Why Bank Nationalization Will Never Happen 58 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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This article has 58 comments:
"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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Unsubscribe is yesterday............
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.
If our economies are global linked, just how do these regional institutions serve any purpose whatsoever in that regard? Do they acquire the international operations of the so-called insolvent masters?
I find this laughable.
I also find it laughable that many readers here see a comparison of RTC to the current crisis. Obviously, CNBC is a popular source of financial information but any ignorance bred from such dependence is the public's own downfall.
Lehman was a very small piece of the financial puzzle. That alone should make conservatives think. Also, differentiating the investor from the taxpayer is lost upon me.
This author finally looks at the dilemma with these issues in mind. Whether or not nationalization is on the table hardly makes it a viable solution.
Wake up America! Or we will all be experiencing the bread lines we never thought possible.
Gold, and commodities will win out in the end, rest assured.
As far as nationalization, I don't question the authors reasoning on that. I just don't think the answer is as easy as printing money. Tough times are ahead for us all.
Those Who Attempt To Use Logic To Determine The Next Action Of Loonies Will Always Be Surprised.
The Future Is Bleak.
No level of transparency is going to occur prior to that, simply because it doesn't look good politically to transfer money from the ultra poor (the tax paying public) to the ultra rick (the bank owners and debtors).
In factor, I will be very surprised the day some basic accounting transparency regarding the money center banks occurs.
By the way, please don't use terms that have no meaning. "Nationalization" is a term of rhetoric, not economics. Do you mean purchase ? Or condemnation ? Or forced receivership ? Or expropriation ? I really like Seeking Alpha, but gosh, a whole lot of articles here appear to be written by 3rd graders.
(sorry, just my opinion)
You might do better to review the history of financial regulation beginning with Ronald Reagan. This is ultimately the return to roost of an ideology that the financial markets needs no regulation.
Ronald Reagan and his heirs paved the way for the whole range of financial re - engineering that made the current collapse possible.
Get over it. Nationalization is a done deal and rightly so. The banking industry needs to be reinvented and it is clearly incapable of reinventing itself.
Leading Senators. The longer they wait the larger the black whole gets. The larger the whole becomes the more triggering of dormant but huge notional amounts of cds s for settlement. TAP-TAP-TAP.... is this thing on?
Roubini's model of OVERALL losses is based on IMF model, when did IMF do a good job ever? Goldman and Citi produce loss numbers much lower than Roubini and IMF.. Maybe the reason for that they actually get all the shortcomings of FASB rules (like 157 etc), because they are in the tranches every day, unlike ivory tower economists?
There is a good reason why Geithner wants banks to run "stress tests".. Lets see what they produce first... Before screaming "nationalization"..
Also, before you jump on this "nationalization" bangwagon, look at Russia which suffocating without foreign credit.. Why you ask? Because of Putin nationalization fear... If you start nationalizing everything, do you think private money will ever want to invest? Wake up people!
JP Morgan Chase Bank held $91.7 trillion, in derivatives in the third quarter of 2007. One year later, it held only….$87.7 trillion: a shrinkage of $4 trillion. Now, JP Morgan’s assets are only $1.7 trillion in 2008, better than the $1.2 trillion they had in 2007. At least one financial institution is getting some benefit from the crisis and US government bailouts, but with a little bit of risk :). Good luck with MS and GS bonds
Ah, not really. The truth is that God can buy and sell the entire world economy a trillion times with no more than His pocket change. Buffett's wealth, on the other hand, is no larger to God than a single mote of a dollar bill shredded so finely it would take an electron microscope to have the ghost of a chance to distinguish the individual bits.
The scariest thing of all is what lengths God will apparently have to go to in order to properly whittle the U S A down to size. The process is already underway.
en.wikipedia.org/wiki/...
Somebody has to hold the bag (eg china), but unfortunately, there are not enough bag holders - there are however plenty of those with trash bags. Money is not in unlimited supply like the author believes.
Our children/grand children have quite a mess to sort through. This is more of an indictment on our brainless debt spending today (ie the mentality that we can always raise debt to pay problems off. see the above articles discourse), than an indication of how we escape this mess.
I don't agree that we will get zero sum from that just because if you would put fair intrest on those bilions banks wouldn't be able to repay it to the end of times.
I don't think that nationalization is going to happened but it's taxpayers money so I wouldn't be supprised if we will see some kind of hybrid. to be honest I would like to see some goverment involvment in managing banks. they would make sure that banks are pumping money to the system and not keeping cash for better times. would cancel all bonuses in banks that recived goverment help. That would have positive influence on taxpayers and hardheaded politicians.
If bankers are buying something it doesn't mean that they are right in that case they probably are, but we all are only humans.
NEVER SAY NEVER!!!!!!!!!!!!!!!!
Well the winner must discount the fact the loser like AIG can't pay or will only pay a percent of his liability if you want it immediately (thanks to the taxpayer since it's your money being used to pay the derivatives loss). It also must consider the fact that it's bonds if it sold them may be kicked back to them since their CDS or CDO insurance backing them may be worthless. And no one wants to buy them making the trading in them illiquid.
The loser can beg the government for $. Disappear into the shadows. Or negotiate with the winner for lower payout. They are in a good position since the buyers of the insurance paid a premium for the insurance maybe 2-10 years ago and required no collateral in the deal. So by and large their premium probably has already been blown. And the assets of the contract writer may be 0. So really, the loser has literally nothing to loose.
That being said, the conservative estimate is that the liability for all these contracts works out to a few trillion dollars give or take a few lol. Of course, in reality since the number equals all the assets in the US (since there is no regulation and no collateral requirements) it may be a few tens of trillions. After all even the US government doesn't have that type of dough without doubling, tripling, or quadrupling it's national debt.
Just putting the extent of the problem in perspective and let you know why the Fed and Treasury doesn't want to rationally talk about it. Have a nice day.
The costs will be definitely higher than the current rescue plan. With the current prime pumping, we should be out of the crisis in a year or two. But if the world goes into a deep Depression, it may be five to 10 years, before we ever see the light.
So Obama will have to think very carefully before he consider nationalization. It will lead to a worldwide catastrophy, not as simple as some of you have put it. Those who advocate nationalization are simply not seeing the deeper implications and furhter fallout that it will lead to. God bless you.
As TARP funds are handed out, the government exerts its influence in how the bank is run....executive compensation, bonuses, corporate planes/jets, etc.
The government, always vigilant and on the lookout for anyone wasting tax dollars, shamed Wells Fargo into cancelling a Las Vegas (a city in dire need of stimulus) junket/ conference/ awards event for about 1,000 employees. Other banks had previously cancelled scheduled events due to government pressure. That is small stuff, for now.
With each added bailout dollar, we are certain to see more influence from Washington. (Few believe that the banks are done asking for TARP funds.) More dollars = more government control and influence. Regulations will be passed, imposed, threatened. Pressures will be applied. It is even possible that some banks may have an assigned Washington overseer -- with an office at bank headquarters..
There will likely be a tipping point, where the banks are effectively nationalized, even though the shareholders may be left intact, but in tatters.
Now, as to what Mr. Buffett may or may not be doing, in reference to gold:
1. We only know that he is not touting gold. Maybe he has a basement full of bullion. (What would happen to the price of gold if Mr. Buffett was touting it ? What would happen if he was not touting, but it was discovered he was secretly hoarding it ?)
2. If the situation arises where Mr. Buffett starts hoarding gold-- it will be all over, anyway.
i see this crisis as a watershed mark in the capitalistic system that developed over the past 300 years. There have been many bank credit induced panics and depressions in England and the USA over this time period and the economies somehow recovered and grew in the ensuing years. This time, however, we are confronted with a simultaneous global breakdown that threatens to literally destroy the whole banking institution at once. Without a viable banking system, the economic underpinning of the capitalistic system collapses.
The paramount issue now is to save the "system". the Paulson/Geitner solution has been to throw money at the banks to shore up their capital. This sounds good and may be do-able were that their "capital needs" were quantifiable.
Sadly, even the banks themselves are not sure of the extent of their capital shortfall. The derivative portfolios leave such huge potential liabilities that everyone is afraid to even attempt to quantify them ($60 trillion to $130 trillion have been bantered about).
So what else can be done. That is when the concept of nationalization started to creep into the equation. I am sorry to say that this concept is D.O.A. because it will destroy the foundation of independence of the economic system and render it stagnant, leaving us with a Soviet like economy subject to corruption and mismanagement (not that free markets insulated us from this).
The problem remains in that the banks are paralyzed. When they lent the money out, they were able to leverage their deposits at a rate of 8:1, i.e. they were able to lend 8 times the value of their "deposits". Deposits are many times the amount of "capital" or equity that a bank has. When a bank's loans go into default the bank take a direct hit to its "capital" for every dollar lost. When the capital is exhausted, the bank becomes insolvent, or bankrupt. We can imagine the extent of the potential damage when we contemplate the number of defaulting mortgages, car loans, and credit cards. With all of these loss absorptions, the bank are left unable to issue new loans because they don't have enough capital to absorb any additional losses.
So the answer has to lie with raising more "capital" for the banks to function. But how are we going to do so when the stockholders (read: capital holders) are systematically decimated by the policies of the SEC and the exchanges. Having eliminated the long standing rules that prohibited the short-sellers to sell "naked" and demolishing the "uptick" rules, the markets have destroyed $1.5 Trillion in bank valuation, thus scaring the B-Jesus out of the stockholders and foreclosing future stock or capital issuance.
Until the market understands this truth, I fear it would continue stumble and shrink.
On Feb 16 10:52 PM Mr. Ed, Jr. wrote:
> I guess it depends on how you define nationalization.
>
> As TARP funds are handed out, the government exerts its influence
> in how the bank is run....executive compensation, bonuses, corporate
> planes/jets, etc.
>
> The government, always vigilant and on the lookout for anyone wasting
> tax dollars, shamed Wells Fargo into cancelling a Las Vegas (a city
> in dire need of stimulus) junket/ conference/ awards event for about
> 1,000 employees. Other banks had previously cancelled scheduled events
> due to government pressure. That is small stuff, for now.
>
> With each added bailout dollar, we are certain to see more influence
> from Washington. (Few believe that the banks are done asking for
> TARP funds.) More dollars = more government control and influence.
> Regulations will be passed, imposed, threatened. Pressures will be
> applied. It is even possible that some banks may have an assigned
> Washington overseer -- with an office at bank headquarters..
>
> There will likely be a tipping point, where the banks are effectively
> nationalized, even though the shareholders may be left intact, but
> in tatters.
>
> Now, as to what Mr. Buffett may or may not be doing, in reference
> to gold:
>
> 1. We only know that he is not touting gold. Maybe he has a basement
> full of bullion. (What would happen to the price of gold if Mr. Buffett
> was touting it ? What would happen if he was not touting, but it
> was discovered he was secretly hoarding it ?)
>
> 2. If the situation arises where Mr. Buffett starts hoarding gold--
> it will be all over, anyway.
Yet Mr. Geithner seems intent on resurrecting this "failed" Ponzi scheme.
As for the bank "nationalization" concept, even in the best of times (far from where we stand now) it would be difficult for Geithner to achieve his goal of saving the big banks. But given the state of the economy, a multi-trillion dollar bailout that leaves the banks in private hands is just not realistic. Geithner will not succeed. Wall Street's credit model is irretrievably broken. There is no need for an oversized, overleveraged financial system. Business activity is slowing, investment and trade are dwindling, and consumers are broke. THE BIG BANKS ARE INSOLVENT. Every attempt to save the banks will be met with greater and greater public resistance and rage. The banks that are underwater need to be put out of their misery and nationalized.
For those people who really really really believe C and BAC are going to be nationalized or will go bankcrupt pretty soon and all stockholders will be wiped out for sure.
They should short C and BAC at these depressed prices and hold them for at least six months.
Let's see who will be able to survive after six months; the shorts or the banks.
On Feb 17 10:45 AM yank wrote:
> Yeah I find it fascinating that Wells Fargo can't hold a conference
> in Vegas while the US Congress does not have the time to read a $800B
> stimulus bill before voting on it, so Rep. Pelosi and 8 other Dems
> can jet off to Rome for a "business" trip. This Congress needs to
> be impeached. Incompetence, greed, and corruption run amok.
>
>
> On Feb 16 10:52 PM Mr. Ed, Jr. wrote:
In regard to your argument pertaining to retirees: 401K's have dropped an average of ~40% in the last year; whereas bank stocks have plunged >90% in some cases. Anyone managing a retiree's investment account knows that the key to safety is not a certain kind of investment (such as bank stock), but diversification. That's why 401K's and pension funds tend to track the S&P, not the stock of any one industry.
Furthermore, in regard to your argument about devalued bank stock affecting the balance sheets of other banks: that is the very least of a bank's concern. Those balance sheets are bogged down with the trash bags full of originally mispriced credit derivatives that have subsequently been marked down >95% in many cases.
So for example a post-nationalization drop in shares of Citi from $2.80 to $1.20 isn't going to break anyone. It's unfair to the taxpayer, and moreover it's an inefficient plan for recovery, to keep injecting free capital into insolvent banks no strings attached. We all end up being disappointed that those banks used that free money to pay bonuses instead of make loans, and then Washington has to go and write retroactive legislation to enforce the original intent.
Wall Street isn't going to fix itself. Most of those in power here have a vested interest in keeping things broken. It's like a patient with a gangrenous limb. The patient will not cut of his own leg, even to save his life. He requires a doctor to hold him down and forcefully remove it.
This place needs to be gutted and restructured, not simply pumped full of cash every time things get furry.
In addition, if you allow the BAC and C preferred stocks to be wiped out you will forever destroy the preferred stock market as a whole. Does anyone really think that any investor would ever buy another preferred stock again? How does the gov't ever expect that TARP money to be paid back if the preferred market is gone?
Finally, the author overlooked the one industry that could be the most impacted if the preferreds go to zero. That is the insurance industry. Specifically the likes of AFL, HIG, MET and others. All of them hold various preferred stocks in massive amounts. As recently as a few weeks ago AFLAC stock lost a large percentage of its market value on speculation of its exposure to Royal Bank of Scotland preferred stock. Imagine now wiping out the C and BAC preferred stocks, what do you "nationalizers" think the consequences will be to the insurance companies? How about the cost to "bailout" and put the insurance industry back together again? Or do we just go ahead and nationalize them too? Are you people going to tell me also that it's a fallacy that retirees own annuities and rely on them for substantial sources of retirement income? How about telling that senior citizen that the living benefit he thought he could count on in his annuity in no longer valid. You "nationalizers"should be very, very careful of what you wish for.
The entity holding your Mortgages, home equity, Car Loans, Credit Card debt, etc, Is The US Government.
Imagine their Great Financial skills applied to all of the Above, Be Careful of what you wish for.
Settling Up with the Government
JPMorgan chief Jamie Dimon partners up with the government and plans to give TARP money back, reports CNBC's Charlie Gasparino; with Wilbur Ross Jr., WL Ross & Co.
Nobody knows. It's possible a wave of panic will wipe many financial stocks that could also be nationalized. Clearly, any institution that accepted tarp would be even further driven down. Which would discourage any other institutions from seeking tarp money. So then banks aren't lending anymore. Now you have nationalized banks going against private banks. And how exactly are c and bac run? Are they then combined? Is there anyone in the government or private sector that has experience to run such an organization? And then what about other companies, like GM- do they get nationalized? Or GE? Fear is an incredibly powerful market mover. The domino effect of what companies might be nationalized next is an animal spirits that would last longer than a recession.
Or nationalization might solve all the problems. Somehow, maybe, I don't know, it's unclear. Fear doesn't answer to rational discourse.
That's what they did to BAC and Merl. Also why would they kill BAC when they forced Merl on BAC. Incidentally, BAC said they made money of Merl already. Plus, all the legislators I heard have said that they don't manage banks. That means they would have to liquidate any bank that they do not merge. WOW, the ripple effect is unbearable to think of.
Simple solution:
1. Feds (with industry economists) develop a model formula for calculating the “realistic future value” for assets in each of the 20 top asset classes and subclasses. Models are regional and updated quarterly. Formulas are published.
2. Feds implement “Model formulas” thru out the financial system uniformly. Banks do not create their own “mark to model” formulas. The ”Mark to Model” can be favorable to the banks. Feds are trying the stabilize banks, not break them. This replaces “mark to market”.
3. If necessary, Feds buy assets at this "Mark to Model" value (less a fee). This creates a market value for the assets and stabilizes asset values.
4. Banks insure any loss, if the Feds buy assets and liquidates any of the bank’s assets at a loss. Gov does not insure loss; again, banks insure losses on their own assets, if the gov liquidates at a loss. (This was Pandits suggestion at the hearing @ 11:56 am) Thus, taxpayers support plan.
5. Banks must pass "Stress Test" to participate. i.e. once assets are removed bank must demonstrate that it will become healthy enough to pay gov for any losses.
On Feb 16 03:16 PM phdinsuntanning wrote:
> Bond holder of JPM, MS, GS:
>
> JP Morgan Chase Bank held $91.7 trillion, in derivatives in the third
> quarter of 2007. One year later, it held only….$87.7 trillion: a
> shrinkage of $4 trillion. Now, JP Morgan’s assets are only $1.7 trillion
> in 2008, better than the $1.2 trillion they had in 2007. At least
> one financial institution is getting some benefit from the crisis
> and US government bailouts, but with a little bit of risk :). Good
> luck with MS and GS bonds
Folks, nationalization of banks means the total wipe out equity interest, including preferred.
How would you feel when treasury (oops, that's you) reported that it just suffered hundreds billion dollar loss for preferred in big four by nationalizing them, not to mention the triggering of CDS and the complication of derivative contracts written by them which will definitely bring down massive banks along with them around the world which will eventually bring down the USA itself.
Tell me, if you were Geithner or Obama, will you take the blame for lossing hundreds of billions and sinking the USA into the abyss. No, you won't, though you might say you should have done after you leave the office.
As it stands now, the Internal Revenew Service (IRS) is, for all intents and purposes, completely above the law. On the basis of whim or error it can declare any of us delinquent in paying our taxes, demand payment with penalty fees added on, and there is almost no possible way of opposing it even when it is wrong (and it is wrong about 50% of the time). If the government operating the IRS also operated the banks, we would all be entirely powerless to prevent it from taking our entire life savings at any moment.
Once American banks are nationalized, they will never become un-nationalized. It is fallacious and specious to say nationalizing banks would only be a temporary measure. The income tax was supposed to only be a temporary measure, and the federal government promised that the income tax would never rise above 1%, and we have seen how that worked out.
If we are at all concerned that the government robs us and wastes tax money on stupid programs that we find loathsome or insufferable or unconscionable, we should recognize that nationalizing banks would completely free the government to spend all our money on anything it wanted at any moment, and we would be powerless to prevent it.
The only safety any of us would have would be with private, Swiss-style banks. This would immediately result in a complete separation between the majority of people, who couldn’t afford such banks, and a small privileged minority who could afford them.