Why Bank Nationalization Will Never Happen 57 comments
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From sea to shining sea, the chorus is ringing out. "Wipe out the bank equity holders and bondholders, nationalize the banks, clean them up, and sell them back to private equity". The movement is so vehement now that you would think that BAC has 3 shareholders, The Guy from the Monopoly Game, the Planters Peanuts eye-piece logo guy, and Ebenezer Scrooge. I am guessing that all of the pundits that are calling for this mass carnage don't own equity or bonds in the questionable banks, but who does?
At the macro level, who usually owns bank equity and bank bonds? Well, they are usually very conservative investments, provide a steady stream of income through predictable and stable dividends and their bonds are extremely safe and pay consistently. The perfect holder of a bank stock, preferred, or bond from about 1950 to 2006 would be a retired person, a pension fund, or even 401k type plans. So why should we wipe them out?
Did you know that some of the largest holders of preferred bank stocks are other banks? That is how many banks and people create cash flow and income. If you wipe out the preferred stock of BAC and C, you would cause a domino effect in a number of other banks. Cash flow would be impeded, capital would be required to meet current needs, and government assistance would have to step in at some point. Could there be a run on the banks if you wiped out BAC and C equity and bondholders? If the bondholders are other banks that rely on those funds for operations then yes, you could see scary headlines.
Second, the baby boomers are the world's largest retirement class in history, how many of these people directly or indirectly hold bank stocks and bonds as part of their retirement? I am guessing that since up until 24 months ago they have worked like clockwork to generate income and pay dividends, that a lot of people who require income from sources other than a job, may be holding these positions. With the viability of social security already being questioned as the baby boomers age, do we really want to knock out another leg of what was once considered a very safe retirement strategy?
Third, the domino effect of killing the preferred shares and bonds will create a Lehman (LEHMQ.PK) type ripple across the globe. Just what we need now, right? Also, I am sure that the Obama Administration has broadband internet by now, and if nationalizing the banks was going to happen, I think they would have moved on that path before the Stimulus package was passed. Obviously someone looked at the bank nationalization plan, fed it through the super-computers like Constellation at UBS, and said "WOW! I guess we better not go down that route!"
Fourth, never bet against Jamie Dimon. The guy is good - "Hall of Fame" good. When he tells me JP Morgan (JPM) is doing fine and bank nationalization is never going to happen, I want to believe him. GS and MS want to pay TARP money back yesterday because they could be crushing it in the market right now. Ken Lewis is buying millions of dollars of BAC stock with his own money. I don't think he would be doing that if nationalization was right around the corner.
Okay, so how does this all play out? It is pretty simple really, although the timing of it is where people will be caught off guard. All the banks will be bailed out by world wide taxpayers. Each government will take on their trillions of dollars or Euros of debt, and the banks will be allowed to function. Each government will then run a deficit and take time to pay it off. Since this will end up being a "zero sum" game, with everyone taking on massive debt, the US will still be the best of breed out there. The dollar will still be a safe haven compared to the risk of other countries' currencies. The US will be the first out of the recovery gate. Decoupling is a myth and the rest of the world has to take the nosedive first, and then feed off the US recovery. Did you see that European banks were FAR MORE leveraged than US banks? They have an estimated $25 trillion USD to work through, while the US has about $7 trillion? Anyone want to go long the Euro?
The gold play is a fool's errand at this point. We are stuck in a massive deflationary cycle. Do you see Warren Buffett touting gold? Nope. He is buying corporate debt like a wild man at this point. He isn't playing the "guess the equity price" game; he is playing the "I bet these guys will still be in existence in 3 years" game. Granted, he is getting a juicy yield for biding his time and having more money than God, but still, look at what people are doing, not what they are saying. In the past few months he has bought debt in Tiffany and Co. (TIF) (10% yield), Goldman Sachs preferred with 10% yield, and high yielding debt in General Electric (GE), Swiss Reinsurance (SWCEY.PK), and Harley Davidson (HOG). His yield and bonds will do well in a deflationary time, and he has the kicker to convert to stock in all his deals.
In conclusion, look at what people are doing, not what they are saying. There will never be a bank nationalization of BAC or C in the US. The government couldn't afford the fallout of such a move. It will create a bad bank, aggregate bank, IOU bank, taxpayer bank, whatever you want to call it, and help the banks survive. Once pricing of toxic assets stabilize, even at extremely low levels, we will all know what "stuff" is worth and be able to sell and buy it again. If you read your weekend edition of the WSJ, you might have noticed that distressed debt buyers are stepping up and buying toxic assets from pension funds and banks for a few pennies on the dollar. Not a great price for selling, but still a price, and from there, more and more toxic debt can be priced out to normal buyers of debt. The recovery in the bond and debt markets has begun. Look at the debt issuance of BBB rated and above companies recently. Look at LIBOR. Look at distressed debt buyers starting to buy toxic assets, although it is at very low prices. These things would not be happening if bank nationalization was right around the corner.
Disclosure: Bond holder of JPM, MS, GS
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"Did you see that European banks were FAR MORE leveraged than US banks? They have an estimated $25 trillion USD to work through, while the US has about $7 trillion? Anyone want to go long the Euro?
"The gold play is a fool's errand at this point. We are stuck in a massive deflationary cycle."
We in the US may be in a deflationary cycle, but if the Euro is going down, massive European money will flow away from the Euro and into the dollar, (primarily) and also into gold. Gold’s price doesn't require US money to rise--flight capital from anywhere will suffice. That's what's happening already--the pattern of the dollar and gold moving in tandem (presumably due to being subject to the same influx of European capital) is becoming clear. Tom Iacono wrote about this yesterday here in SA, saying that the two have moved together 13 of the last 15 days. Here's the link:
seekingalpha.com/artic...
As gold continues to rise, the real collapse will be in the derivatives tied to Gold, this will be the cut, that infects the entire system. As usual the patient will be administered antibiotic too little, too late.
If this is what happened, the down-move in the market wasn't a vote of no-confidence in Geithner, but the reverse (!). He would realize this--and be quite annoyed at not being able to get the media off his case.
"however the aggregate losses already by share/bond holders in AIG & FRE & FNM easily have already eclipsed those of C & BAC in future terms. So, no big deal if C & BAC go the same route."
Yes, but "the system" has a limited capacity to bend before it breaks, or to stretch before it snaps. C & BAC may be the straws that break the camel's back.
Mr. Sage: Collateralized Debt and Credit Default Swaps: I thought there was still something like $60 Trillion that had to be Marked to some sort of Market in the US.
Is the $7 Trillion you are referring to, the amount that the US will try to Leverage to cover the $60 Trillion?
Rodger: did not see your response to my Charting commentary until today.
When I said I do my own charting, it means that I only have myself to blame if I screw up.
I used to follow Stan Weinstein's Professional Tape Reader religiously. Bought the Bible (at the time, mid-70's, $90) on Technical Stock Analysis by O'Neil. And have held true to the methods used at that time.
I know that current views are different, that different techniques exist. But "I am what I am"....
sorry about not replying earlier.
Never again would the banking industry cause our counties economy problems exploiting realestate loans.
When things are going up the bulls get greedy and stay in too long. However, when things are down the shorts get greedy and egt caught in short squeezes.
Bulls and Bears make money and pigs get eaten!
I wonder if the US government has learnt anything from Japan. They studied the deflation cycle, but they aren't responding properly! I tell you, its way to slow.
Recently there was an article about Asian analysts calling to the US for more money into its system. They see the exact same thing happening that Japan did wrong in the '90s. The eventual breakthrough and its rise of the three pillars were based on the nationalization of Jap banks. After that things went into recovery mode.
The US of A is way to slow with the injections. My personal opinion is to let the system fail and stop the phoney money policy, but you know politics. For a politician to face the gallows is simply doing nothing. Obama needs to respond for his constituents, but we all know (at least the sane ones do) that this stimulus is merely a jobsaver. It won't get us out of this mess.
Just like Japan did, America is going to use a few trillions of dollar more to get out of this crisis....and fast.
Just look for the reports on how much Japan is pushing through for stimulus as we speak....
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Also, the government has made it quite clear with its actions that it would not let BAC or Citi fail. To do so now would mean anyone the government approaches in the future would not trust what they are told.
That was their only problem. Money leaving the country and not returning.
On Feb 16 08:54 AM De Graaf wrote:
> Good article, thank you.
>
> I wonder if the US government has learnt anything from Japan. They
> studied the deflation cycle, but they aren't responding properly!
> I tell you, its way to slow.
> Recently there was an article about Asian analysts calling to the
> US for more money into its system. They see the exact same thing
> happening that Japan did wrong in the '90s. The eventual breakthrough
> and its rise of the three pillars were based on the nationalization
> of Jap banks. After that things went into recovery mode.
>
> The US of A is way to slow with the injections. My personal opinion
> is to let the system fail and stop the phoney money policy, but you
> know politics. For a politician to face the gallows is simply doing
> nothing. Obama needs to respond for his constituents, but we all
> know (at least the sane ones do) that this stimulus is merely a jobsaver.
> It won't get us out of this mess.
> Just like Japan did, America is going to use a few trillions of dollar
> more to get out of this crisis....and fast.
>
> Just look for the reports on how much Japan is pushing through for
> stimulus as we speak....
Of course, Geithner, Summers and Obama can't discuss it publicly. As soon as the administration publicly mentions nationalization as a viable possibility they will have no choice but to nationalize - there would be an instantaneous run on BAC and Citi deposits that would require federal takeover.
Am I absolutely certain that these banks will be taken over? No. But don't kid yourself - it is very much still possible.
Monetary adjustment has always been a function of relativity. All economies of scale are "stimulating" except china needs to stimulate a little more (power play?). Big economies need big stimulus california alone is a bigger economy than most individual EU states. We don't hear about the other guys printing money in the mainstream news. Heck, look at ireland $8bil last week, thats 1% of our stimulus that sounds about right for that economy of scale. How about australia $81 bil stimulus thats %10 relative of our stimulus, is australia 1/10th the economic power of the US probably not even. The bottom line is as long as we are all cutting of our legs we are not in danger of losing the ass kicking contest. The fed has already stepped up and said rates aren't going anywhere anytime soon, we are looking ahead to the devil that will be in our bed (inflation) except we are not looking square in the eye the devil that is here now (deflation). Stocks (and interest rates) go nowhere without inflation and it's probably a year or two off. In the meantime cash is king and short term vicissitudes imho are bubble-icious.
Right away you're off the mark. Truly conservative investors looked at the balance sheets and sold awhile ago. Owning banks stocks out of habit is poor investing.
Nationalization is just FDIC receivership for banks with assets of a certain amount. It happens every month, so why the big fuss over the bigger banks that have been run into he ground more thoroughly than some of these small thrifts.
The US investor will not gain any confidence in the US Government and or our economic investing systems until those that are guilty of creating the financial mess that the US is now in are accused, prosecuted and jailed. The US Congress are the ones that are responsible and guilty for the laws and legislation that forced home lending institutions and banks to lower lending standards to a point of predicted economic catastrophe. For those that pushed and forced those bad laws and legislation, let them resign in shame, lose their pensions and health care and live in shame and poverty like millions of Americans that have suffered because of their incompetence, irresponsibility, arrogance and greed.
Do you really want Barney Frank(or any other politico) running the banks and giving jobs in banks to his pals;relatives;campaig... contributors;lobbyists;hangers-on etc etc?
These politicos are the same people that brought us the US Govt deficit which was already astronomical before the bailout.The same politicos who have been overspending for decades now with no thought to who/how/when all this govt debt would be repaid.The same bunch that caused the subprime mess by legally obligating the banks to lend a minimum of 20% of their mortgages to sub-prime borrowers(go look at the NYT of 1998 praising the Clinton admin for forcing the banks to lend in this manner in order to give poor americans the chance to buy a house).The same politicos that bankrupted Freddie mac and Fannie mae.Should I go on???If these guys takeover,it's time to emigrate.