Bank Nationalization: It's Just Plain Wrong 60 comments
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The clamor for nationalizing big banks grows each day. Those favoring nationalization recommend removing all bad assets from bank balance sheets thereby wiping out, as needed, the equity of common shareholders followed by the interests of preferred stockholders and then the bond owners.
The bad assets would then become assets of the FDIC or a special entity established by the federal government. The new owners could then keep them or sell them to private investors, who are reportedly waiting anxiously to acquire these bad assets.
Proponents of this approach strongly suggest that nationalization is necessary for the nation to end its economic death spiral and begin a recovery. Bank nationalization also has widespread popular appeal, because it supposedly punishes the culprits for destroying the economy and it provides just punishment for making stupid decisions.
Nationalization is neither a necessary nor a sufficient condition to solving today’s problems. The treatment of Continental Illinois in the 1980s and the purported success of the RTC are not appropriate templates to follow. Such actions today could easily aggravate economic conditions by causing further consumer despair and calling into question the value of the US currency and our US government debt.
The truth is that de-leveraging by financial institutions, corporations, and individuals takes time. The bad assets on the books of the banks will disappear as they either heal, are liquidated, or are charged off through earnings. The debt of corporations will be reduced as corporations either take bankruptcy or use their cash flow to reduce debt. Individuals will similarly de-lever by either erasing debt through bankruptcy or curtailing consumption. During this period the level of economic activity will be negatively impacted unless the government expands its expenditures and levers its balance sheet. Nationalization of banks will not prevent this process from occurring.
The fact that “vulture investors” are among the most vocal supporters of nationalization testifies to the fortunes they made when the government engaged in widespread closures of financial institutions in the 1980s and 1990s. They can’t wait to once again be the beneficiaries of a large transfer of wealth courtesy of the federal government.
While fans of the RTC cover it in accolades, the beneficiaries of its largess chuckle. Here is what one person had to say about the RTC:
When working on a mortgage-backed trading desk back in the '80s, the RTC went to the street to solicit bids for the assets that they had taken over from the insolvent thrifts. We made a killing. It was an unadulterated field day. We bought the stuff at a discount to the projected cash flows and resold it within hours for huge profits. In anticipation of once again earning huge profits, the likely beneficiaries are doing their best to drive banks off the cliff so they can once again buy distressed assets at fire sale prices. It is the way of the street.
Bank nationalization proponents claim that the only proper way to value banks is on the basis of liquidating value or tangible common equity. Such an approach is understandable, because that is in their best interests. Valuing banks on a going concern basis has no place in their playbook. Calling these investors “vulture investors” gives vultures a bad name!
Unwittingly, regular citizens, including the unemployed, have joined forces with these people to form an unofficial bank nationalization coalition. The fact that these disparate groups increasingly favor nationalization is disturbing and requires examination.
There are two issues that merit careful consideration before being swept up in this drive for nationalization. First, who determines what “bad assets” need to be excised from a bank being nationalized? Second, who determines the price of a bad asset at the time of its removal?
In the case where a loan is determined to be a bad asset and is transferred to another entity, that borrower loses their right to renegotiate that debt with the original lender. This puts the borrower in a less favorable position than they would otherwise be, since the new holder of the loan would either be unable or less likely to lend more money, extend the term, and/or lower the interest rate. Borrowers and the local economy are better served by loans staying where they are originated.
Recent events with securitization prove beyond a reasonable doubt that original lenders have a greater likelihood of getting repaid. Accordingly, the intrinsic value of a bad loan on the balance sheet of a bank that made it is greater than the intrinsic value of that loan when it is housed and administered elsewhere. Furthermore, an original lender is far more likely to advance additional funds to borrowers, thus extending the economic life of a borrower.
Similarly, it can be argued that the intrinsic values of securitized assets held by a bank are greater than the comparable values if they are held by most private investors. This is so because banks benefit from having a much lower cost of funds, especially today. Banks also have more secure and virtually unlimited funds available thanks to expanded FDIC coverage, which removes the fear of bank runs, and an aggressively accommodative Federal Reserve. The intrinsic values of assets on the balance sheet of a bank today are understandably greater than what non-bank investors claim.
We cannot afford to experiment with nationalizing our banks. It is not necessary, especially in view of the fact they do not face deposit runs; their cost of funding is plummeting; they have very favorable interest spreads; and, their earning assets exceed their paying liabilities.
The truth is that almost all of the banks and savings and loans that were closed during the past 30 years would have survived if they had today’s deposit guarantees, deposit rates, and were given some time. The exceptions are those institutions that were caught by persistent negative interest rate spreads when interest rates soared and those banks closed because of fraud and malfeasance.
The federal government needs to ignore the cry for bank nationalization. This is not like the 1980s or 1990s.
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This article has 60 comments:
This little movie is absolutely incredible. If you are interested in this topic at all, you MUST learn about where money comes from!
video.google.com/video...
It starts out black but hang on to your seats!
then AFTER you see it ask yourself this:
Why not let the US Government buy into the banks big time then share the profits with the people? Right now Uncle Sam is not only stimulating but capitalizing the banks and getting lots and lots of shares in return. This is happening right now. Today the bank's stock values are lower than they have ever been. Let Uncle Sam BUY LOW. Grab the banks that are insolvent then add them to the banks that the US owns a high percentage of. Over time the people (Government), could own the banks and share the interest and profits with us (put it back in the treasury), so our kids can be taken out of debt (at least Government debt anyway), and the people that work in banks could keep their jobs.
I like the kind of bank shares our government is buying right now. They are preferred shares that pay 5% dividend. I wouldn't buy the old ones but I'd love to buy into the ones our government is getting. Maybe they could set up a huge mutual fund that we could participate in. In the end the people would own our banks and those terrible bankers would not.
This is the ideal time to do this. This movie needs to be seen by everyone then you will all agree with me!
Think about it. Uncle Sam capitalizes the banks and takes their shares. With the money the banks buy treasury bills so Uncle Sam can pay for this stimulus. if Uncle Sam owned the banks, then the interest and bank profits would be shared with the people since the interst payments would go back into the treasury, eventually so will the principle. The more money the banks loan to Uncle Sam the more money there is right now. If the banks charge high interest rates later rather than sooner, our government will be out of debt. Ask yourself, why are we paying interest to bankers when we could be paying it to ourselves?
But believe it or not: Uncle Sam's borrowing is the answer to the credit crunch. As long as it's from Government owned banks that is.
You will only understand how this is posible if you have seen this movie.
video.google.com/video...
But even if that was the case and they are right, the bank can still be a viable entity provided that those losses actually only materialize slowly over time. Why exactly do you want to force those banks do realize potential losses TODAY that would normally be realized over the entire life of a loan? Especially when there is considerable uncertainty over the true amount of losses? Just so that some vulture investors can make out like bandits?
If you seize institutions that would otherwise be viable over time based on arbitrary and very debatable assumptions, you are no better than Chavez or any banana republic for that matter. I have no qualm with nationalization of banks that are on the verge of collapse due to bank runs or severe funding issues. But all other banks should be left alone.
What is your opinion of this proposal?
brucekrasting.blogspot...
--------
Why Bureaucrat will, ofcourse!
On Feb 15 02:12 PM ClydeDNA wrote:
> What we should do is buy the Banks not their assests. There is not
> enough money to buy the toxic assests anyway. We couldn't put a
> dent in the problem with $3 trillion. But the Banks are going cheep.
>
>
> This little movie is absolutely incredible. If you are interested
> in this topic at all, you MUST learn about where money comes from!
>
>
> video.google.com/video...
>
> It starts out black but hang on to your seats!
>
> then AFTER you see it ask yourself this:
>
> Why not let the US Government buy into the banks big time then share
> the profits with the people? Right now Uncle Sam is not only stimulating
> but capitalizing the banks and getting lots and lots of shares in
> return. This is happening right now. Today the bank's stock values
> are lower than they have ever been. Let Uncle Sam BUY LOW. Grab the
> banks that are insolvent then add them to the banks that the US owns
> a high percentage of. Over time the people (Government), could own
> the banks and share the interest and profits with us (put it back
> in the treasury), so our kids can be taken out of debt (at least
> Government debt anyway), and the people that work in banks could
> keep their jobs.
>
> I like the kind of bank shares our government is buying right now.
> They are preferred shares that pay 5% dividend. I wouldn't buy the
> old ones but I'd love to buy into the ones our government is getting.
> Maybe they could set up a huge mutual fund that we could participate
> in. In the end the people would own our banks and those terrible
> bankers would not.
>
> This is the ideal time to do this. This movie needs to be seen by
> everyone then you will all agree with me!
>
> Think about it. Uncle Sam capitalizes the banks and takes their shares.
> With the money the banks buy treasury bills so Uncle Sam can pay
> for this stimulus. if Uncle Sam owned the banks, then the interest
> and bank profits would be shared with the people since the interst
> payments would go back into the treasury, eventually so will the
> principle. The more money the banks loan to Uncle Sam the more money
> there is right now. If the banks charge high interest rates later
> rather than sooner, our government will be out of debt. Ask yourself,
> why are we paying interest to bankers when we could be paying it
> to ourselves?
>
> But believe it or not: Uncle Sam's borrowing is the answer to the
> credit crunch. As long as it's from Government owned banks that is.
>
>
> You will only understand how this is posible if you have seen this
> movie.
> video.google.com/video...
PS This comment appears a 2nd time because it is intended as a response to ClydeDNA (sorry... joe from chi)
O
Obama and Emanuell have put us on a course for DEPRESSION AND SOCIALISM. Do you want to live under H. Chavez or the other dictators in the world. We are grooming our own dictators. Tzar and Mrs Obama, assistant Tzar Emanuell. Then of Coure the loyal COURT JESTERS:
Pelosi, Franks, Reed, Dodd. Et Al.
I am 65 years old and have never seen our country in such trouble. We caused the trouble. If we keep the Government out of it, we will work it out. Not one voting member of Congress or our Car Salesman of a President and his parts manager Emanuell has read the bill. Even Pelosi who wrote the bill has no idea of what it says. Their great Roosevelt did not bring us out of a Depression. His new deal was a total failure. Unfortunately WW11 brought us out of a depression
Bottom line. No Nationalization. We have millions of capable people in this country who can take control of the entire situation.Unfortunatel... or fortunately none of the are in government. Put the all the criminals in jail and let men like Paul Volker take charge.
On Feb 15 02:40 PM donbob wrote:
> Dr. Baker
> What is your opinion of this proposal?
> brucekrasting.blogspot...
Let's say we don't nationalize the banks.
Then what do we do?
Fine, deleveraging takes time, but to buy these banks that time, why must we pay with taxpayer money?
If you're saying that undoubtedly we'll get "all the money back," then you're looking very charitably on what has been acknowledged to be a very stupid lending spree. If you're using the Swiss banks example (which were nationalized, by the way), in the bank's assets coming back, realize that most times—including 1929, the 80s, and the 1994 debacle with LTCM—it doesn't happen. The Swiss had a relatively small banking system (relative to the world as a whole) with pretty good, but illiquid assets. We have a massive banking and financial system with fundamentally unsound investments.
You can't be pushing that we just let them collapse, and you don't seem to be. So for quite a few of these banks, we need to pour taxpayer money into them to prevent them from collapsing if we aren't nationalizing them—money that probably won't be coming back.
So what sort of message does it send if we DON'T punish them, and ALSO lend them a hand?
Certainly, it probably isn't as bad as some people say—but it still does unmistakeably send the message to banks, "Lend intelligently... but if you don't, don't worry, as long as you're big enough, we'll come and bail you out."
Hey, maybe they lose a bit of money from ownership dilution from all this bailout equity from the government, but I think it's a pretty good deal considering how we're minimizing their downside, when their upside from taking on all this idiotic risk was theirs and theirs alone.
We share the downside, but they get all the upside?
Can we make a guess where this will lead us in the future?
Nitram. I know you want to punish those CEO that still have jobs, but except for Madoff, nobody is going to even pay a fine.
The collateral that underwrote all those $trillions in loans is going down in value. The banks are broke! Hang the banker CEOs! …that's not going to help. What do we do now?
First I want you to cheer up and face the future in a positive manner. Unless you got a car with a Flux capacitor, we are going forward. You know, this is the very first time that everyone I voted for actually won. I've voted a lot of times over the years. I'm going to stay involved as much as I can and hope for the best rather than worry about the worst. I'm going to stay positive about my life going forward, even though as Yogi once said "the future is not as good as it used to be".
And I'm going to try to figure where all the money came from so I can figure where it's going -- and get some.
video.google.com/video...
It think it is a case of " Live by the Sword, then Die by the Sword".
On Feb 15 02:32 PM klarsolo wrote:
> Fantastic article. Any kind of approach requires coming up with a
> fair value of the "toxic" assets. The proponents of nationalization
> simply declare the current market price as the fair price, trying
> to sidestep the entire issue of valuing those assets.
>
> But even if that was the case and they are right, the bank can still
> be a viable entity provided that those losses actually only materialize
> slowly over time. Why exactly do you want to force those banks do
> realize potential losses TODAY that would normally be realized over
> the entire life of a loan? Especially when there is considerable
> uncertainty over the true amount of losses? Just so that some vulture
> investors can make out like bandits?
>
> If you seize institutions that would otherwise be viable over time
> based on arbitrary and very debatable assumptions, you are no better
> than Chavez or any banana republic for that matter. I have no qualm
> with nationalization of banks that are on the verge of collapse due
> to bank runs or severe funding issues. But all other banks should
> be left alone.
Banking is not just another business with the usual ebbs and flows, and successes and failures. Instead, the banking system is the like the circulatory system of the body of capitalism. If the banking system breaks, so, too, des everything else. Hence, unlike CLECs circa-2000, failure is not an option.
Considering how the banking private sector, after getting more fredom in this past generation (a looser regulatory system) used it to blow up the system, it seems that government has no choice but to step in to manage the crisis in the short term and give some serious dogma-free consideration to what role, if any, the private sector can and should continue to play in banking.
It may be premature to suggest nationalization is the answer. Perhaps a much more tightened regulatory setup will do. (Yes, regulators are not great decision makers, but how much worse could they be than what private-sector bankers have already done? At least bureaucrats won't have financial incentives to get so reckless with other people's money. Dull and unimaginative, which is what we'd likely get, would be a major improvement.) But whatever the case, it's way too early to dismiss nationalization as at least one potentially plausible solution.
But I do agree with NITRAM in one area: criminal prosecution of wrong-doing bankers at all levels of the organizations (not just the CEOs). It shouldn't take too much imagination to bring all this under the larceny statutes; theft of shareholder money and theft of FDIC funds with "willfull recklessness" providing the requisite criminal intent. Throw in a dash of RICO, and perhaps the private sector would be so scared straight we wouldn't even need nationalization or increased regulation.
And what are the loans which these "banks" actually hold in portfolio? Many are loans to speculators, to abet the outlandish hedging positions permitted by laxity of the past Administration.
We should let "banks' that can't pay their way go into bankruptcy, and the federal government should be present to purchase selected portfolios of loans which were made in the national interest and to insure deposits, regardless of FDIC limit. (Most of the legitimate bank activity at the supermarket "banks" would be purchased by real banks, anyway, if we insisted on bankruptcies.)
Instead, we are spending billions just to prop up counterparty loans on leveraged gambles of big banks that were too big just to be banks. Those gambling positions should not have been honored with taxpayer money. Let's put it simply. We are bailing out bookies. The loans which they made to assist hedgie gambling, and the institutions which made those loans, should be flushed through the bankruptcy courts, as we have done with other incompetent and unnecessary businesses over the decades.
Instead, we are contributing capital to prop up bad bets, and not putting money into the real economy. $800 billion per year would cover all of the employment taxes in the USA. That's a 7 & 1/2 % boost in wages for each worker, and a 7 & 1/2% support to their employers. That is how the money should be spent if we want to get working America back on its feet.
LordD
1. Changing the accounting rules (ie, suspend mark to market)?
2. Having the government provide more loan guarantees?
3. Having the government make more capital investments in banks?
4. Some other action different from the three above?
Creating national good banks (a national commercial lending operation) on the other hand would be cheaper, more effectively isolate the banking problems from the rest of the economy and the banking muppets who invested in the toxic crap they are peddling will go down the tubes as they so richly deserve.
www.pbs.org/moyers/jou...
is surely designed by the present state of the mind of economists. Money is book-keeping's debit system. A great deal of economic exchange takes place without the assistance of banking at all. Our culture needs to understand how a proper double-entry book-keeping framework works if we are to even begin to understand how money works.
The role portrayed in this film, of banks being exclusive money lenders, is completely misleading. as to what makes a well run culture successful. Yes is true that banks, particularly since book-keeping is being done by bogus book-keeping software, have become corrupt. But to get a handle on how a culture trades it goods and services, you have to look at those goods and services, and not at the money that is so easily corrupted by schemers.
This film is a bad joke on unstudied minds, which includes most of today's economists who believe that economics can be expressed mathematically. It cannot. If one studies book-keeping in the detail that this film attempts to study money, they would find that book-keeping, and the money supply, are in fact grammatical language. There is a subject, predicate, and object involved in every business transaction. The object is a story we live by. That our culture, as story, is so badly corrupted today is the work of liars, not miscalculation. Book-keeping, after all, can be precise without going beyond simple arithmetic. If you want a clear picture of today's best alternative solution view this interview:
www.pbs.org/moyers/jou...
All the banks need is time. If that is the case, then they should have gone private and those investors could decide that their investment horizon is 15 years. But these are public companies that trade everday. AS an investor I have to value them today with what the market thinks they are worth (are we arguing that the market is wrong because we don't like the results; these are very widely held concerns and I can not assume that 'market wisdom' is wrong). Perhaps the author is right that the assets of these banks are undervalued; perhaps he is not (one can make the argument about a globalizing, low-cost race to the bottom). The bottom line is that these banks are insolvent. Investors who invested in them can only have recourse to the management because the bail-out is essentially a bankruptcy. In a bankruptcy, the new owner negotiates the value of the debt, and the equity is wiped out (hence why equities are rightfully risky instruments). Just because we have had 3 decades of unending equity gains does not mean we can negate the basic risk structures that exist.
Nationalizing the banks means nothing more than wiping out the equity holders. The government will recapitalize the banks as it sees fit (new well capitalized owner), start lending as it sees fit, and then privatize the assetts as it sees fit. The example above about vulture investors making out on RTC assetts is the fault of the governement, not the process. The government can hold out for a good price through an auction process where it is well advised on minimum values.
This should only happen to banks that are "too big to fail"; other banks should go through bankruptcy, liquidation, work-outs or mergers as the private market dictates. Fannie May and Freddie have been nationalized essentially.
The big question will be how the rest of the private markets work and this stillhas to be thought out, but I am not ready to reject nationalization if any institution is "too big to fail" at this moment.
I do agree that banks have to be regulated in the future so that compensation especially meets the goals of the shareholders and the banks' role in the economy.
On Feb 15 07:37 PM john1940 wrote:
> Stop. The banks and financial institutions have barfed up a financial
> chaos about every 5-10 years. Remember the South American bonds
> that became Brady bonds. Long Term Capital Management. Russisan
> Bonds. S&L failures. Too big to fail. BS. Now we have the
> mother of all financial crises. There is no reason to support this
> kind of risk for depositary institutions. I am ready to go through
> a good bank/bad bank solution just like the S&L crisis and then
> keep the survivors in a very regulated environment. Yes, returns
> will be low. Bank stocks won't be exciting. And regular crises
> may stop and deposits safe. And they can still make good loans.
www.pbs.org/moyers/jou...
I was hoping to make my ideas more questions than answers. I think the Grignon video is a great place to start. Maybe I took some of Grignon's questions further than I should. That video was made several years ago, long before the current crisis. For me, thanks to Grignon, I think I can understand the MIT proferssor I lot better. (I was an MIT Postdoc years ago).
Again the idea of Uncle Sam buying the bank's shares as "preferred shares" would say to me that the old shares are going to end up worthless. Some of the banks are doing well, those shares are higher priced. Uncle Sam doesn't need those, those banks probably don't need new capital anyway. The insovent banks are the ones FDIC can take out of the system and off the market, like IndyMac (although I don't think they were actually that bad off).
It's the inbetween banks that I talking about. They have no real value right now, but they serve a purpose, they have useful infrastructure. Let's have Uncle Sam buy them on the cheap and get these "preferred shares", the other shares will go to 0 like they had a bankrupcy. The MIT Prof was saying something just like this. The exisiting and new CEOs would have some sort of Government pay grade and the Bank's Board of directors would be Uncle Sam's people.
My second idea is that I would like to get some of those shares that the governerment would be getting. How about some Mutual Fund made up of the shares that Uncle Sam just got. I'd like in on that.
Here you have it, a rocky yet doable transition to Government banks rather than taking on the Toxic assests. I think we should leave those on the books of the banks we bought. But be nice to the people that hold all those loans. Figure out a way to save the ones the are in real need, but look out for all the crooks out there. If Uncle Sam starts to fiddle with the toxic assests, they will grow like crazy, because there are thousand and thousands of people that will try to work the system.
The banks that cant preserve themselves need to be put through bankruptcy. The stimulas package needs to build value into the asset know as the United States of America.
"The Japanese have been here before. They endured a “lost decade” of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.
Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail".
www.nytimes.com/2009/0...
And after Bush and Cheney had us RIGHT THERE ON THE EDGE OF ETERNAL PROSPERITY ... and John and Sarah, such NICE biblical names, were there just awaiting to carry us all into heavenly bliss.
The American people are SUCH idiots.
On Feb 15 06:05 PM otbricki wrote:
> There is another group that would benefit from nationalization -
> short sellers. This would be their greatest hour - to see C, BA,
> etc go to zero.
> In case you hadn't noticed, those banks have already fallen off the cliff and valued near zero. Slim pickings for the short sellers in financials these days.
Excellent response. I do however question your final point of using the $800Billion to give each worker a 7.5% raise and a 7.5% raise to each employer. If this is done simply as a percentage, most of the raise will go to the best off including the bankers and I would argue that it would be completely not stimulative. If this raise went to workers on a fixed $ basis as George Bush did with his rebate, you would get more money into the hands of people that have to spend it, but it still might not be too stimulative; people would likely save the money for a scary future (rational), pay down high interest debt, shop for cheap products at Walmart (mostly imports), and some small amount would revolve a few times through our economy, but much of the spending we need to do would still need to be done. For the employers, with business on the downturn, and with credit frozen, the prudent thing to do is to increase liquidity as budgets have higher risk than usual. The best solution is to do some tax cuts so some money enters the economy immediately and then embark on a major spending program to do the spending that is needed anyway so you are better off in 2 years when the economy is ready to grow, and this spending will revolve a few more times in this economy creating more employment here. Hopefully they can pull it off.
On Feb 15 05:35 PM lorddarley wrote:
> Who knows what a Bank is these days? Since the repeal of Glass-Steagall,
> we have a lot of financial supermarkets. The current spin is that
> the investment houses (like Goldman) now get to pose as banks.
>
>
> And what are the loans which these "banks" actually hold in portfolio?
> Many are loans to speculators, to abet the outlandish hedging positions
> permitted by laxity of the past Administration.
>
> We should let "banks' that can't pay their way go into bankruptcy,
> and the federal government should be present to purchase selected
> portfolios of loans which were made in the national interest and
> to insure deposits, regardless of FDIC limit. (Most of the legitimate
> bank activity at the supermarket "banks" would be purchased by real
> banks, anyway, if we insisted on bankruptcies.)
>
> Instead, we are spending billions just to prop up counterparty loans
> on leveraged gambles of big banks that were too big just to be banks.
> Those gambling positions should not have been honored with taxpayer
> money. Let's put it simply. We are bailing out bookies. The loans
> which they made to assist hedgie gambling, and the institutions which
> made those loans, should be flushed through the bankruptcy courts,
> as we have done with other incompetent and unnecessary businesses
> over the decades.
>
> Instead, we are contributing capital to prop up bad bets, and not
> putting money into the real economy. $800 billion per year would
> cover all of the employment taxes in the USA. That's a 7 & 1/2
> % boost in wages for each worker, and a 7 & 1/2% support to
> their employers. That is how the money should be spent if we want
> to get working America back on its feet.
>
> LordD
Another factor is simply that the cost or re-capitalizing the largest 20 banks is beyond the abilities of the Treasury. That leaves the Fed, already extended. Ben can QE is he wants, but the bigger market—that of the US$—would catch on very quickly and interest rates would scream upwards.
So, you cannot pump much more capital in from public funds, and you cannot prime the printing press. Private funds trust no bank, so that's out. The big sovereign funds have already been burned. Selling mortgage backed securities in a recession will bankrupt the banks, and,like Northern Rock in the UK, could lead to runs on some of them, the very worst case scenario. You have no time because so much capital is sucked up into these assets that the rest of the economy is starving. it's a major cause of the mass layoffs.
That leaves only receivership. Call it that or nationalization, it's going to happen anyway. Limits are being reached elsewhere that compel this as the only solution.
Also, mortgage contract rewriting to extend the term does not adequately address the problem, only delays it. Only downgrading the principal owed and lowering the interest will work as a significant number of these houses in California, Florida and Arizona were over-valued so much that the value could not be redeemed via normal growth ina shrinking credit economy to the tune of 20+ years. no one will pay that long into a house where the value vis-a-vis inflation stays flat. You'll just see foreclosures rocket up again in a year or two when people get over their desperation and begin to (finally) act rationally. Time is your enemy here, not your friend. The longer this plays out, the more capital bleeds from these banks, like Japan.
On Feb 15 04:07 PM Jolly_Rancher wrote:
> The government should nationalize the mortgages, NOT the banks: 1)
> Take possession of every mortgage; 2) Refi each mortgage at a low
> fixed interest rate and pay $20,000 down on principal; 3) Return
> the mortgage to the original holder.
On Feb 15 08:11 PM spigzone wrote:
> "Obama and Emanuell have put us on a course for DEPRESSION AND SOCIALISM"
>
>
> And after Bush and Cheney had us RIGHT THERE ON THE EDGE OF ETERNAL
> PROSPERITY ... and John and Sarah, such NICE biblical names, were
> there just awaiting to carry us all into heavenly bliss.
>
> The American people are SUCH idiots.
>
It seems to me that the government has more staying power and fewer requirements to adhere to in order to stay in business than anyone (else) in the banking industry.
That might take some of the pressure off, and instill some confidence in consumers, investors and lenders.
- leverage up to 30:1,
- securitization of all kinds of risky assets,
- hedge funds operating behind a veil of secrecy,
- and shamefully turned a blind eye to widespread fraud like that of Madoff.
The regulators are empowered by the government, and IMHO it is the government that got us into this mess. The bankers simply responded to the encouragement they were given by the regulatory system, including "encouraging home ownership" among less credit worthy borrowers (as I understand it, this was a goal first set up by the Clinton administration and reinforced by subsequent administrations and the federal home loan organizations)
Why are the Canadian banks in such good shape? Because the regulatory system does not allow such high leverage as we see in the US system, the mortgage lending industry does not allow no money down, teaser initial rate mortgages. Canadians get no tax relief for mortgage interest, so there is incentive to pay off the loan. In the US, the incentive is to have as big a loan as you can. The US government reaped the crop of bad mortgages that it sowed. Don't blame the bankers. The government needs to first fix bank regulations and take responsibility for what has happened.
Temporarily suspending the mark to market rules would be a good start. Nationalizing the banks will just play into the hands of the short sellers, many of whom post on Seeking Alpha. Kudos to Baker for being a voice of reason among the self-serving short sellers.
The government nationalizes the banks who, then, makes the decisions a bureaucrat a low-level one at that? How many government employees have you met that you want running your local bank and making loan decisions. Government employees by in large only care about one thing... keeping their jobs and the time proven way to do that is make no decisions.
It's a fu----g bubble you dingbats. It's the pendulum swinging too far the other way.
Every bubble people think is the one that will defy gravity. It hasen't happened before and this negative bubble will burst too.
The real estate bubble was unsustainable, so was the oil bubble last year but it caused every wallet in the U.S. to snap shut in October. Gas was going to $5, $6 even $7 a gallon and we'd never see $2.50 a gallon again, they told us. Checked the price of oil or gas lately?
The media looks at year over year drops in the median price of housing or sales activity and tell us this won't be over until there is some good news. I've got news for them, there won't be any good news until they tell us there is some. They make their money with bad news. It's worked really well this time almost every newspaper in the country is half the size it was before all the "news." We can only hope this goes on long enough for them all to be swept away and you can take the network talking heads with them.
Dingbats the world is full of dingbats!
Shareholders should know that they are the last to be compensated in the event of a bankruptcy (or nationalization). This is the risk of share holding. Every investor knows this. You don't want this risk? Buy bonds.
The writing is on the wall. The Obama administration is just playing for time, hoping that the economy will recover somewhat, that the stock markets will rise this year, i.e., the value of the banks' good assets rise so that the bank can then write off some of their bad assets (which really have zero value). If this does not happen, they will have to nationalize. When that happens, the common shareholders have even lesser reason to complain as they have been given ample 'warning' and time to unload now -- albeit at prices 5% to 10% of peak levels (Citi is $3.50 now. Peak $50 ? ).
On Feb 15 05:46 PM athena wrote:
> If you wipe out the bank shareholders, and there are many, you will
> never see anyone invest here again.
Given time, the banks will earn their way out of the problem and housing prices will stabilize and begin to rise. Inflation, sure to follow the multi-trillion dollar deficit spending, will speed up the process.
Examples from socialist countries do not apply to the US. If the price of government help is nationalization, few companies will ask for help next time and few investors wil risk their capital in an industry where the house closes out the game while there are still chips on the table.
As for moral hazard, even here in Texas there are penalties short of capital punishment.
www.nytimes.com/2009/0...
Lets stop complaining about whats happened and concentrate on the future.We still have millions of great Financial and Industrial men in this country. Lets put the criminals (James Diamond, K lewis. J. Thayne, Geithner, franks Pelosi Etal in Gitmo.Put the likes of Paul Voker, Jack Welsh, Bill Gates, Warren Buffett, and the millions of great American businessmen to work to help us..If we follow Tzar/Used car salesman Obama and his group of Socialists, including Mrs Tzar, we will wind up in a Depression that will make the early 30"s look good.
We should not be worried about shareholders. I owned and still do shares in several financial institutions. We shot craps and lost. Shareholders have the ability to mclass action sue the likes of James Diamond,K.LEWIS,J.THAY... ETAL) under officers fiduciary violations. Why the Lawyers have not used this means to protect clients is something I dont understand. Every major corporation carries OFFICE LIABILITY INSURANCE. By starting suits against the individual officers, you force the insurance companies to defend in court. Do you think the insurance companies want to be in court for the next 20 or 30 years. They will settle. And then they will persue criminal action against these crooks. Lets do it. As a shareholder I would sign for a class action
On Feb 16 08:20 AM dare16 wrote:
> Nationalization would scare away investors, it is the most brutal,
> cruel, and uncivilized ways to treat shareholders of the bank. Vulture
> investors call for natinalization because they sense there is value
> in the bank assets and they can profit from it.
Nationalization is effectively bankruptcy protection for the banks that will ensure depositors and the financial system's integrity are protected.
The model used in Switzerland shows how it can and did work. The author claims nationalization "could easily aggravate economic conditions by causing further consumer despair and calling into question the value of the US currency and our US government debt."
I think that is way off-base. In fact, I argue the opposite, that simply providing bottomless financial aid to insolvent institutions is far more damaging to US currency and is massively increasing the national debt burden.
Furthermore, how can the author assert on one hand that "the debt of corporations will be reduced as corporations either take bankruptcy or use their cash flow to reduce debt", yet argue that this is exactly what the banks should NOT be doing? If the US's flagship institutions are insolvent, they should take bankruptcy, as their cash flow cannot realistically reduce their monstrous liabilities.
The author also makes the quizzical argument in FAVOR of nationalization when he claims that, "during this period the level of economic activity will be negatively impacted unless the government expands its expenditures and levers its balance sheet." Is this not exactly what nationalization would do? The Fed would be leveraging its balance sheet to absorb and wind down banks' overwhelming liability in an orderly fashion.
Finally, the author argues that loan transfer is detrimental because "in the case where a loan is determined to be a bad asset and is transferred to another entity, that borrower loses their right to renegotiate that debt with the original lender." Nationalization makes the new lender the federal government, and I think that this administration would probably be the most sympathetic lender you could have.
Proposal from Citizens of the United States of America
It is time that we eliminate the privatization of profits and the socialization of losses.
Summary (one page)
US taxpayers are being asked to incur massive debt to recapitalize insolvent financial institutions. While a sound banking system is required to drive economic activity – HOW we implement this rescue is critical. If the rescue of these institutions is adopted as proposed, (the “good” bank / “bad” bank proposal) we will recapitalize the same management, Board of Directors and oversight structure that created these catastrophic circumstances in the first place. If adopted, this proposal will effectively shield them from having to bear responsibility for their actions. In addition, it will impose a debt upon us that is so burdensome it will strangle our capacity for economic growth, threaten our liberty and diminish future opportunity for our children. There is no measure of maturity, honor or decency in encumbering our children with massive debt to pay for our generation’s mistakes and the inept management of our affairs. We must demand an alternative course of action from our government. This Proposal offers such an alternative.
In this Proposal we citizens propose that in exchange for US taxpayer infusions of capital all of the securities representing the ownership of these businesses (see Provision #3 for the exception) will be treated as though the business had actually made a bankruptcy filing. When US taxpayers recapitalize the insolvent institutions, a new class of shares shall be issued. Those securities will: (1) become the property of the US taxpayers and (2) be deposited into a Trust, called the Social Security Trust, for the benefit of all Social Security system participants.
As the business activity of the citizenry revives the economic vitality of these institutions, the value of shares in those rescued institutions will increase. As they increase in value they will become the financial backbone for the Social Security system – a system that now has no real assets but for the social security taxes taken from future payrolls. The SST shall be managed by a FIDuciary Oversight Board (FIDOB) whose members shall; be experienced investment fiduciaries, report directly to the President of the United States and be subject to oversight by the General Accountability Office. When there is clear evidence that the rescued financial institutions are stable, the FIDOB may examine the prudence of selling the securities to the highest bidder in the marketplace. While such a program would require the President’s and GAO’s approval, the proceeds from a sale will remain as SST assets.
By implementing the actions proposed in this Petition, we citizens of the United States will:
• recapitalize the financial infrastructure of the country,
• employ market-based principles consistent with the intent of our laws,
• substantially alleviate (not solve) the financial burden upon our children of paying for Social Security benefits we have promised to give ourselves,
• create a governance model grounded in and guided by an authentic fiduciary standard of care (not how banks or bank regulators operate now),
• establish a Trust with real assets that serve as a financial backbone for Social Security, and
• exemplify our President’s call for individual responsibility.
Please visit sociallyresponsibleres... to read the entire 7 page Petition and sign it.
Pass it along to friends, family and colleagues. Thank You.
On Feb 15 04:40 PM ClydeDNA wrote:
> Genie. I hate to tell you this but the innocent investors already
> lost their money, Citi for example who merged with the Wacos, is
> mostly owned by the commies (i.e. USA). I'm just kidding, but you
> know of course that Russia and China are not communistic at all.
> Those countries are run by capitalist dictators. Our country is a
> democracy with our leaders chosen by the people. It's too bad that
> human beings on the average are such a bunch of crap, otherwise getting
> rid of the Kings and Queens would have been fantastic! We replaced
> them almost world-wide with a bunch of nincompoops. Human beings
> need to do a better job at choosing leaders and then getting involved.
>
>
> Nitram. I know you want to punish those CEO that still have jobs,
> but except for Madoff, nobody is going to even pay a fine.
>
> The collateral that underwrote all those $trillions in loans is going
> down in value. The banks are broke! Hang the banker CEOs! …that's
> not going to help. What do we do now?
>
> First I want you to cheer up and face the future in a positive manner.
> Unless you got a car with a Flux capacitor, we are going forward.
> You know, this is the very first time that everyone I voted for actually
> won. I've voted a lot of times over the years. I'm going to stay
> involved as much as I can and hope for the best rather than worry
> about the worst. I'm going to stay positive about my life going forward,
> even though as Yogi once said "the future is not as good as it used
> to be".
>
> And I'm going to try to figure where all the money came from so I
> can figure where it's going -- and get some.
>
> video.google.com/video...
>
to the first point the financial system has an ecosystem just like a biologic ecosystem. When big creatures die other creatures come along and eat them - that is, they provide liquidity to the market. That is fundamental to capitalism. To use that as an argument against nationalization is misplaced.
Second, if we are going to argue that banks should just be given time as their assets will return to value then why not apply the same argument to everything? LTCM's trades would all have been profitable if they had been able to stay in the market a few weeks longer. The same may well be true for many hedge funds who went down. So lets suspend margin calls and mark to market and let everyone just have more time.
No, it doesn't and shouldn't work like that. Institutions have to remain solvent or die. We should not be further increasing moral hazard by some slow roll of the problem with taxpayer guarantees.
That said, what's really needed is a return to effective regulatory policy over financial intermediaries. The boom created by CDOs and CDSs has given us this latest bust. The policies of the Greenspan/Rubin doctrine allowed these sophisticated and complex financial instruments to grow unfettered in the economy. The fact that the market for these "structured products" was totally unregulated, coupled with the fact that the market for loan origination is largely unregulated has given us a financial meltdown of catastrophic proportions.
The Graham Leach Blyley bill which dismantled the Glass-Steagall Act (effectively commingling the risk of investment banking with your common garden variety deposit banking) opened a Pandora's box of problems we are now experiencing.
The Greenspanian dogmatic view of the infallability of free markets is preposterous, and until we get policymakers in Washington who see the gravity of the situation, we are doomed to repeat the mistakes of the past 20 years. Nationalization is not the answer long term, but we may inadvertantly find it is the only thing that gets us through until enlightened policy makers (there's an oxymoron) get a picture of reality.
Nik
There is no "clamor" for nationalizing the banks. Today, the total market cap for the USA's top 100 banks and financial institutions is about $650 billion. This is totally dwarfed by the credit markets. Neither the USA nor anyone else has enough money to buy all the "Toxic" assets. There is no way we can "fix" the financial system, but I think to goal is to keep it from causing a worldwide catastrophe. Yes the governments here and around the world were complicit with the worldwide private banking industry, and now together have screwed-up big time. The last US administration to fight private banking was that of Andrew Jackson. He beat the crap out of them, and for his efforts he got his face on our $20 bill. I know it's very cathartic to play the blame game, fine go ahead it's fun, but it is ultimately not productive.
Dr. Baker, my question to you has still not been addressed. A few weeks ago I found this video by Paul Grignon that was made several years ago. Long before this crisis took off. You, nor any of these nearly 50 posters have commented on this "Money as Debt" movie, nor did anyone say they understood where the money in world comes from. That must be because nobody took the time to view it, or after they did they went into shock. This has been available on the internet for some time I guess. With this version from "google" I got rid of the links to the people that want to blow up the banks and go back to the good old days of "beads and shells".
video.google.com/video...
If you understand where money comes from you will agree that "nationalizing" the banks is a GREAT idea. But how do we do it? The ideas so far seem to me to be a little half baked. I like the information posted by "goldenhinde". The idea is not to try and take the Toxic assets off the books of all those screwed up banks, but buy the banks instead. The bad debts would belong to the people, but we wouldn't have to buy them! The idea of funding the social security system with the revived banks earnings sounds pretty good, but that would that be a bit risky. What if the banks still didn't make any mooola? How about a big mutual fund that we could all participate in? We could help Uncle Sam buy the banks! That would be risky for me but more appropriate for our senior citizens.
There was a brief discussion about an admitted half-baked "nationalizing the banks" idea on abcnews.go.com/thiswee... "Graham Open to Bank 'Nationalizing'" Let's talk about it Dr. Baker!
If bank assets are as bad as the experts think the question on whether to nationalize will answer itself quickly as banks have to keep asking for federal help to cover losses. The Fed disquised this need by "forcing" major banks to take 100 billion of bailout money late last year. If/when banks run out of this money, they'll have to be nationalized.
We'll see what happens but I wouldn't buy any banks short-term.
Perhaps the big question now is; are the banks now making enough money to begin to accumulate enough reserves to pay for these losses? We have a global recession affecting all kinds of loans, such as credit cards loans, commercial real estate loans, and others. In addition there are derivative liabilities that few people have even mentioned. Also the stocks are so battered that equity markets are closed to them. Their preferred stocks are selling like junk (over 11%) and their costs are also high for raising money in the bond market. The money the gvt. has already given "healthy" banks at 5% will enable them to make lots of money on loans but in a recession there aren't a lot of safe loans to be made. Certainly the banks are reluctant to take on more risk given their balance sheets. So how long would we have to wait under these economic conditions before the banks could begin to write off these loans.
Without the burden of reserving for the bad loans they could loosen their purse strings and begin to take on more risk (loans). Perhaps If the gvt. comes in with equity money then we could break this log jam but I really don't think that we can proceed without the gvt. help.
Unless we can get the management of the banks to feel more comfortable about taking on riskier loans then they will not make a loan that isn't a "sure" thing.
It´s better for everybody if things come back to normal as soon as possible.
And I totally agree with this part:
When working on a mortgage-backed trading desk back in the '80s, the RTC went to the street to solicit bids for the assets that they had taken over from the insolvent thrifts. We made a killing. It was an unadulterated field day. We bought the stuff at a discount to the projected cash flows and resold it within hours for huge profits. In anticipation of once again earning huge profits, the likely beneficiaries are doing their best to drive banks off the cliff so they can once again buy distressed assets at fire sale prices. It is the way of the street.
What people that are in favour of nationalization are forgetting is that almost every american is a stockholder of large bank. So if the stockholders are wiped out, every american is losing a little more money again. Nationalizing banks would be increasing the problems.
And in the end, a group of vulture investors would say thank you for the profits, and every american would be poorer.
> jack
Go ask Japan how well your solution worked from 1989 through 1998? Let me just refresh your memmory - it didn't work at all. Zombie banks don't make an ecomony strong, in fact the opposite happends, it leads to ever weaker economies.
Do we follow the Japanese down the same path to another lost decade?
Insolvent financial institutions must be allowed to fail. Let the vultures pick over the carcases and restore liqudity to the system.
Regards
Should add...in August 16. 2009 Barron's article it was pointed out that over 70% ($1.5 billion out of $2.2 trillion of bank reserves for 'potential bad debts') represent amounts required to be reserved under mark to market accounting rule and not because the loan is non- performing-i.e. not being paid.
Is the real reason for maintaining mark to market accounting to artificially depress the value of these assets on the balance sheets of the banks so that these assets can be confiscated by the US Government in its subjective stress testing?...or to help their old buddies in former investment banks or hedge funds? The Barron's article clearly pointed out how mark to market in the current highly illiquid marketplace resulted in artificially low values.
Hopefully, Tim G. is an honest man and can withstand the vociferous opinions of the self interested vultures. This could help restore investor confidence.
Who do you think is going to invest a single dollar in the US ?
On Feb 15 04:15 PM NITRAM wrote:
> Nationalizing the banks who would the worst thing. Yes, the men who
> ran our banks into the ground must be criminally punished. Look at
> the Group of Eight that was in front of the Senate. Those are the
> ones to start with. James Diamon(JPMORGAN) Ken Lewis(BANK OF AMERICA)
> Should be the first ones to have their pictures on the walls of the
> Post Office. J. Diamond, in my opinion, has pulled off the greatest
> scam in nBanking History, I dont need any Tarp money. Oh, if you
> insist I'll take it, but also GIVE me Bear Sterns and throw in Washington
> Mutual. If congress does this for me, i will take the money for you.
> Madoff hits the fan. Several weeks later Mr. J. says he took JPMorgan's
> money out of Madoff a while ago. Oops, i forgot to tell clients of
> JPM. I am sorry. Then at a later date another oops. I found $500,000,000
> of IMadoff money that was hidden in our bank. I am sorry. Mr. Lewis,
> we dont need any Tarp money. Governemnt just about gives Wachovia
> to Citi Bank for nothing. Mr. Lewis says wait i have alot of extra
> money and I will buy Wachovia for billions of those taxpayer dollars
> you guys gave me. Then John Thayne and his predecessor at Lynch.
> ETC ETC .
>
> Obama and Emanuell have put us on a course for DEPRESSION AND SOCIALISM.
> Do you want to live under H. Chavez or the other dictators in the
> world. We are grooming our own dictators. Tzar and Mrs Obama, assistant
> Tzar Emanuell. Then of Coure the loyal COURT JESTERS:
> Pelosi, Franks, Reed, Dodd. Et Al.
>
> I am 65 years old and have never seen our country in such trouble.
> We caused the trouble. If we keep the Government out of it, we will
> work it out. Not one voting member of Congress or our Car Salesman
> of a President and his parts manager Emanuell has read the bill.
> Even Pelosi who wrote the bill has no idea of what it says. Their
> great Roosevelt did not bring us out of a Depression. His new deal
> was a total failure. Unfortunately WW11 brought us out of a depression
>
>
> Bottom line. No Nationalization. We have millions of capable people
> in this country who can take control of the entire situation.Unfortunatel...
> or fortunately none of the are in government. Put the all the criminals
> in jail and let men like Paul Volker take charge.
>
All this anti-nationalization talk is about the big Wall St. players—no one else. They have so messed up the system with this ridiculous construct of securitization that they deserve to have the public put them out of misery for the greater good.
Citi, BoA, Wells, Morgan, and maybe even GS are all either insolvent or very close. Even taking these "toxic assets" off their hands will leave massive holes in their balance sheets. Kill them and sell their assets to better managed banks on an open market. There are over 8,000 US banks, for Pete's sake! There's a lot of terrific bankers in the US who can clean up this mess; they're just not on Wall St.
Some of these folks have a point though. It seems to me that there are three categories of banks, lending organizations and financial institutions that are in the system. A lot are doing fine, they have good balance sheets, they didn't take on a lot a bad debt, their stock price is high, they don't need any cash infusion, and they don't want to be run by Uncle Sam. I'll bet the new plan will leave these guys basically alone and their stockholders might have some value left next year. A second group is way underwater and being taken over by the FDIC. The shareholders lose everything; the assets are added to the more stable banks..
Then there is group three. These are the ones we are talking about "nationalizing". Maybe that's a bad connotation. These are the Banks you listed and others like them. Many of them made a lot of bad choices, but others have adsorbed the bad banks at the behest of the Government. Some, through no fault of their own, doing just what the Government and Fed wanted them to do, are now in trouble.
It's like some are in a Congo line, the FDIC and Fed deciding which halfway strong bank gets to go home with the next one coming down the line. I can hear the groans from here. At this point these guys are "too big to fail", but unfortunately they already have, not to a small degree because of Uncle Sam. He got a lot of these banks in trouble.
The market cap of these "group three" banks has been crushed. The long-term stockholders and mutual funds that like bank stocks have already lost most everything. The infrastructures of these banks are huge, but their near term and likely future profits are dismal, thus their market cap now sucks big time since investors have fled. The specter of Uncle Sam's cash infusion, and recapitalization comes with a big price. What's left of those Bank's adoring investors stock holdings will unfortunately go to zero. Uncle Sam will have bought the "group three" banks for exactly what they are worth, NADA. The "toxic" assets that the banks willingly bought for way too much mooola, will now be owned by the kind old screw-up named "Uncle Sam".
For us, the number one thing is that buying the toxic assets will just create more toxic assets. We can not do that! Dr. Baker's idea, if followed, will be an absolute total disaster.
Everyone keeps saying that they were so disappointed with Mr. Geithner last week. Think about this. Maybe he wanted to talk about a plan like this to the American people that day. Everyone was primed to hear the new great idea! Uncle Sam's PR types would have made him try out his speech on a "focus group". If that group contained the nice folks like those writing on the blog, they probably ran out of the room screaming hysterically -- with good reason. We need to understand where money comes from in order to understand how idea like this might work.
I think there is a chance the American people can save the world's economy, but we have to think this through a lot better.
On Feb 16 08:20 AM dare16 wrote:
> Nationalization would scare away investors, it is the most brutal,
> cruel, and uncivilized ways to treat shareholders of the bank. Vulture
> investors call for natinalization because they sense there is value
> in the bank assets and they can profit from it.