Why Nationalize in 2016?

The key number in Treasury's latest bank bailout plan is 7: that's the number of years that banks will have to repay the government before they get nationalized the preferred stock converts to common equity.

I think it's fair to say that those of us in favor of bank nationalization want nationalization now, when it would be very useful in terms of bringing down the banks' cost of funds and helping to erase the counterparty mistrust which is currently endemic to the system. Nationalization in seven years' time does no good to anybody. Indeed, I fully hope that if any bank were nationalized now, it would have been re-privatized by 2016.

In the meantime, the government's bailout money will be earning a healthy 9% interest rate for we taxpayers -- yet another liability which the banks are going to struggle to be able to meet. Hasn't the government learned its lesson from AIG? Burdening leveraged financial institutions with expensive new debt doesn't help them, it hurts them. Especially when they have no choice in whether or not to accept that burden.

Comments

[ironpants:]

Your SHORTS are showing.
BAC looking good today, sorry.

Feb 25 04:34 PM

[fizbert:]

I think they just want to wait until the CDSs expire and then take them private.

Feb 25 04:38 PM

[pengs4:]

Who should I trust, you or Bernake ? What happens if nationalization does not work and things get much worse than today ? You , talking heads and academics just hide away with no responsibilities. I hate those talking heads that destroy our system and lives without having to face any consequences if they are wrong. ( Roubini etc .. )

Feb 25 05:30 PM

[Ranchr:]

The Eagles said it best...GET OVER IT.... Felix it's not gonna happen!

Everyone bets in the market and you bet wrong.

Hail Bernanke!

Feb 25 06:04 PM

[Stewie:]

"Everyone bets in the market and you bet wrong."

I think it's safe to say, if he is short he didn't bet wrong.

Feb 25 06:44 PM

[whisperonth...:]

Since when has the government ever let go of anything, once they got their dirty little hands on it? If they ever did nationalize them, I'd change banks. IN A HEARTBEAT. In fact, maybe I'll do that anyway.

Feb 25 06:50 PM

[Ranchr:]

As long as he covers and makes money, fine but he's probably seen the lows.

Feb 25 07:10 PM

[User 364458:]

I am sure his position offers him unique access to data about what exactly each bank has on its balance sheet. No need for bank examiners - Maybe we should make him into a super regulator.

Feb 25 07:58 PM

[Chkrazer:]

you sir ... are very transparent and to be polite ... an ass

Feb 25 08:10 PM

[driftwood2:]

I'm surprised how much vitriol we have here. Do you people honestly think that naysayers and shortsellers are responsible for what's happening now? Give me a break. This crisis was caused by the people that were actually in charge of the show: the bankers, the investment firms, the fed and the government. Also, although few people appreciate this, our current crisis was also due to corrupt academics and is also an inevitable consequence of debt based money. Everything Salmon has said is reasonable. Look at what happened to Japan. They kept their zombie banks operating and had to nationalize one of them eventually anyway.

Feb 25 08:41 PM

[Lejcp76:]

You can always count on Americans to do the right thing—after they’ve tried everything else. -- Sir Winston Churchill

Felix is right. Analyzing the situation abroad and have experienced similar situations in banks from Brazil, nationalization is the only way to go. It worked here, in Sweden, in UK. It will work in the USA.

Feb 25 08:42 PM

[Duude:]

Nationalize now and reprivatize in 2016? What are you kidding me? Let the government run the banks till 2016? Isn't it bad enough we gave them social security, medicare, amtrak, US Postal and education? Why isn't Johnny learning? I dunno. Maybe our financial system is only as important as Amtrak to our economy......NOT!!!

Feb 25 09:48 PM

[SugarDaddy:]

Would someone explain to me how in the $#%#%# it's better to own pure common(real price risk) versus preferred that yields 7-10%. Where in the $#%# did they come up with 40% equity position as well, based off of the current preferred investment and notwithstanding the guarantees on $308 Billion.

?????????????????????

Feb 25 10:46 PM

[CIK:]

depends on when you cover, whiplash coming soon, cover now if you have not already


On Feb 25 06:44 PM Stewie wrote:

> "Everyone bets in the market and you bet wrong."
>
> I think it's safe to say, if he is short he didn't bet wrong.

Feb 25 11:56 PM

[normthefedup:]

Hey Driftwood.....I'm presuming you don't have much money in the market. Vitriol is a good word. And yes, whether or not you believe it, MUCH of what's happening NOW is a result of no confidence. The crisis has hit and you're right in your assessment that this author didn't start all of this. It was greed. But there's no reason now to continue to kick and torture our prostrate economy with opinions that only do more damage. As long as no-responsibility, no-consequence, and no-brain "experts" like this one continue to spout "nationalization" and doom and gloom with absolutely no regard whatsoever to the damage they are doing to the rest of us, we will continue this downward spiral. FDR's "nothing to fear but fear itself" speech is as true today as it ever was. And spreading fear, for one's own glory is just wrong. Felix, like so many others have said, we've just had enough. Just shut the hell up until you've got something constructive to say. Kudos to the rest of you with the intestinal fortitude to tell this guy the same.

Feb 26 08:52 AM

[normthefedup:]

Sugar Daddy, at least as I see it, preferred stock, even though it provides a return, doesn't give you voting rights. Common stock does. Holding less than 50% of the total common, even though the government claims it doesn't want to vote anyway (un-huh), means they do not have a controlling stake in the company. And assuming (here's hoping, anyway) that Citi survives this mess, at about $2.50 a share, the government stands to make one hell of a profit (I wonder if they pay capital gains?) if it goes up to $5 or whatever. The guarantees of $300 billion? Sorry, I don't think even GOD can help you with that one! Hope this helps a little.

Feb 26 09:11 AM

[klarsolo:]

normthefedup, Felix Salmon is not a money manager, he's a journalist. Panic always sells. He'll keep "selling" whatever gives him the most readers. Right now it's panic. It is sad, but people like him make sure that good money managers have great opportunities. The more people panic, the more mispriced the market is. But yes, there comes a tipping point where his gloom & doom posts get out of hand, and I think with his perpetual glorification of nationalization he's going too far.

Feb 26 10:38 AM

[HChang:]

Felix, you are obviously one of those short sellers. Better cover your ass (shorts) soon before the price overshort your shorts. With Obama and Berneke's repeated assurance and a good plan, the bank has 7 years to recover. By then, the world has already been in prosperity. Nobody will remember BAC was trading below $5, the buyers will be willing to pay $40. Your fear story is getting weaker and weaker....sorry about that.

Feb 26 10:55 AM

[normthefedup:]

klarsolo, thanks. Have a great day.

Feb 27 08:24 AM