. Thus bank is broke, insolvent. Should be closed.
6.Not only is the shareholder equity wiped out to zero, the unsecured bondholders would have to, and should have to, take a "haircut". This thus creates a Lehman situation. This is "CRUX" of the matter/problem. The govt appears to be willing to let the shareholders get wiped here(and with Fnma and Freddie) and they should. BUT, no-no, do not touch that unsecured bondholder!!
Are you really going to try to sell as proper public policy that we protect this class of knowledgable, informed bondholder investor at the expense of the American taxpayer who did not even participate in the mess.??
7.When a failing bank is closed, the FDIC protects all the depositors, and sells the franchise(the buildings, people, customers) to a good bank. The shareholders get nothing and unsecured creditors(bondholders ) get only a fraction when the liquidation is over. This is how every regional and small bank that failed was handled.
8.I could suggest that the gov't sell Citicorp, BAC, etc.bank franchise to a new group of investors with new capital (a new good bank). The old senior managers are fired, the good people keep their jobs and transfer to the new bank. They do not even change buildings or desks.. The new good bank then STARTS LENDING, and that is what you folks think the problem is, lack of lending.
9.We do not need to create a new "bad bank"....we have hundreds of them. Instead, create new "good banks" to buy the good assets and franchises from the failed banks.
10.Either way, whether you create a new bad bank or a bunch of new good banks, the result is essentially the same!!. The good assets end up in one shell and the bad assets end up in a different shell.!!
11. So here is the DIFFERENCE, the only DIFFERENCE. When the "gov't", (Fed, Treasury, Bush, Paulson, Obama, Geithner, FDIC, Bair and Congress) elects to create the bad bank, versus, create the good bank, they are just shifting the 'losses' away from shareholders and unsecured bondholders, many from Middle East, Asia, Japan, China and US money market funds, to the good old American Taxpayer. Its that simple.
12. If we are not going to stand up for the taxpayer in this charade, then at least hire Bill Gross and Warren Buffett, and provide them staff, to represent in a fiduciary capacity the taxpayer; to determine what price they, as fiduciaries representing the American taxpayer, we will pay for this trash. They both can get to a 'close' number, if they are told and required to buy at 'prices' you would buy for the Pimco Bond Fund or for Berkshire Hathaway's portfolio.
13.Think about it, when the Fed Reserve decided it was going to start buying MBS from the marketplace, they decided they did not have the expertise to judge and handle the purchases. So, they hired Pimco, Goldman Sachs, and two others to act as fiduciary for the Fed. And, all this paper was agency backed paper and much easier to understand.
Now, when the new "bad bank" has to buy this junk from the big zombie banks, what makes us think we do not need similar or even more expertise, of similar stature. Better yet, have Pimco/Bill Gross and Buffett take a financial stake in the purchases, ie, skin in the game.
14. If the govt did this(#13 above) then there would be less loss shifting to taxpayer, the zombie banks get less, the zombie banks take bigger losses and the zombie banks become more insolvent. Thus , the zombie bank shareholder equity goes to zero. Then , the unsecured bondholders have to take huge loss/haircut. Because of this last fact, this is why the govt will never do it.
Instead we will create a farce, a political cover, a complicated, clandestine process called a "bad bank"....for the sole purpose of knowingly, purposefullyand intentionally shifting the losses from those who created it and took the (risk and benefits) to the unsuspecting, virtual "chump", the American taxpayer. None of the government policy makers, especially Congress, has the guts to tell the public what is really going on. Socialize the losses, but do not claw back and get all the earlier gains, profits, income, dividends and bonuses from the private stakeholders???
Please, reconsider this before Obama team makes its big announcement any day now.
Respectfully.
By the way, see #4 above, the bottom feeders will still be the eventual buyers of these assets, even if you set up a bad bank. They will just wait and buy the junk from the new gov't controlled bad bank, and they (smart money people) will buy them at huge discounts from the purchase price originally paid by the "bad bank" to the failing zombie banks. Privatize the gains, after you socialize the losses
Congratulations. That's the best analysis of the situation I've seen.
Its obvious that Geithner and Co are doing everything they can to protect the Citi and BAC bondholders. So the real question is - who owns those bonds and what leverage do the bond owners have over our government?
Its too bad the mainstream media will not read your post and investigate. (but they probably wouldn't be able to understand the post even if they did read it).