Nationalizing the U.S. Banking Sector: There's No Choice 50 comments
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I wish Mr. Geithner would just do us all a favor. Please, just tell us what we already know. And that's this: the American financial industry is functionally insolvent. Don't mince words. Just admit our banking institutions are on the brink of death.
The traditional money flow in the global financial system has ground to a halt. The normal players - holding banks, hedge funds, private equity funds, commercial lenders - are either broke or too scared to lend. The only players who still have any real liquidity are the foreign sovereign wealth funds and their central banks and many of them have already been burned once by this crisis.
Despite what we hear in the mainstream media, the problem isn't that there are no buyers for the so-called "distressed assets." Quite the opposite. The investment bankers who still have jobs will tell you that there are plenty of buyers out there. The problem is that there are no sellers. But why wouldn't banks jump at the chance to get this junk off their balance sheets? One simple reason: if the banks holding toxic assets took the full hit that this would involve, they would be put out of business. Why would they want to do that?
So instead, the Treasury Department wanders aimlessly in the twilight zone of denial and delay, postponing the inevitable. That "inevitable" is the full nationalization of our banking sector. Nouriel Roubini, the New York University economist who correctly predicted the current financial crisis and has been one of the leading critics of the TARP bailout, recently endorsed the idea of nationalizing the banks. Other well-respected economists like Paul Krugman have also joined in the chorus.
What's clear is that our financial institutions are too stressed right now to absorb these losses. It's like a doctor telling a patient: "You could go through another round of chemotherapy that might put the cancer in remission, but the treatment would likely kill you." Instead, our banks cling to the hope that things will improve, hold onto the assets and pray that they can sell them down the road when the storm clouds lift. If they sell now, they are actualizing the loss and they aren't prepared to do that because that would be an admission of failure for many institutions. Doing so would also mean the end of a high paying job for many executives.
We all know that there are a lot of functionally insolvent banks out there but, unfortunately, there is no incentive right now for any bank to admit the vast discrepancy between the book and market value of the assets they hold on their balance sheet. Put another way, what these institutions say these assets are worth for accounting purposes is much higher than the value of what someone will pay for them out in the open market.
Geithner's concept to establish an "aggregator bank" that would partner the government with the private sector might do the trick to deal with some of this bad debt. But it probably doesn't go far enough, as critics of the latest plan warn. One potentially beneficial outcome emerging from Geithner's external "stress testing" process is that it will provide the hard metrics for regulators to fully measure the problem at hand (and not as it is presented now on the balance sheets of individual banks). This evidence can then be used to do what needs to be done politically on Capital Hill. But what Geithner must avoid doing is having taxpayers pay a premium for toxic mortgage-backed securities, as his proposal to insure private investors against possible future losses would seem to allow.
At this point, I'm not so sure that private investors can be counted on to set the price for the simple reason that these assets will never regain their pre-crisis value, unless of course another bubble arises which we obviously don't want to encourage. If the present value of future returns of the toxic assets is greater than the current market value then more buyers would be entering the market and more institutions would be selling. The fact that this isn't happening shows that these mortgage-backed securities are as worthless as a pair of Bermuda shorts in the Artic.
Moreover, one of the main reasons the toxic assets are difficult to value - and thus sell - is because of the challenges in forecasting future default rates which determines the future cash flow of these securities which, in turn, ultimately sets the price. Understanding this, the task the Treasury Department should be focusing on at the moment is to come up with a comprehensive foreclosure plan targeting homeowners around the country who are underwater with subprime loans. The ability of at-risk borrowers to make their monthly mortgage payments is the single biggest determinant in the value of toxic assets held on the balance sheets of zombie banks. Keeping people in jobs in important but so is realigning current income levels more realistically with estimated mortgage payments.
Sure, there are some investors out there willing to buy the assets, but only at a price much less than what the potential sellers are willing to accept. There is no way around this log-jam. The government should acknowledge that the assets are basically worthless and stop using a failed whac-a-mole strategy to manage the crisis. It is time to move on with long-term remedies which address the structural deficiencies of our capital markets at the heart of this crisis.
The good news is this: most policymakers agree that letting the banks fail is an unacceptable outcome. This is a start. The alternative to the Treasury's latest plan for solving the mounting financial crisis is to nationalize its insolvent banks. While that initially involves a government takeover of the banks, the government intervention wouldn't be permanent. The toxic assets would be purged, the banks reorganized and then sold.
But first things first. Someone needs to eat the loss. Who will that be?
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This article has 50 comments:
Second, there ain't enough money in the piggy bank to nationalize the entire US banking system.
So let's stop doing the typical tunnel-vision trader thing, and try to find and support pragmatic and creative ways out of this mess. Personally, I think that if you cut through the lousy packaging, the lousy timing, and the lousy delivery, some of the core concepts (and that's all they were - concepts, not market-ready products) that Geithner talked about the other day are not the worst possible solutions. Some of you may be old enough to remember the Latin American debt crisis in the mid-1980s and the robust debt-for-equity swap industry and other distressed debt trading opportunities that came out of that. When life gives you lemons...
Don't get me wrong - in theory, you and the whole host of people talking about nationalization are probably right in terms of the most efficient way to deal with the problem. The problem is, it's kind of a surgery that would kill the patient - and by the patient, I don't mean the banks. I mean the whole US economy (which is barely managing on life support as it is).
Then, we will have to determine just when to return any surviving assets back into the private sector, and again, at what valuation.
As taxpayers, we stand to doubly screwed, and although we seem to be growing more and more used that situation, it is no more acceptable!
However, Obama and congressional democrats and republicans also have social socialistic & welfare agendas. This is the critical junction where the sound economic sense becomes a hostage to ideology leading to an inevitable economic collapse.
Actually, if future (or present) cash flows were used to determine the values, the banks wouldn't have a problem. With mark to market, they can't.
I would like to know if the author is short BAC, C, WFC, JPM?
MBS are backed by mortgages on houses that have a median sale price of 197,100, and that at a time when prices are depressed by foreclosure sales occuring at 20% less than voluntary sellers would accept.
If you are going to reason from such a stupid premise you will get a stupid conclustion.
We are seeing massive job losses and a stagnant economy. Nobody wants to spend money - and THAT is the biggest problem of all!
If you keep going this way, we will have the dreaded "tsunami" of foreclosures some time next year, along with 20% unemployment and a total wipeout of many insurers, including a lot that have promised annuities to people who are soon to retire.
Think about that - we are in danger of really tanking our economy, just because a bunch of lying egomaniacs won't admit their ridiculous blunders, and are desperately trying to hang on to their jobs.
I say throw the lot of them out on the street, and start over.
That will also expose the fact that many of these joker CEOs and CFOs and "managing directors" are still being paid ten times what they are truly worth!!!
Goodbye Vikram, bye Ken, bye Jamie, and all the rest of you who got us mired in this toxic derivatives swamp.
You deserve to be kicked out the door.
If it was up to me, I would let all the bad banks go through a structured bankruptcy process. The process would include past and current executive teams over the past 8 years (including risk managers and anyone else with bonuses totaling over $500k), who would be required to pay restitution.
It is not true. Let us deal with large New York "too big to fail" banks the same way our government deals with the rest of banking system: the failed and insolvent banks must be closed and sold to private businesses.
Unfortunately, we American taxpayers will have to take a big hit. However, this painful surgery is absolutely necessary to remove the present malignant banking & political tumor that is killing our economy and our free & democratic way of life.
Let us assume that the housing market prices have gone down by an average 30% during this crisis, less in some areas of the country, more in others. Therefore, it is a reasonable assumption that the toxic assets on the books have a fair market value of 70%. The government should buy them from the banks at this price, and establish a market for them with government guarantees backing their value. If the securities cannot be sold at the 70% valuation then the banks have to pay the government the differential over time, so that the hit is not overly onerous.
Using this valuations for bank takeovers, the homes can be sold with no risks to taxpayers. At this level of valuation, the houses will sell quickly and the prices will even go higher because of demand. The difference between 1999 and actual selling price, if positive, can be a shared benefit between the taken over bank and the taxpayers.
You know we've arrived in Wonderland when it's good news that failed capitalists will be made whole, at the expense of their competitors and the taxpayers. It's sad commentary on how dishonest and immoral this "free market" has become.
Yes, it's a BAD start. The banks who made these poor investment decisions SHOULD be allowed to fail. The managers who made these poor choices should be out of work. Nationalizing and subsidizing these "zombie" banks will only keep these poor decision-makers in the financial system.
"The alternative to the Treasury's latest plan for solving the mounting financial crisis is to nationalize its insolvent banks. While that initially involves a government takeover of the banks, the government intervention wouldn't be permanent."
The idea that government will willingly give up power by divesting itself of such a powerful cudgel as the financial system of America is preposterous. The federal government hasn't divested itself of the scores of needless military installations both at home and abroad. Washington hasn't divested itself of Amtrak and the Post Office, neither of which provides quality service at a low cost.
But the homeowner surely has an idea. Perhaps the banks should permit homeowners to buy their mortgages back at whatever value the bank currently has them marked down to, as a first step in reaching a market consensus on what their true value is. That should clear a lot of these toxic assets off the books, and would go a long ways towards solving our problems.
Then, only the mortgages not bought back would need to be marked down a little more, and the offer repeated. And just keep repeating that process until all the old mortgages have been replaced with brand new mortgages based on current market valuations.
An added benefit would be that the new lower-principal mortgages would free up a lot of discretionary income for the homeowners, which would serve to fix yet another problem our economy currently faces.
First off, the writer is very short sighted. Some of these Nobel Prize winning economists have had a doom and gloom forcast for the last decade and obviously given enough time, since economics is cyclical, they were proven right. These same economists are also the ones that supported CDO's, derivatives, and other complex instruments while at the same time touting "portfolio theory" and other mainstream avante guard commecial economic theories that have been proven wrong. In other words, they supported the same system they are now tallking down to sell books.
Second, in theory sure these assets are backed by mortgages. However these mortgages were sold and resold 50 times over as well as derivatized which means the actual value of the underlying properties is still there, however if liquidated it will only be worth something to the mortgage holder, not the fabricated security thats been flip flopped around the world as a type of option on the original mortgage. And that's where alot of speculative trading floors like JPM and Merrill are invested in. The lure of investing in AAA rated subprime mortgages for a 10% return on the bond side is one thing. But to invest in a derivative or default swap is what has ultimately burned them the most.
All this toxic paper will eventually get sorted out through a combination of write downs and of course selling them to one entity or the other. Deposots are up, credit will flow, and new profits will offset these losses, and so goes the financial sector. Too many lessons have been learned from the Japanese crisis in the 90's. Stimulus + bailouts = credit flowing = businesses back on track = banking sector profiiting = profits to offset writedowns.
This market bubble real estate crises was not created overnight and there is no quick fix. I don't think there is any question that due to some of the lending practices the banks are partly to blame and they are facing some tough consequences. But bad government policies and "public servants" were a large part of building this bomb also. These public servants seem to love to place the blame on the big bad evil bankers instead of looking in the mirror. Should all the blame be put on the banks and then we will all feel good about letting them fail - because they deserve it? And should the government be protected to come out of this paid back with interest even though they were a major player in creating this problem?
A few months ago, the government was encouraging (arm twisting) the stronger banks to buy some of the larger troubled financial institutions which they did with government help. Good deals...who knows. Letting other banks fail at this point would only add more jobless people to the unemployment lines - the majority of which are not highly paid executives.
The Worldwide DEBT is the problem.
The best solution for the present economic crisis would be a REBOOT or restart of the entire debt system for the ENTIRE WORLD.
1. A data base listing ALL DEBT, government, business and personal needs to be created. The list would need to list the debt and debt holder with a bank that could make an accounting of the debt. Included would be all national debt of all nations, all mortgages car notes and credit cards for individuals. All outstanding bond and other debt for corporations, The idea is to list ALL DEBT of any kind owed.
2. Every government on the planet would need to call a special session of its legislature.
Using the same authority that governments have to use or create FIAT CURRENCY the legislatures and Central Banks need to authorize the creation of ACCOUNT CREDIT in an amount equal to all the listed debts in the world.
3. The Various governments and Central Banking Systems then need to make an accounting change equal to the debt in the form of an ACCOUNT CREDIT or CREDIT zeroing out ALL THE DEBT in the entire world, and crediting all debt-holders in the world.
The following day the economy of the entire world would restart and the Stock Markets of the world would react to the new renewed capital in the banking systems, the Capital now available to restart all business and the disposable income to the individual people would restart and grow the retail sectors and the manufacturing sectors of the entire world.
Some have commented that if this was done in a very short time the exact problem would be repeated. My answer to this idea is history does recycle and repeat itself but some do learn and avoid making the same mistake. Europe learned after WWII and has avoided a major repeat for more than sixty years.
The other objection has been the possible inflation that would result would weaken the dollar. My answer to the weakened dollar is it may be a GOOD thing to help our ability to export manufactured products and also make our manufactured products more competitive in our own country. Jobs are needed for our own citizens especially the bottom forty percent.
Allen Charles Report
allencharlesreport.blo.../
The only real alternative, however, is to simply let them fold. Not a very attractive proposition.
His co-editor (fancy word) is a failed law major. LOL
That's what you get on Seeking Alpha.
First: I dont want any Tarp money. OK, if you insist
Second: Thanks for Bear Sterns for free
Third: Thanks Wamu for free
Fourth: I took JPM's money out of Madoff. Forgot to tell my customers,
Fifth: long after Madoff hit the fan, Jamie found $500,000,000 in a Madoff
account.
Jamie Diamond IS A TOXIC ASSET
On Feb 13 09:21 AM citetez wrote:
> Perhaps, as Jamie Dimon suggests, the reason the banks are not selling
> their "toxic assets" is because they realize that the media hysteria
> is causing them to be improperly undervalued. Rather than sell at
> firesale prices, the banks would rather hold onto them and wait for
> sanity to return to the market.
Remember when Merrill Lynch sold 13 Billion dollars of assets for twenty-two cents on the dollar and forced banks like Wachovia into virtual bankruptcy because their auditors forced them into the same mark down. Does any serious person believe that once admittedly overpriced houses are only worth 22% of what they once sold for? Is this what we want for our entire banking industry, so that a few eager vulture companies can make a "killing" buying distressed properties.
What the government should do is set a minimum floor of about 50% of original value and take them off the hands of any holder willing to sell at that price. Part of this process could give the banks a 50/50 stake in any future profits from the eventual sale of these houses, while at the same time forcing them to take on a 50/50 interest in any future losses. Once this was done, the vulture firms would know that the properties were in "strong hands" that did not have to sell and suddenly, I predict, they would be worth much more than 22% of original value. The banks would then have stronger balance sheets, with fresh capital to loan in order to help economic activity, instead of sitting on their hands, afraid to lend in order to protect their weakened capital structure.
So, if all this is true why doesn't the government adopt this policy and free up the system; because they are afraid of "Moral Hazard." What the heck does that mean, you ask? Well, it means that somehow government types do not want to benefit common share holders, even if it provides the most help for everyone. Somehow common shareholders are not "Taxpayers" that many are saying need to be protected, when in reality most of those "Taxpayers" don't pay nearly as much taxes as shareholders do.
NEWSWEEK
From the magazine issue dated Feb 16, 2009
Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th.
Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn't grown in size; the others have all shrunk.
So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.
Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north. In addition, home loans in the United States are "non-recourse," which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours. Ah, but you've heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian homeownership? It's 68.4 percent.
Canada has been remarkably responsible over the past decade or so. It has had 12 years of budget surpluses, and can now spend money to fuel a recovery from a strong position. The government has restructured the national pension system, placing it on a firm fiscal footing, unlike our own insolvent Social Security. Its health-care system is cheaper than America's by far (accounting for 9.7 percent of GDP, versus 15.2 percent here), and yet does better on all major indexes. Life expectancy in Canada is 81 years, versus 78 in the United States; "healthy life expectancy" is 72 years, versus 69. American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America's largest car-producing region.
I could go on. The U.S. currently has a brain-dead immigration system. We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal "permanent residents" in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities. If a prospective immigrant earns 67 points out of 100 total (holding a Ph.D. is worth 25 points, for instance), he or she can become a full-time, legal resident of Canada.
Companies are noticing. In 2007 Microsoft, frustrated by its inability to hire foreign graduate students in the United States, decided to open a research center in Vancouver. The company's announcement noted that it would staff the center with "highly skilled people affected by immigration issues in the U.S." So the brightest Chinese and Indian software engineers are attracted to the United States, trained by American universities, then thrown out of the country and picked up by Canada—where most of them will work, innovate and pay taxes for the rest of their lives.
If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet—OK, sometimes boring—neighbor to the north. Meanwhile, in the councils of the financial world, Canada is pushing for new rules for financial institutions that would reflect its approach. This strikes me as, well, a worthwhile Canadian initiative.
URL: www.newsweek.com/id/18...
Until we get that right, no nationalistic approach is going to understand WHY its a worse solution than the problem!
I think financial bloggers have found their "optimal traffic impact" topic by pushing this button over and over again. It's getting boring!
What happened to Morgan Stanley's insolvency back in September? They now seem to be the darling with the best prospects!
Bank of America and Citigroup will redirect their business models as well - with a lot of help from INVESTING TAXPAYERS. The result will be another horse rising from the dead.
I agree with you.
The Nationalization has to be done soon and expeditiously. The more we let it drag on the more that bad teeth rot let alone the toothaches so far. The Bad Apples have to be taken out and a clean up operation be ensued.
I know it its hard for the administration to take this so-called drastic step, amounting to admitting a temporary failure of the free market system. But once we get over this pride hurdle we would be truly on our way to that final recovery that has so far been illusive.
It do not have to mean that the government will run banking business. After the takeovers, they will be sold to new owners in the private sector.
I don't think much of Rob Kellogg's too easy (for him) solution. Mentioning Krugman gets me even angrier. How he ever won a Nobel Prize beats me. Everything I've read from him recently borders on disaster for our country. jasnjim deserves the Nobel Prize for his suggestion!
On Feb 13 10:40 AM jasonjim wrote:
> I disagree with the author that the so-called toxic assets held by
> banks are virtually worthless. They are all backed by mortgages,
> the vast majority of which are good, viable investments. The problem
> is there is no market for the assets to establish their fair value,
> and nationalization is not going to solve this enigma. Nationalization
> would just create a bigger mess, and could at its worst ruin the
> United States of America.
>
> Let us assume that the housing market prices have gone down by an
> average 30% during this crisis, less in some areas of the country,
> more in others. Therefore, it is a reasonable assumption that the
> toxic assets on the books have a fair market value of 70%. The government
> should buy them from the banks at this price, and establish a market
> for them with government guarantees backing their value. If the securities
> cannot be sold at the 70% valuation then the banks have to pay the
> government the differential over time, so that the hit is not overly
> onerous.
Look at the GDP with and without Mortgage Equity Withdrawls from 2004-2007. If we didn't have MEW's, we were growing at 1%. We were living an inflated lie that was a concoction of low rates, negative savings, and materialism. There's only so much you can do about a bad hangover.
I agree with all your points. But like a hangover, the only cure is time. You don't shoot yourself in the head to get over it!. Nonetheless there is pain during the time of cure and one has to adjust to a new reality (you aren't as studly as you thought).
If only bad residential mortgages were the problem, it could be fixes quite easily.
The problem is much more complex and much more widely spread:
- Commercial real mortgages
- Car loans
- Student loans
- Huge and unsustainable domestic deficits
- Huge and unsustainable foreign deficits due to the simple fact that America industries became uncompetitive worldwide
- etc.,
Politicians would like to preserve/go back to the "old good times". Unfortunately, such possibility is not available any more.
The ridiculous notion of nationalizing the entire banking system is disingenuous. Why not just a couple of the biggest? Wipe out everybody and start the healing process. Its time to get past ideologies and politics and do the right thing for a change. Like Canada!
On Feb 14 07:10 AM mwfall wrote:
> how about you just shut your pie hole and get a real job. if the
> banks want you're opinion they'll call you.
The sector needs leadership with vision and a strategy that doesn't remain solely focused on only one quarter.
seekingalpha.com/artic...