Obama Talks Himself Into - And Out of - Bank Nationalization

Reading as President Obama talks himself into and out of bank nationalization makes you think we should all be charging for some sort of economic psychoanalysis. The following quotes are from a small press gaggle on Friday. Read it in two parts, starting with this:

As you pointed out, sort of along the spectrum there are two ways of handling this. There’s the Japan model -- as I said, they sort of papered things over, never really bit the bullet, took their medicine, and so you never got credit flowing the way it should have and the bad assets in their system just corroded the economy for a long period of time.

Sweden, in contrast, took over their banks and took out the bad assets and then resold the good banks, the fixed banks, to private hands. And they were up and running pretty soon.

Whoa, Obama got there. And he explained why some species of temporary nationalization makes more sense than continuing to shovel money into insolvent banks, especially when the alternative is a Japan-style lost decade with Zombie banks roaming the financial landscape.

But wait, he starts to backslide:

And as I said when I was asked about this the other day, you can make a good argument for the Swedish model, except for this fact: They only had a handful of banks. We’ve got thousands of banks. The scale, the magnitude of what we’re dealing with is much bigger. We’ve got global financial markets that are reacting in all sorts of unpredictable ways. And so what we have to do is to we have to pull the Band-Aid off so we don’t duplicate what happened in Japan. But we’ve also got to make sure that in pulling the Band-Aid off we don’t just start doing so much damage that things end up getting much, much worse.

Oh, ugh. As soon as he had crossed over and made sense, there he goes dropping off the other side again. The issue is not the number of banks, as I said in a post on this same subject here over the weekend. The top five U.S. banks by assets account for more than 70% of the assets in the U.S. banking system. That there are a bazillion teensy banks that may or may not be solvent is not the issue. Matter of fact, those smaller banks are ones for which we already have an effective process, the one that FDIC now administers on a weekly basis for failed banks.

[via WashPost]

Comments

[emilyx:]

The other factor, which you don't mention, is that Sweden didn't have a bunch of obstructionist republican hyenas in the way. Sweden's not as terrorized abt things remotely s-o-c-i-a-l-i-s-t as half this country seems to be. We can't even get nationalized health care because of rightwing hysteria -- I doubt very much they'd go for nationalizing the banks, and unlike the previous gang, Obama isn't going to just do what *he* wants and everybody else be darned.

Feb 17 09:18 AM

[Steve in Gr...:]

Gentlemen, what we have in Washington today is "Amateur Hour". Unfortunately, the amateurs are all socialist lawyers with absolutely no understanding of economics.

Feb 17 09:26 AM

[Consider_this:]

Obama is very smart! Considering what he said, he is one of the few in Washington that "Got it".

Unlike the previous administration, this time we got a president that got things right quickly.

Unfortunately, his back peddling seems to indicate heavy political resistance in the govt. Political infighting if you will.

To me, his words and action says volumes. The issue isn't a problem of not understanding the problem or the solution anymore.

This has now become a huge vested interest warfare. And the people are losing. The ones advocating quick nationalization is losing as there's no lobbist fighting that war. Because once you nationalize, not only will the rich lose their power and money, but the whole bailout gravy train will stop.

The bailout has become so profitable to certain sectors of the economy, that it cannot be allowed to stop. In a twisted way, cure the patient and lose your job describes this perfectly.

This is probably why throughout history, no civilization has managed to avoid it's ultimate demise. Think about all the huge empires of years past.

But I don't worry about it, Nationalization will happen, whether we're doing it willinging (without chaos), or be forced into it by the market (with a lot of chaos). If it's the only thing that will break this crisis, then it'll be the only thing that happens.

Only questions is timing, now or 10 years later, or 30 years, 60? How long will we be willing to suffer before we go towards a cure.

Feb 17 10:01 AM

[Larrysyr:]

Obama is not reversing course every couple of days, as happened in the previous administration.

Given the political situation of the moment, especially the trouble over the stimulus, Obama is being cautious in his approach to the banks. He is not ducking a solution (I think he's smart enough to realize it's on his shoulders now), but he's also not charging into a situation where he'll need to reverse course suddenly.

The markets are not liking his approach, but I appreciate the steadiness and think that will serve everyone better than any particular solution which may not be followed through to completion.

Feb 17 10:14 AM

[User 161034:]

Best thing Obama could in Denver is to VETO this bill Congress sent him.
Send it back to Congress with instructions to "get it right" - - - and that would mean writing a true bi-partisan bill.

Such an act would lift the markets, improve the country's optimism, and his own PR standings.

(I know - - - Fat Chance)

Feb 17 10:25 AM

[Jake Berzon:]

The problem is that the big bank lobby is just too strong even for Obama. You should listen to the Bill Moyer's Journal interview with Simon Johnson on PBS. He explained it quite nicely.

Feb 17 10:32 AM

[rich c:]

The issue is not the number of banks, .... The top five U.S. banks by assets account for more than 70% of the assets in the U.S. banking system.

~~~~~~~~reply~~~~~~~~~

Bingo! As I and others have noted here (summarizing the numbers), the top 5 have ~$5 T in total assets against ~$170 T (!!!!) in notional derivative contracts. The rest of the banking system TOTAL has $5 T in assets against ~$5 T in derivative contracts (about 1:1).

Many a writer here has cried for the shareholders and bondholders. News Flash: They are already toast but in total denial.

"Too big to fail?" No, too big to allow to survive.

P.S. Get rid of Glass-Steagal. It (like mark-to-market) has been an absolute failure!!!! And while we're at it, kill Sarbanes-Oxley. We haven't slowed down fraud or greed, OR IMPROVED TRANSPARENCY, yet the costs are harming the small public firms we need to survive this mess. And we're having some great IPOs/small companies list elsewhere because of it.

Feb 17 11:00 AM

[JohnAl:]

Face it, this is a no win situation. There are only two ways to fix this.

1. Let 'em go bankrupt and let the chips fall where they may.
2. Nationalize, wipe out equity, and stick the taxpayers with the rest of the mess.

Either way, a lot of people are gonna be hurt. Doing the first is the right thing to do, but it risks further economic turmoil. Who knows how much. Doing the second risks taxpayer insurrection.

So, even though he says he won't, Obama is gonna have to go with the band aid approach. Hello Japan.

Feb 17 11:12 AM

[NITRAM:]

Unfortunaely this will not happen. Remember, Obama has not read the spending/stimulus package. Congress just uses him as a salesman.I dont believe he really cares. He and his band of tax cheats want a socialistic country


On Feb 17 10:25 AM Fritz Hottinger wrote:

> Best thing Obama could in Denver is to VETO this bill Congress sent
> him.
> Send it back to Congress with instructions to "get it right" - -
> - and that would mean writing a true bi-partisan bill.
>
> Such an act would lift the markets, improve the country's optimism,
> and his own PR standings.
>
> (I know - - - Fat Chance)

Feb 17 11:45 AM

[NITRAM:]

You know some of us, me included, are bashing most of Obama's actions and lack of what's happening. We know he has picked several tax cheats to be members of his administration. Of course the most disturbing is Geithner. This man ran the New York Fed. Where was he when the financial companies were basically stealing billions and billions of dollars?
He was using Turbo Tax to figure out how NOT to pay his taxes. As a reward for violating the law Obama appoints him Treasury Secretary and Congress approves. The man who CHEATED on his taxes is now the boss of the Internal Revenue Service. Anything wrong with that?

Lets go to Emanuell. Did you know that he was a member of the Board of Directors of Freddy Mac? A member of the Board when the Board and Barnery Franks didnt give a shit about the billions of dollars they were losing. As a member of the Board Emanuell had Fiduciary Responsibility. In my opinion he violated his Fiduciary responsibility. So, we make him Chief of Staff. What position will the Rev Wright get for spewing his hatred of white people? Obama must be impeached immediately or we will be a Socialistic country in a DEPRESSION>

Feb 17 11:58 AM

[Socialism c...:]

The problem is radical socialism, now sweeping the land. Do you even know how many people have quit paying mortgages since November? "Obama's gonna take care of it for me."


On Feb 17 10:32 AM Jake Berzon wrote:

> The problem is that the big bank lobby is just too strong even for
> Obama. You should listen to the Bill Moyer's Journal interview with
> Simon Johnson on PBS. He explained it quite nicely.

Feb 17 12:04 PM

[Socialism c...:]

"P.S. Get rid of Glass-Steagal"

Um...getting rid of Glass-Steagal was part of what CAUSED this, along with social engineering in the housing markets...and the very existence of Fannie & Freddie. RESTORING Glass-Steagal would be a GOOD move.


On Feb 17 11:00 AM rich c wrote:

> The issue is not the number of banks, .... The top five U.S. banks
> by assets account for more than 70% of the assets in the U.S. banking
> system.
>
> ~~~~~~~~reply~~~~~~~~~
>
> Bingo! As I and others have noted here (summarizing the numbers),
> the top 5 have ~$5 T in total assets against ~$170 T (!!!!) in notional
> derivative contracts. The rest of the banking system TOTAL has $5
> T in assets against ~$5 T in derivative contracts (about 1:1).

>
>
> Many a writer here has cried for the shareholders and bondholders.
> News Flash: They are already toast but in total denial.
>
> "Too big to fail?" No, too big to allow to survive.
>
> P.S. Get rid of Glass-Steagal. It (like mark-to-market) has been
> an absolute failure!!!! And while we're at it, kill Sarbanes-Oxley.
> We haven't slowed down fraud or greed, OR IMPROVED TRANSPARENCY,
> yet the costs are harming the small public firms we need to survive
> this mess. And we're having some great IPOs/small companies list
> elsewhere because of it.

Feb 17 12:06 PM

[rich c:]

Oops. My bad. I meant RESTORE Glass-Steagal. Typing too fact. Good catch!!!


On Feb 17 12:06 PM Socialism cannot compete! wrote:

> "P.S. Get rid of Glass-Steagal"
>
> Um...getting rid of Glass-Steagal was part of what CAUSED this, along
> with social engineering in the housing markets...and the very existence
> of Fannie & Freddie. RESTORING Glass-Steagal would be a GOOD
> move.

Feb 17 12:13 PM

[Ranchr:]

BAC would be in a far better position had the "government" not held a shotgun to Ken Lewis' head. Countrywide is Lewis' mistake but Merrill was the United States government's fault. Bank of America would be in fine shape if it hadn't been for the government and now the shareholders of Bank Of America pay the price.

Any Class Action Lawyer's out there issue a call for mom and pop plaintiffs! Just this failure to take this nationalization crap off the table has hurt millions whilst the shorts keep driving the system into the ground selling naked.

Feb 17 12:16 PM

[Ranchr:]

P.S. I'd be lead plaintiff in that class action against the feds and it would make the $455 million the Feds had to pay, last year in what was the largest in history, pale in comparison.

Go ahead, make our day!

Feb 17 12:21 PM

[Aristophanes:]

Remember the scene in the film Apollo 13 where the room full of engineers is arguing about the possible solutions to the capsule's problems, with no one in charge. Then Ed Harris tells everyone to stop, prioritize things and 'work the problem", like engineers should?

I'm no fan of Geithner, but I think this is generally what the Obama team is doing. They are taking some time to properly assess and fix the problem using what tools they have. They are deliberately not building expectations but letting everyone know the general direction of their efforts.

And, as in Apollo 13 with the jury-rigged solution is still something to hold one's breath over (literally). No one is sure it will work or for how long, but they've used a process of elimination to reduce the probabilities of catastrophe.

I, for one, and glad that the Republican Bush/Paulson gang and their quick-jerk reactions are gone. Remember all those announcements timed for the Asian markets? That is not happening this time. That's a sign of policy maturity.

In Apollo 13, they "lost the moon". But they survived.

One thing I will give the Obama administration credit for is the announcements last week about putting all government obligations on the table: national debt, government spending, Social Security, Medicare. At least they are talking about liabilities that the Bush/Cheney, supply side idiots refused to acknowledge.

Feb 17 01:20 PM

[User 161034:]

If you want to see a class action suit, wait until someone launches one against the "Plunge Protection Team" - - - that Treasury group behind the curtains that props up the stock market every so often.

Can you just imagine how many claimants there would be?
And the damages would make Obama's bail-out seem like peanuts.


On Feb 17 12:21 PM Ranchr wrote:

> P.S. I'd be lead plaintiff in that class action against the feds
> and it would make the $455 million the Feds had to pay, last year
> in what was the largest in history, pale in comparison.
>
> Go ahead, make our day!

Feb 17 03:52 PM

[atlasman:]

Did someone unplug his teleprompter again?

Feb 17 05:54 PM

[Igorsky:]

Jake Berzon

<The problem is that the big bank lobby is just too strong even for Obama. You should listen to the Bill Moyer's Journal interview with Simon Johnson on PBS. He explained it quite nicely.>

You should also watch Boncaccio's NOW interview with Bethany McLean the week before. She got it right including ethics and sociology of people. She correctly identifed the Enron debacle long before it became obvious to people and again with this subprime fiasco. She is very sharp, knowledgeable and ... well, appealingly very pretty!

Feb 18 03:45 PM

[vaughn:]

Obama realized nationalizing banks will bankrupt the USA itself.
The nationalization of banks means the total wipe out of equity interest, including preferred.
Take, citigroup, for example. Nationalization of Citigroup means the treasury will suffer an immediate loss of 45 billion preferred, plus a circa 250 billion guarantee loss, plus an unknown amount of loss to cover deposit insurance. Once citigroup is nationalized, no bank can absord citigroup with circa 3 trillion assets(including off balance sheet) and the assets will be distressed. Assuming a 20% haircut to dispose the assets by FDIC, that means another loss of circa 600 billion. In total, nationalizing of Citigroup alone might cost treasury circa 1 trillion losses, not to mention the triggering of CDS event and the complication of circa 40 trillion derivative contracts written by Citigroup which will definitely bring down massive bank failures around the world which will eventually bring down the USA itself.

Soon, senator Dodd will shut up, upon realizing the gravity of the situation. Treasury (that means you) will be better off for just sitting up tight and collect big and fat dividends while doing something else to bring a housing floor and waiting for time to solve the crisis on its own.

The rumor of nationalization can only benefit shorts and media seeking ratings. All others will lose out.

Feb 21 05:46 PM