Furthering the Discussion on Bank Nationalization

More and more discussion is appearing on the TARP-Bad Bank-Nationalization debate. I (Solving the Bank Crisis: More TARPs Are Not the Answer and On David Sanger's Analysis of Bank Nationalization Conundrum) have tried to get a discussion going on a government buyout option for failed banks. It has the following elements:

1. Compensation of current shareholders at current market value.
2. Government ownership, but independent management, a al RTC.
3. Maintenance of basic business structure and relationships.
4. Time provided for sorting out “good” and “bad” assets without further market impact.
5. Opportunity to develop new business plan.
6. Maximizing taxpayer recovery.
7. Removal of prior executive management involvement, as appropriate, determined by an independent board of directors.
8. Timely discovery of any still uncovered “skeletons in the closets”.

Thursday morning, Bill Seidman (Bad Bank vs Nationalization) proposed a similar idea, but excluded the stock purchase option. I think this has a logical shortcoming. It might be argued that the government and the Fed have become a party to the current position that CitiGroup (C) and Bank of America (BAC) are in because, starting with TARP I, they (the banks) have been following the direction of their benefactors. For the benefactors to say thanks anyway, but you are now toast borders on extremely unethical behavior. Bait and switch anyone? By the way, don’t take this as a criticism of Bill Seidman, whom I consider one of the truly rational voices speaking on the current crisis.

On CNBC, Charlie Gasparino (Bank Bank Plan Back in Vogue ) has discussed the asset pricing problem and the relationship to bank nationalization.

Meredith Whitney ("No bad bank please," says analyst Whitney ) has asserted that isolating “bad” assets (and, therefore, a “bad” bank) is not a good idea. Her position is that “good” assets should be sold and “bad” assets kept. If the bank still becomes insolvent, then it goes under. My question is: What happens to the taxpayer investment so far, estimated to be as much as $8.5T in equity investment, loans, loan guarantees and bailouts? A list of these exposures has been listed by Shah Gilani.

Dirk van Dijk (Bad Bank' Is a Bad Idea) has also pointed out problems with the “bad” bank idea. His proposal is to have the Treasury assume 50% ownership with dilution of existing shareholder equity, similar to the process applied to AIG.

A NY Times article (report) quotes new Treasury Secretary Tim Geithner:

“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.”

This raises the question: What exactly does he want to preserve? Is it the “system” or the current business plan, management structure and executives of the banks? This question has to be answered. We do not want an attitude like Charles Wilson, GM CEO, who said (my recollection, not from an attributed quote): “What is good for General Motors is good for the USA.”

Another worthwhile read today comes from Felix Salmon (Where's the Nationalization Debate?). Felix is another source requesting further debate of the bank nationalization issue.

I come back to my position as an investor. What addresses the problems, while preserving a functioning financial system, and simultaneously maximizes my return as a taxpayer? Let’s keep pushing this discussion until it gets to the top of the food chain.

Comments

[TheBookkeeper:]

“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.”

Wouldn't it be nice if Secretary Geithner's words were in fact a.true statement of fact? The fact is that our financial system is being run by dreamers who are guessing "What might we try next," in the way of a solution to 40 years of Ponzi schemers using new-found computer power to accelerate bad ideas into today's crash.

Jan 30 05:09 AM

[Ishortyou:]

hm....I would probably better buy the MBS/CDOs tier 2, 3, 4 securities at cost price out of the banks books to clean up their balance sheets, that would probably would allow me to kill two birds in one shot i.e. injecting more money through TARP and cleaning their sheets at the same time.

Jan 30 07:29 AM

[Ishortyou:]

I would probably add a temporary bann on new house starts and permits till the housing bubble stabilizes.

Jan 30 07:30 AM

[monday1929:]

You can't "stabilize" a bubble.


On Jan 30 07:30 AM Ishortyou wrote:

> I would probably add a temporary bann on new house starts and permits
> till the housing bubble stabilizes.

Jan 30 08:25 AM

[monday1929:]

The criminal Geithner , who failed massively in his role protecting the banking system as NY Fed Head, wants to protect those who control him- the Bankers. His appointment made me regret my Obama vote and re-double my shorts. We've been had again. We've been fooled again.
We are going to have a Great Depression, it is just a question of how many more Trillions are looted by the elites before it is over.

Jan 30 08:31 AM

[Jason Rines...:]

1) I am strongly on the side of nationalization. None can be spared, including common and preferred shareholders. Chronie capatalism has destroyed investor confidence. The taxpayers are going to foot the bill. Transparency moving forward is key. Your not going to get transparency outside of nationalizing at this point. Prefer 4.3 T of private capital sitting on the sidelines coming back to the markets.

2) I agree with Noriel Roubini. Sweden has a successful blueprint. We can't have an intelligent debate without reading that blueprint. Whom here can get a copy?

3) Lack of price discovery is continuing to cause bank intepredation in lending to those worthy of expansion. Price all CDS (bad assets) at .50 cents on the dollar until contracts can be reviewed. This will take a full year if not two years to determine true value. Housing will have bottomed and started a tepid recovery. Hold a private auction at that point of CDS. Good assets are traditional banking. Those assets will look even better when price floor has been set. Outright fraud discovered MUST be prosecuted as multi-year prison sentences.

Jan 30 09:37 AM

[sleepless_o...:]

John Lounsbury, great series of articles with good reference links.

Look for a series of three articles today by James Quinn which gives a broad picture of how our current crisis relates to the Japanese experience of the past 20 years. Their mishandling of insolvent banks was a major factor in producing 20 years of economic stagnation.

How can we get through to Washington? They don't seem to be considering the nationalization option for insolvent banks.

HELP!!!!!

Jan 30 09:48 AM

[nym:]

I find absurd the notion of the taxpayers guarantying stockholder equity just because the bank followed the regulations. When you invest, due dilligence is your responsibility, otherwise, where would the guaranties end?

Jan 30 12:51 PM

[John Lounsbury:]

nym - - -

Thanks for your comment. You have a good point. I have expressed an opinion that is different. Let's keep the subject open for debate. My mind can be changed by sound argument.

Jan 30 03:41 PM

[Concerned_C...:]

Here's an idea. Protect depositors 100% and let the banks that overextended go bankrupt. Stockholders would be completely wiped out and all debts converted to equity with whatever is left. The bad debts are gone, the people who played by the rules are protected and the fools and charlatans get zero. Frankly, by the time we finish the next wave of the mortgage defaults ($2T) and consumer credit defaults ($2T), you'll be at triple of what has been spent already. The Level 3 toxic derivatives that sit on all the fund's and bank's balance sheets exceed the GDP of the world by a factor of 10x. All of the countries in the world combined don't have a big enough balance sheet to bail that out. We are pouring good money after bad.

The argument that the assets are not fairly valued at present, because there is no market is specious. You ran out of cash, didn't preserve your capital and now it's judgement day for banks. Too bad.

A fair solution except for the lack of possible graft and corruption, which is happening under TARP. Has anyone been straight with the taxpayers about where their money went? To continue TARPing into a bottomless rat hole is the ultimate folly that will destroy our currency .

Under my plan, everyone would get to "tell it to the (bankruptcy) judge". A year, start to finish and we'd be done with it all.

Jan 30 07:25 PM

[Tom Armistead:]

On the topic of the government compensating shareholders of nationalized banks, here is a link to a thought-jprovoking article:

www.skepticalcapitalis...

One reason banks have trouble attracting capital is that nobody wants to invest money in order to be wiped out by the government. JPMorgan looks good because that they were given possession of WaMu, not because WaMu was necessarily insolvent, but because the regulators feared the problem was to big for them to resolve if the bank failed. The whole action was pre-emptive, and a favored company got the fruits of it. JPMorgan needed deposits and it got deposits, thanks to Paulson.

There needs to be a definite body of adminstrative law to prevent the government from seizing investors property based on capricious and arbitrary determinations.

Jan 30 08:37 PM

[rm:]

[How can we get through to Washington? They don't seem to be considering the nationalization option for insolvent banks.]

The unspoken assumption here is that "Washington" gives a rat's patoot about what's good for the country.

That assumption is false.

Jan 31 09:15 AM

[John Petersen:]

Liz Moyer of Forbes has proposed the perfect name for a bad bank, the Bad Asset Repository Fund or BARF. I've suggested an equally truthful alternative, the Federal Union Bad Asset Repository or FUBAR.

There are times when I wonder whether it wouldn't make more sense to use $350 billion to create 35 fully functional good banks and let the chips fall where they may on the judgment errors of the past.

Jan 31 11:13 AM

[sleepless_o...:]

nym, Concerned_Citizen and Tom Armistead -

You are doing a good job of getting both sides of this nationalization issue discussed. John Lounsbury said: "Let's keep the subject open for debate." That you are doing. Thanks.

Jan 31 11:31 AM

[Jim Hawthorne:]

Tip 'o the hat, John, for working to promote rational debate of an issue that often seems to be overly testosterone-driven.

Like everything that has a season under heaven, so too, does nationalization. The devil is in the details, as always!

The asset pricing issue is huge, as some of the baddest and most toxic of the bad assets really have no value at all (as far as I can see), the pious protestations of the bankers notwithstanding.

My biggest concern about nationalization comes at the other end of the slippery slope; What is to be the 'Exit Strategy'?

In other words, what triggers will begin the return of the nationalized back to the private sector?

If the issue of when to quit as well as when to jump in is not is not dealt with upfront, then the long-suffering taxpayer runs the nasty risk of being royally... let's say... 'taken to the cleaners'... literally from both ends.

Jan 31 09:14 PM

[Jim Myrtle:]

"Price all CDS (bad assets) at .50 cents on the dollar until contracts can be reviewed. This will take a full year if not two years to determine true value"

All CDS are bad assets? You're funny. Unless the government is going to become the sole market maker in CDS, how will they prevent the market from trading CDS? Why should someone who just bought a CDS for .01 cents suddenly get a boost to their capital of 0.49 cents?

Yours is the recommendation of someone who doesn't understand how markets work. Or how a CDS works.


On Jan 30 09:37 AM Jason C. Rines (iThinkBig) wrote:

> 1) I am strongly on the side of nationalization. None can be spared,
> including common and preferred shareholders. Chronie capatalism has
> destroyed investor confidence. The taxpayers are going to foot the
> bill. Transparency moving forward is key. Your not going to get transparency
> outside of nationalizing at this point. Prefer 4.3 T of private capital
> sitting on the sidelines coming back to the markets.
>
> 2) I agree with Noriel Roubini. Sweden has a successful blueprint.
> We can't have an intelligent debate without reading that blueprint.
> Whom here can get a copy?
>
> 3) Lack of price discovery is continuing to cause bank intepredation
> in lending to those worthy of expansion. Price all CDS (bad assets)
> at .50 cents on the dollar until contracts can be reviewed. This
> will take a full year if not two years to determine true value. Housing
> will have bottomed and started a tepid recovery. Hold a private auction
> at that point of CDS. Good assets are traditional banking. Those
> assets will look even better when price floor has been set. Outright
> fraud discovered MUST be prosecuted as multi-year prison sentences.
>
>
>

Feb 01 10:08 AM

[Obama is Bu...:]

..." My question is: What happens to the taxpayer investment so far, estimated to be as much as $8.5T in equity investment, loans, loan guarantees and bailouts? A list of these exposures..."

This is more than disturbing. Bailout advocates are now arguing we have to double down on a terrible investment in order to bail out the previous bailout?

I am very happy that bank nationalization is now being debated, rather than rammed down our throats by an unelected Treasury Secretary... but one argument that has ZERO validity is the claim that we have to make more foolish moves because we already made foolish decisions.

The unfortunate reality that nationalization advocates won't admit to is that the banks (in aggregate) are too big to save. The trillions it would take to prop up poorly run businesses would devastate the US government's financial position.

Further, a nation filled with zombie banks would not possess the tax base needed to keep Uncle Sam in business going forward.

Too many people cite the (isolated incident) of the Chrysler bailout as evidence of bailout "success". One success, if it really is a success, does not prove a idea is sound.

Was Chrysler a success? The company is back for more handouts, so at best Chrylser can be called a delay of death, not a save. While government accountants have stated that the US government "got all its money back" -- this is an incomplete accounting. If Chrysler had been allowed to fail, what other businesses would have been created in its place? How much taxes would those other businesses have paid while Chrysler was paying none?

Further, if Chrysler had been allowed to fail, would that have been the kick in the pants needed to get GM and Ford to implement reforms? How much extra taxes would have been paid by a more healthy car industry? And fast forward to today, how many more billions will the "successful" Chrysler bailout cost taxpayers to bail out Chrysler (again) as well as GM?

With success like that, who needs failure?

Banks are poorly run businesses -- they have proven that beyond any doubt. Plenty of writers have talked about financial disintermediation -- banks are no longer really needed to perform many of the functions they used to. Indeed, it was bank's efforts to branch out into businesses they didnt know and didn't understand that got them in trouble.

New financial institutions, based on a different business model, are needed. Bailing out poorly run banks is unaffordable (even if it was a good idea) and delays the needed reforms in the industry

Feb 01 05:12 PM

[TVTHRIA:]

The main issue is to get the banks lending again.I think that is the only thing that matters .Of course everyone in Washington is trying to politicize and complicate the issue.I wouldn't worry too much about being "fair" to anyone.Banks will continue to act like Banks which is to say that they aren't great risk takers and they see the yawning abyss in front of them that is why they aren't lending.Securitize this junk and sell it to the best bidder .Take it off the balance sheets and sell it and let the risk takers make money.

Feb 09 09:29 AM