A Viewer's Guide to Bank Nationalization

By Simon Johnson

At the end of last week, Senators Dodd and Schumer signalled that financial elite solidarity has broken; “nationalization” is no longer taboo. The consensus is dead (check with Barney Frank), crazy ideas abound, and long live what new policy approach? Here’s five sets of issues to guide your viewing this week as we slip and slide sideways into our future.

1. The White House and Treasury have fallen behind events. When and how do they try to regain control of the situation? Is there a relatively early and decisive move up their sleeves? This seems difficult, as they have committed to doing stress tests first and foremost, and presumably any meaningful tests take at least a week (probably they were intended, when announced, to buy more than a month). But these are resourceful and imaginative people, with lots of connections and some big friends to save, and they fully understand the importance of retaking the initiative. Watch for a major announcement early in the week.

2. The strategy alluded by the Senators is: the devil take the hindmost. This implies two big banks are in the line of fire; both, of course, are strenuously denying that anything of the kind is true (we could call this the Irish Ministry of Finance line; it also worked for Northern Rock and Iceland, at least for a while). But the banking system problems are likely to be much deeper, and any attempt to deal with just two banks is likely to founder fairly quickly. Probably our financial leadership will for now dig in around “two and only two,” but when the consensus is so fragmented, anything can happen. Follow the public statements of Lloyd Blankfein closely; use the hubris in his February 8th, 2009, Financial Times op ed as a benchmark (remember: this was timed to appear upstage on the morning Secretary Geithner was supposed to present his financial system plan).

3. How does the designated government leadership communicate that credit probably needs to contract for all banks, including anything taken over by the government, given the declining willingness to borrow by creditworthy individuals and firms? Some of the language used in and around the House Financial Services Committee hearing with bankers demonstrated a worrying misperception - just because banks are taken over does not mean they should, could, or would increase lending. If we get a substantial increase in government directed credit, our problems will get much worse before, if ever, they get better. This is definitely a media blitz assignment for senior political nominees at Treasury. Will we learn more of their names this week?

4. There is no panacea, and that includes taking over banks. We face a pervasive global confidence problem for consumers, firms and - in some countries - governments. The government takeover of failed banks with systemic importance is the worst of all possible strategies, apart from all the alternatives. Decisive action on the banking system is necessary but not sufficient for the economic recovery. Will this message be communicated clearly by the architects of the bank strategy, to keep expectations at reasonable levels? Could someone, please, have a word with the official forecasters (yes, I’m looking at the Federal Reserve). It is hard to focus the world (and Congress) on forestalling Financial Armageddon when your crack modellers publicly predict something close to a V-shaped recovery near the end of the forecast horizon.

5. Will there be a clear, upfront commitment to reprivatization, with a promise that large banks will be broken up in the process? Changing the industrial structure of banking is essential for altering the political economy of the sector. Community bankers - influential in the Senate - need to be brought onside with aggressive FDIC-type interventions, and this is more likely to happen if they sense that the era of megabanks is drawing to a close (the dinosaurs are finished; someone notify the mammals). Watch also for supportive body language among private equity investors. If the banking lobby breaks into small pieces, politics could become a lot more interesting.

Comments

[morph366]

The credibility of the financial technocracy is being completely blown apart. As you say on both sides of the Atlantic - US and UK - government forecasters are still talking about strong V shaped recoveries.
Citigroup is slipping further into a comatose state and the UK government is announcing a major U-turn on Northern Rock - now it has to be aggressive at lending again!
Your point 5, I am afraid is far too optimistic - yes the mega banks are dinosaurs but the problem is that the banking community to whom you are appealing to "be brought onside" share one characteristic with the mighty lizards i.e they have tiny brains.

2009 Feb 23 09:28 AM

[jrs87sch]

You're right there is no panacea, this is a pretty sticky situation. All I can say is nationalization better not include government control of operations. That would ensure long-term failure. We really can't let these mega-banks fall; they are counterparties and custodians for way to many people and businesses.

Take a look at Japan's Nikkei index since 1989. They still have not come close to recovering those highs. We need to do everything we can to avoid this scenario!

It's interesting what's happening to the dollar though; check out what mywealth.com's Sean Hyman predicts for the US dollar in 2009 at www.investorpitstop.co...

2009 Feb 23 09:43 AM

[MJJP]

How many banks is the US willing to nationalize? One , two, more? If they do one where does it end? How do you choose? Prop the banks up with money if needed , stop them trading , freeze the stocks(no sales or buys), and return the banks to normal when they begin paying the money back.

2009 Feb 23 09:53 AM

[Mad Hedge Fund Trader]

There is a new proposal making the rounds for solving the financial crisis known as “desecuritization.” There are $1.4 trillion in CDO’s outstanding backed by Alt-A and subprime loans in the form of 3,700 individual securitizations. Over 68% of the loans backing these bonds are current. Mark to market rules are forcing the banks to carry this paper on their balance sheets at 50% discount. This is where the $700 billion figure for the first TARP comes from. The problem is that mark to market is a meaningless accounting fiction when there is no market. If you break up these securities and place the underlying loans back on the banks’ balance sheets, the good mortgages can be valued at 100% of face, and those behind in their payments can be discounted to maybe 70% because they are still secured by the value of the underlying homes. This would boost the value of the entire asset class assets from 50 cents to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. It sounds like a workable plan, and therefore is unlikely to ever see the light of day.

2009 Feb 23 11:09 AM

[Jason Rines (iThinkBig)]

www.theburningplatform... .

2009 Feb 23 06:00 PM

[CuriousMonkey5]

What is the reason our fearless leaders have not yet just suspended the mark-to-market rule? Won't that improve the current situation greatly?

2009 Feb 24 01:17 AM

[investfarm]

Like the famous Ali Baba crying "Open Sesame" before the cave, the association of the more than forty thieves of America are crying "Nationalize the Banks!" In other words, bring down the U.S. government of President Barack Obama.

The test of both the sanity and morality of any specialist in finance today, is their willingness to support nothing other than a general placing of the remnants of what had once been, prior to the infamous Dodd-Frank swindles, the great chartered private banks of the nation under reorganization under conditions of Federal bankruptcy protection,however the Forty Thieves of America Club have worked to sabotage this.

Under such Federal bankruptcy protection, the accounts, including mortgages, which qualify under the standard of Glass-Steagall chartered banks, are awarded immediate bankruptcy protection, and will be protected, thus, to return the essential business of daily life, and keep their true savings deposited there, to approximately normal operations conducted under Federal Bankruptcy protection. It is the gamblers who must eat the losses which they, and they alone, have earned.

Under that arrangement, Federal banking and the U.S. Treasury will be freed from the currently operating, inherently larcenous grip of "bail out" of gamblers and thieves, and the Federal government's support activities will be to promote the restoration and growth of what have been traditionally, maintenance of, and investment in productive employment and essential services.

Any different policy would have the same effect as treason or worse than treason. The greedy maniacs who used persons such as Dodd and Frank and complicit tools in the Federally supported robbery of America, must be removed from the table and the equations of government, in order that the great general welfare principle of the Preamble of the Federal Constitution shall prevail, and the financial swindlers of all persuasions left to moan.

Defend that principle as if your family's life and future depend upon it. They do.

2009 Feb 24 09:38 AM