The NY Times on Bank Nationalization

Here is a look at a recent NY Times article that discussed the various forms bank nationalization can take:

(From The NY Times): "Few words conjure the specter of radicalism quite so well as nationalization. Seizing control of large industries — nationalizing them — is often among the first acts of a leftist government. Lenin did it, and so did Hugo Chávez. Even the comparatively tame François Mitterrand made the nationalization of some banks and heavy industry the centerpiece of his agenda when he became France’s president in 1981. He held it out as the alternative to the laissez-faire ideology of Ronald Reagan and Margaret Thatcher.

So it is a bit odd to watch Barack Obama , who aspires to finally end the era of Reaganomics, spend his early weeks in the White House swatting away calls for nationalization from decidedly non-leftist quarters. Lindsey Graham , a Republican senator from South Carolina, recently said that, given the depth of the credit crisis, he wouldn’t rule out nationalizing banks. Alan Greenspan went further a few days later. “I understand that once in a hundred years this is what you do,” Greenspan, an Ayn Rand disciple before he was a central banker, told The Financial Times.

There are really two different kinds of nationalization. The first draws on a belief that the government can run large enterprises more justly and efficiently than self-interested capitalists can. This is the nationalization of Lenin, Chávez and Mitterrand, and its record is pretty dismal. France’s economy staggered through the 1980s, as government-run banks backed political pet projects that didn’t work out.

The second version of nationalization is the one that today’s advocates point to. It is a temporary takeover born out of crisis. Sweden pursued this kind of strategy in the early 1990s to clean up its banking system. Even the United States has nationalized banks on occasion, including IndyMac Bank last year.

In these cases and others, the government had none of the grand ambitions that Mitterrand-style nationalizers had. The same would clearly be the case with a nationalization of banks today. “Nobody in their right mind wants the government to be in the banking business any longer than it needs to be,” said Adam Posen, an economist in Washington and a prominent voice for nationalization. Instead, the federal government would declare a bank insolvent, wipe out its existing shareholders, fire its top executives and inject enough money to keep it functioning. The government could then siphon off the worst assets into a so-called bad bank — pooling them with toxic assets from other nationalized banks — and resell the bank’s healthy parts to private investors. Once the crisis lifts, some of the toxic assets may even have value.

The promise of nationalization is that it, and only it, can break a self-reinforcing cycle in which banks continue to make bad bets in an effort to dig themselves out of a hole. It’s frequently said that bankers, paralyzed with fear, have been unwilling to make any new investments. But Posen points out that this isn’t quite right. In the months before they collapsed, both Washington Mutual and Lehman Brothers made the financial equivalent of a Hail Mary pass: investments that had little chance of paying off but at least had the potential to put them back in the black."

For the record, the idea of nationalization of a bank (or any business for that matter) makes me very uncomfortable, and in many ways it's the usual American ideological opposition to nationalization as it feels like an unwanted expansion of government powers. But let's say it's done to protect the economy and we don't experience an increase of government control, we don't lose any freedoms, etc, and instead benefit financially via the government saving a key part of our economic infrastructure. I still feel uncomfortable as I'm 100% positive that the government will use the businesses it nationalizes to serve political gains first, business goals second.

After all, just look at what happened with the Mortgage GSEs.

Still I have no problems admitting that while distasteful nationalization is sometimes the best solution, and there is no point in sugar-coating things and/or pretending that nationalization hasn't already happened in many respects within the financials sector.

I just remain concerned as to whether or not our government understands the problems at hand, and will be able to separate political goals from what's best for the business. If nationalization can in fact save a company that's vital to our economy so be it, I just worry that the people involved won't be able to get the job done in an expedient manner.

With all that being said I think we need to think in terms of the best solution to the problem at hand, as opposed to the combination of the best solution and the solution that best fits our own ideologies. Because there is no point in wasting time and energy pretending certain banks aren't nationalized, avoiding it, etc. Instead it's time to develop an understanding of the problem from the ground up and then deploy the best solution for it.

You can read more here.

Sources:

The NY Times: "More Than One Way to Take Over a Bank" -- David Leonhardt, February 25, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[splintar:]

That's great, just like always america should take the easy way out.

And by the way, who ends up owning the bad bank and the bad assets? Oh, I see, the government gets to keep those and the taxpayer, while new stockholders and wall street get all the good stuff.

Will never happen, everybody is going to hunker down and pay for this together under the existing frame work. The republicans are not going to get there way here.

Buy some stock and become a stockholder then tell me how you feel about your plan. Oh I see, all those people are expendable. WRONG.

Mar 01 01:30 PM

[User 366653:]

I agree wholeheartedly. Here's my alternative:

I've read numerous columns and watched countless interviews, in which some noted "expert" maintains that "temporarily" nationalizing one or more of our major banks is the correct or only solution to our financial crisis. Few if any of the proponents of temporary nationalization have explained to us how the process would work. Let's consider some of the obvious ramifications:
First, if we "nationalize" and wipe out common and preferred shareholders, we will cause substantial harm to hundreds of thousands of shareholders, who have done nothing more egregious than invest in a major American company. If nationalization is done in a fashion that hits bond holders and counterparties, the problem escalates dramatically. (Remember Lehman?) Not only will a lot of people suffer substantial loss, but even greater psychological damage will be done to an already beleaguered investing public. A substantial number of people are, in my opinion, perilously close to giving up on the concept of investing in securities. I wonder what the prospects for a recovery will be if a significant portion of our "investment class" gives up permanently on the market.
Second, under nationalization, the "toxic assets" of the banks don't mysteriously go away. Essentially, government would have the same choices they have now: isolate and "own" the toxic loans, insure them, or sell them. The only difference would be that in addition to trying to figure out how to deal with the bad loans, they would now have the added burden of trying to figure out how to get the bank(s) back into private hands. Most proponents of nationaization generally agree that the institution(s) should be placed back in non-government hands as quickly as possible. Good luck on this one: when the FDIC took over IndyMac last July 11, the result was a thirty percent loss ( over $9 Billion loss on $32 Billion in assets). It took six months to finalize a deal with a new buyer, who will take possession eight or nine months after the "nationalization". Please consider that Citigroup has SIXTY TIMES the assets of Indymac. One might wonder how long the process would take, and whether irreparable damage might be done to the "franchise value" of the institution. I don't see how anyone could seriously consider this a "solution".
I have outlined my own solution below. I recognize that some might cry "moral hazard!" and argue that it will reward "those greedy shareholders" at the expense of the "poor taxpayer". Let's remember this - whether we "nationalize" or "rescue", the goal is to stabilize the financial sector, which would, by definition, increase the value of remaining institutions. If nationalizing one or two banks could somehow restore confidence in the remaining banks, the same moral hazard issues would apply - to all banks EXCEPT the one or two that are nationalized. So, apparently the proponents of nationalization believe that "moral hazard" is OK, but not for everyone.
My plan would apply to the nineteen largest banks. Here's how it would work:
The treasury and/or federal reserve bank would insure the collective value of each bank's entire portfolio at the current value, after completion of the "stress test" to assure that current valuations are reasonable, and in compliance with all applicable regulations. By covering the entire portfolio, not just the "toxic assets", the risk to the taxpayer is reduced substantially. (In other words, if the value of a bank's "toxic" assets lost $50 billion, but the good assets gain $50 billion, the taxpayer breaks even).
As a down payment for this insurance, the bank would issue non voting common shares to the government representing twenty-five percent of the bank's common equity. For each year that the insurance remains in force, the bank would issue an additional three percent non voting equity to the government, for up to ten years.
The bank(s) would be prohibited from using any accumulated losses to offset income taxes until the government insurance plan has been cancelled or expired.
The bank(s) would have the right to cancel the insurance at any time after three years, but the government would retain its accumulated stake in the bank. The government can sell up to twenty percent of its position in the bank each year, through open market transactions. This right would be cumulative.
The advantages of this strategy are:
Virtually no up-front costs to the taxpayer. In fact, the taxpayer would immediately receive tens of billions in equity.
Public confidence in the bank(s) would be fully restored immediately. The fear of government interference, as a result of "nationalization", would disappear because the government's equity stake is non voting. Confidence in the entire financial sector would improve dramatically and immediately.
The value of the bank's common stock would appreciate immediately, resulting in a profit to the government/taxpayer.
The value of the bank's preferred stock, trust preferreds, and debt would immediately increase dramatically. This means the bank(s) would now be able to raise new PUBLIC and PRIVATE capital, and would not need additional Government funds. In fact, the bank(s) would be able to use the proceeds of new preferred stock to repay TARP ahead of schedule.
Because it is likely that the bank(s) would immediately return to profitability, and since they would not be allowed to offset profits with accumulated losses, federal income tax payments from the banks would certainly be substantially greater than otherwise. This would help to mitigate any future losses the government might suffer from the portfolio. State income tax revenues would also increase, relieving some of the stress on state budgetss.
Furthermore, as compared to the plans already in place, and those being considered, the advantage of my idea is that virtually all the costs are POTENTIAL, and DEFERRED, rather than DEFINITE, and IMMEDIATE.
Additionally, it is likely that gains in the bank's share prices would offset a significant portion of any losses that may accrue from the insured portfolio(s). It is also likely that the income taxes paid by the bank(s) would further mitigate any portfolio losses experienced by the government. Beyond these considerations, the fact that the implementation of this plan would have almost certainly hastened the recovery of our national economy would mean that the assests insured by the government would be more likely to improve in value than to decline any further. In any event, the government will be in a better position to absorb losses, since the TARP money will have been returned, and no additional TARP funds would have been dispursed.
To summarize, my plan would "nationalize" the current loans of the banks, while leaving the banks intact, with no additional up front costs to the taxpayer. The "moral hazard" issue - helping the "shareholder" at the expense of the "taxpayer", is handled by making the taxpayer a shareholder. Confidence in the security of our financial system would be restored, and we could get on with trying to solve some of our other problems.

Mar 01 01:38 PM

[citetez:]

Best solution is the one proposed by Forbes: Return to sanity. Get rid of Mark to Market for Banks, let them recognize losses when they occur (ie loans go into default) rathe than making them take fictitious paper losses that destroys the capital base because loans "might" go into default.
FDR suspended mark to market in 38 and it was not reinstituted unitl 2007.
These "insolvent" banks have more cash on hand then they have had in a long time. It is the unrealized "paper losses" that are killing them. One should note that Jamie Dimon has refused to sell JPM's "toxic" assets because they are not toxic -- only temporarily without a market. If forced to sell, they become a real loss. If held to maturity they are probably worth close to par. After the great depression, the Feds 1) suspended mark to market for banks because it distorts asset values if the market becomes illiquid and 2) instituted the uptick rule to rein in short sellers.
Those actions were reversed in 2007 and look where we are.

Mar 01 01:49 PM

[JohnL:]

--Still I have no problems admitting that while distasteful nationalization is sometimes the best solution...--

I have a problem admitting that (if it involves the use of taxpayer money or government control over private firms). I've not yet heard a compelling case why we can't simply let it be settled in bankruptcy court. Assets get sold, small depositors are protected by the FDIC, shareholders lose everything. If there's anything left for senior creditors, good for them. And stronger, more prudent bankers take over operations and market share from those that proved themselves unworthy.

Bankruptcy happens in every other free-market industry, every working day of our lives. And that system of winners and losers (and creative destruction) has produced the prosperity we enjoy today. Now, if you argue that the banks are too big to fail, then you should agree that they need to be smaller. But every scheme I've seen proposed will use taxpayer money to keep the big banks big.

What we need is a way to get to smaller banks, capitalized only by private individuals and free of government control. And we should do it before they get any bigger. I've not heard of a better way than the bankruptcy process.

Mar 01 01:57 PM

[Jim Bob Jones:]

I really enjoy all of the bloggers who have voiced opinion as to nationalizing the banks and would wipe out the common share holder who just happens to be Mr & Mrs. Taxpayer. They seem to think that just the rich are involved in the stock market with little or no mention of the fact that anyone with a 101 k (formally 401 k) or other retirement vehicle just might have ties to the banks with money under management or invested directly into the institution. Anyone with a half way functioning brain saw this coming when Reagan and cronies deregulated and pushed for the 401 k setup. I'm sure it started prior to that but this is when the big push was on. The real culprit of our losses is government who slept while they should have been regulating and our congress (including Barack Obama) who instigated and condoned mass givaways of our wealth in order to improve the lives of those who set on their ass and did drugs or were just here illegally for the rape,robbing and pilfering of the real american worker. They've done nothing yet to attack the real problem which is to hunt down and retrieve our wealh from those whose fiduciary duty it was to gaurd our savings and run our country responsibly. It's very hard to have a fox turn in another fox for robbing the hen house. What really bothers me more than the past is that it continues now with the very same people and ideology that have ran our people broke. My solution would require more than a tea party as it would include ropes and town square justice.
It would require only people with a certain knowledge and IQ to be able to vote and to have a certain amount of common sense. After the last election's I'm almost certain that this does not exist and for proof I offer the congress and the presidential candidates. It amazes me that a practiced and eloquent speech can fool so many people.

Mar 01 02:16 PM

[Willy Walnuts:]

Good thinking, but the one flaw I see is the assumption that share prices will rise with the combined government action of both insuring and diluting the equity. It might rise, but making any assumption about how the market would receive it is very risky. I think your strategy sounds a lot like what got us into this mess, which is that everything will go great as long as values rise. What if the government action sparks a sell off in equities, whether due to actual analysis, or just perception? It appears the taxpayer would then lose twice, both in equity loss and through claims on the insurance, which might be even more enormous.

I do agree that outright nationalization would be a huge disaster. Not because of any ideological reason, but practically, who would be able to buy those assets after the government is ready to privatize the bank again. Not only that, but if one bank is nationalized, there would be a sell off of all banks, which would make them all insolvent and require nationalization, in a chain reaction. The scale of the largest banks in the US are bigger than most other countries GDP. The only entities large enough to buy on that scale would be foreign governments, and that is a very scary thought. I doubt the Rothschilds are still out there ready to bail us out again?


On Mar 01 01:38 PM User 366653 wrote:

> I agree wholeheartedly. Here's my alternative:
>
> I've read numerous columns and watched countless interviews, in which
> some noted "expert" maintains that "temporarily" nationalizing one
> or more of our major banks is the correct or only solution to our
> financial crisis. Few if any of the proponents of temporary nationalization
> have explained to us how the process would work. Let's consider some
> of the obvious ramifications:
> First, if we "nationalize" and wipe out common and preferred shareholders,
> we will cause substantial harm to hundreds of thousands of shareholders,
> who have done nothing more egregious than invest in a major American
> company. If nationalization is done in a fashion that hits bond holders
> and counterparties, the problem escalates dramatically. (Remember
> Lehman?) Not only will a lot of people suffer substantial loss,
> but even greater psychological damage will be done to an already
> beleaguered investing public. A substantial number of people are,
> in my opinion, perilously close to giving up on the concept of investing
> in securities. I wonder what the prospects for a recovery will be
> if a significant portion of our "investment class" gives up permanently
> on the market.
> Second, under nationalization, the "toxic assets" of the banks don't
> mysteriously go away. Essentially, government would have the same
> choices they have now: isolate and "own" the toxic loans, insure
> them, or sell them. The only difference would be that in addition
> to trying to figure out how to deal with the bad loans, they would
> now have the added burden of trying to figure out how to get the
> bank(s) back into private hands. Most proponents of nationaization
> generally agree that the institution(s) should be placed back in
> non-government hands as quickly as possible. Good luck on this one:
> when the FDIC took over IndyMac last July 11, the result was a thirty
> percent loss ( over $9 Billion loss on $32 Billion in assets). It
> took six months to finalize a deal with a new buyer, who will take
> possession eight or nine months after the "nationalization". Please
> consider that Citigroup has SIXTY TIMES the assets of Indymac. One
> might wonder how long the process would take, and whether irreparable
> damage might be done to the "franchise value" of the institution.
> I don't see how anyone could seriously consider this a "solution".
>
> I have outlined my own solution below. I recognize that some might
> cry "moral hazard!" and argue that it will reward "those greedy
> shareholders" at the expense of the "poor taxpayer". Let's remember
> this - whether we "nationalize" or "rescue", the goal is to stabilize
> the financial sector, which would, by definition, increase the value
> of remaining institutions. If nationalizing one or two banks could
> somehow restore confidence in the remaining banks, the same moral
> hazard issues would apply - to all banks EXCEPT the one or two that
> are nationalized. So, apparently the proponents of nationalization
> believe that "moral hazard" is OK, but not for everyone.
> My plan would apply to the nineteen largest banks. Here's how it
> would work:
> The treasury and/or federal reserve bank would insure the collective
> value of each bank's entire portfolio at the current value, after
> completion of the "stress test" to assure that current valuations
> are reasonable, and in compliance with all applicable regulations.
> By covering the entire portfolio, not just the "toxic assets", the
> risk to the taxpayer is reduced substantially. (In other words, if
> the value of a bank's "toxic" assets lost $50 billion, but the good
> assets gain $50 billion, the taxpayer breaks even).
> As a down payment for this insurance, the bank would issue non voting
> common shares to the government representing twenty-five percent
> of the bank's common equity. For each year that the insurance remains
> in force, the bank would issue an additional three percent non voting
> equity to the government, for up to ten years.
> The bank(s) would be prohibited from using any accumulated losses
> to offset income taxes until the government insurance plan has been
> cancelled or expired.
> The bank(s) would have the right to cancel the insurance at any time
> after three years, but the government would retain its accumulated
> stake in the bank. The government can sell up to twenty percent of
> its position in the bank each year, through open market transactions.
> This right would be cumulative.
> The advantages of this strategy are:
> Virtually no up-front costs to the taxpayer. In fact, the taxpayer
> would immediately receive tens of billions in equity.
> Public confidence in the bank(s) would be fully restored immediately.
> The fear of government interference, as a result of "nationalization",
> would disappear because the government's equity stake is non voting.
> Confidence in the entire financial sector would improve dramatically
> and immediately.
> The value of the bank's common stock would appreciate immediately,
> resulting in a profit to the government/taxpayer.
> The value of the bank's preferred stock, trust preferreds, and debt
> would immediately increase dramatically. This means the bank(s) would
> now be able to raise new PUBLIC and PRIVATE capital, and would not
> need additional Government funds. In fact, the bank(s) would be able
> to use the proceeds of new preferred stock to repay TARP ahead of
> schedule.
> Because it is likely that the bank(s) would immediately return to
> profitability, and since they would not be allowed to offset profits
> with accumulated losses, federal income tax payments from the banks
> would certainly be substantially greater than otherwise. This would
> help to mitigate any future losses the government might suffer from
> the portfolio. State income tax revenues would also increase, relieving
> some of the stress on state budgetss.
> Furthermore, as compared to the plans already in place, and those
> being considered, the advantage of my idea is that virtually all
> the costs are POTENTIAL, and DEFERRED, rather than DEFINITE, and
> IMMEDIATE.
> Additionally, it is likely that gains in the bank's share prices
> would offset a significant portion of any losses that may accrue
> from the insured portfolio(s). It is also likely that the income
> taxes paid by the bank(s) would further mitigate any portfolio losses
> experienced by the government. Beyond these considerations, the fact
> that the implementation of this plan would have almost certainly
> hastened the recovery of our national economy would mean that the
> assests insured by the government would be more likely to improve
> in value than to decline any further. In any event, the government
> will be in a better position to absorb losses, since the TARP money
> will have been returned, and no additional TARP funds would have
> been dispursed.
> To summarize, my plan would "nationalize" the current loans of the
> banks, while leaving the banks intact, with no additional up front
> costs to the taxpayer. The "moral hazard" issue - helping the "shareholder"
> at the expense of the "taxpayer", is handled by making the taxpayer
> a shareholder. Confidence in the security of our financial system
> would be restored, and we could get on with trying to solve some
> of our other problems.
>
>

Mar 01 03:02 PM

[Willy Walnuts:]

This is interesting.... I agree that the problem is size. I don't agree that we can bankrupt the four largest banks which control 50% of the flow of capital in the US. Every business I can think of relies on credit. If we freeze credit by allowing the banks to go down, what will we be left with 20.. 50.. 100% unemployment?

However, what about a decentralization of banking similar to the breakup of a monopoly, a la the break up of AT&T? It is a general flaw in the nature of business to require growth, but what happens when you get too big... I think we are experiencing that. The best function of government in this context is to facilitate the controlled shrinkage of an entity that has become too big for anyone's good.

On Mar 01 01:57 PM JohnL wrote:

> --Still I have no problems admitting that while distasteful nationalization
> is sometimes the best solution...--
>
> I have a problem admitting that (if it involves the use of taxpayer
> money or government control over private firms). I've not yet heard
> a compelling case why we can't simply let it be settled in bankruptcy
> court. Assets get sold, small depositors are protected by the FDIC,
> shareholders lose everything. If there's anything left for senior
> creditors, good for them. And stronger, more prudent bankers take
> over operations and market share from those that proved themselves
> unworthy.
>
> Bankruptcy happens in every other free-market industry, every working
> day of our lives. And that system of winners and losers (and creative
> destruction) has produced the prosperity we enjoy today. Now, if
> you argue that the banks are too big to fail, then you should agree
> that they need to be smaller. But every scheme I've seen proposed
> will use taxpayer money to keep the big banks big.
>
> What we need is a way to get to smaller banks, capitalized only by
> private individuals and free of government control. And we should
> do it before they get any bigger. I've not heard of a better way
> than the bankruptcy process.

Mar 01 03:16 PM

[JohnL:]

--It is a general flaw in the nature of business to require growth, but what happens when you get too big... I think we are experiencing that.--

I disagree that to run a business requires growth. There have been very successful businesses that have been in small for a hundred or more years -- sometimes family businesses passed down from generation to generation. The flaw that I see is government actions which promote growth of big businesses over their smaller competitors. That said, I agree we are experiencing the problem.

Mar 01 03:37 PM

[jasonjim:]

Nationalization of the largest banks in America while wiping out all common and preferred shareholders in the process would be a national disaster for America and plunge the whole country into bankruptcy. America operates only because of other people's (foreigners) money invested in American institutions. If nationalization of a very large bank wipes out their share values just once, they will pull all of their investment money out of America and go to a safer haven. America will be left destitute, unable to pay their bills. Armageddon! Advocates of nationalization who believe that the world of shareholders who lose all of their money will sit idly by and take it on the chin for good old Uncle Sam should rethink their position. America would never be considered a safe haven ever again----welcome to Third World status.

Mar 01 03:53 PM

[User 366653:]

You are absolutely right!

I'm still waiting for ONE proponent of nationalization to explain how it would work. Please explain how it's better to destroy a two trillion dollar institution so that we can devastate the market, wipe out hundreds of thousands of investors, and then try desperately to sell it back piecemeal to a devastated market that will be even more skeptical than ever about investing in a Bank. Proponents of nationalization fail to recognize that the psychological impact of such an action could be the final death knell to our system.

Here's a thought - Citigroup is approximately seven times the size of Lehman. That Lehman deal really worked out well, didn't it?

On Mar 01 03:53 PM jasonjim wrote:

> Nationalization of the largest banks in America while wiping out
> all common and preferred shareholders in the process would be a national
> disaster for America and plunge the whole country into bankruptcy.
> America operates only because of other people's (foreigners) money
> invested in American institutions. If nationalization of a very large
> bank wipes out their share values just once, they will pull all of
> their investment money out of America and go to a safer haven. America
> will be left destitute, unable to pay their bills. Armageddon! Advocates
> of nationalization who believe that the world of shareholders who
> lose all of their money will sit idly by and take it on the chin
> for good old Uncle Sam should rethink their position. America would
> never be considered a safe haven ever again----welcome to Third World
> status.

Mar 01 05:40 PM

[User 366653:]

We've already seen how piecemeal repairs to the financial system have done - pretty dismal. I believe we need "shock and awe" at this point. The world needs to know that none of the major U.S. banks is going to fail. Let's remember, the taxpayer is already on the hook. My way may not be perfect, but at least it doesn't require hundreds of billions of newly borrowed money.

The negative impact of dilution should be more than offset by the removal of the fear of collapse or nationalization.

On Mar 01 03:02 PM Willy Walnuts wrote:

> Good thinking, but the one flaw I see is the assumption that share
> prices will rise with the combined government action of both insuring
> and diluting the equity. It might rise, but making any assumption
> about how the market would receive it is very risky. I think your
> strategy sounds a lot like what got us into this mess, which is that
> everything will go great as long as values rise. What if the government
> action sparks a sell off in equities, whether due to actual analysis,
> or just perception? It appears the taxpayer would then lose twice,
> both in equity loss and through claims on the insurance, which might
> be even more enormous.
>
> I do agree that outright nationalization would be a huge disaster.
> Not because of any ideological reason, but practically, who would
> be able to buy those assets after the government is ready to privatize
> the bank again. Not only that, but if one bank is nationalized, there
> would be a sell off of all banks, which would make them all insolvent
> and require nationalization, in a chain reaction. The scale of the
> largest banks in the US are bigger than most other countries GDP.
> The only entities large enough to buy on that scale would be foreign
> governments, and that is a very scary thought. I doubt the Rothschilds
> are still out there ready to bail us out again?

Mar 01 06:01 PM

[Ranchr:]

Nationalization would wipe out so many retirees and near retirees pre and actual baby-boomers we would have a welfare state is that what you ass-oles want?

Mar 01 09:44 PM

[Ranchr:]

Why not just show them to the gas chambers!

Mar 01 09:44 PM

[Subhankar:]

Indira Gandhi nationalised banks in India many many moons ago. Large international banks like Citi and HSBC were (and still are) kept in a tight leash.

The result? A rather rumbling and inefficient banking system that put customers last and held up the economic growth of the country.

Guess what? Inspite of the global down turn, not a single nationalised Indian bank has collapsed. In fact they have improved their services over the years and are highly regarded by stock market participants.

Mar 02 04:10 AM

[yank:]

"The Republicansd are not going to get their way"
Newsflash for you in case you missed the "memo"- The Republilcans are NOT in power right now. That have little to say what happens to the banks. Your paranoia of a Republican conspiracy is a bit lame.


On Mar 01 01:30 PM splintar wrote:

> That's great, just like always america should take the easy way out.
>
>
> And by the way, who ends up owning the bad bank and the bad assets?
> Oh, I see, the government gets to keep those and the taxpayer, while
> new stockholders and wall street get all the good stuff.
>
> Will never happen, everybody is going to hunker down and pay for
> this together under the existing frame work. The republicans are
> not going to get there way here.
>
> Buy some stock and become a stockholder then tell me how you feel
> about your plan. Oh I see, all those people are expendable. WRONG.

Mar 02 08:55 AM

[Mad Hedge F...:]

CC xf r So nationalize the banks already! Get it over with! Call it whatever you want: partial nationalization, temporary nationalization, socialization, liverwurst, or rutabaga. Just get it over with! This tortuous slow drip of on again, off again, stop gap measures is going to cost us more than if we executed the politically incorrect “N” word. Of course, a government takeover is the worst nightmare for many Republicans. But now that former Fed governor Alan Greenspan and many fiscal conservatives are on board, this shouldn’t amount to political suicide for Obama. The FDIC’s Sheila Bair already does this on an almost daily basis with smaller regional banks, like Washington Mutual, but for some reason the top nine “too big to fail” banks are sacrosanct. Their deposits have been effectively nationalized with government guarantees since last fall. The market is already selling us that many of these once hallowed institutions are now worthless. This is what Citigroup (C) at $1 and Bank of America (BAC) at $2 are telling us. Just wipe out the pitifully little the common shareholders have left, clean them up, and resell them in five years after the credit markets are restored. Every government that ever did this, like the UK in the eighties and Hong Kong in 1998, made a fortune. I was involved with both, and serious coin was made by the sellers and the buyers. Not to drive a stake through the hearts of these de facto “zombie” banks really would risk a Great Depression II and an “L” shaped lost decade. The markets would love decisive and surgical action like this and rocket.

Mar 02 09:34 AM

[hwood007:]

You have a well thought out plan. The current administration has not done as well and I assume they have been planning longer than you have (he knew he M AY have to take over this mess six months ago). I hope he believes in prior planning because PPPP has never been a good plan.


On Mar 01 01:38 PM User 366653 wrote:

> I agree wholeheartedly. Here's my alternative:
>
> I've read numerous columns and watched countless interviews, in which
> some noted "expert" maintains that "temporarily" nationalizing one
> or more of our major banks is the correct or only solution to our
> financial crisis. Few if any of the proponents of temporary nationalization
> have explained to us how the process would work. Let's consider some
> of the obvious ramifications:
> First, if we "nationalize" and wipe out common and preferred shareholders,
> we will cause substantial harm to hundreds of thousands of shareholders,
> who have done nothing more egregious than invest in a major American
> company. If nationalization is done in a fashion that hits bond holders
> and counterparties, the problem escalates dramatically. (Remember
> Lehman?) Not only will a lot of people suffer substantial loss, but
> even greater psychological damage will be done to an already beleaguered
> investing public. A substantial number of people are, in my opinion,
> perilously close to giving up on the concept of investing in securities.
> I wonder what the prospects for a recovery will be if a significant
> portion of our "investment class" gives up permanently on the market.
>
> Second, under nationalization, the "toxic assets" of the banks don't
> mysteriously go away. Essentially, government would have the same
> choices they have now: isolate and "own" the toxic loans, insure
> them, or sell them. The only difference would be that in addition
> to trying to figure out how to deal with the bad loans, they would
> now have the added burden of trying to figure out how to get the
> bank(s) back into private hands. Most proponents of nationaization
> generally agree that the institution(s) should be placed back in
> non-government hands as quickly as possible. Good luck on this one:
> when the FDIC took over IndyMac last July 11, the result was a thirty
> percent loss ( over $9 Billion loss on $32 Billion in assets). It
> took six months to finalize a deal with a new buyer, who will take
> possession eight or nine months after the "nationalization". Please
> consider that Citigroup has SIXTY TIMES the assets of Indymac. One
> might wonder how long the process would take, and whether irreparable
> damage might be done to the "franchise value" of the institution.
> I don't see how anyone could seriously consider this a "solution".
>
> I have outlined my own solution below. I recognize that some might
> cry "moral hazard!" and argue that it will reward "those greedy shareholders"
> at the expense of the "poor taxpayer". Let's remember this - whether
> we "nationalize" or "rescue", the goal is to stabilize the financial
> sector, which would, by definition, increase the value of remaining
> institutions. If nationalizing one or two banks could somehow restore
> confidence in the remaining banks, the same moral hazard issues would
> apply - to all banks EXCEPT the one or two that are nationalized.
> So, apparently the proponents of nationalization believe that "moral
> hazard" is OK, but not for everyone.
> My plan would apply to the nineteen largest banks. Here's how it
> would work:
> The treasury and/or federal reserve bank would insure the collective
> value of each bank's entire portfolio at the current value, after
> completion of the "stress test" to assure that current valuations
> are reasonable, and in compliance with all applicable regulations.
> By covering the entire portfolio, not just the "toxic assets", the
> risk to the taxpayer is reduced substantially. (In other words, if
> the value of a bank's "toxic" assets lost $50 billion, but the good
> assets gain $50 billion, the taxpayer breaks even).
> As a down payment for this insurance, the bank would issue non voting
> common shares to the government representing twenty-five percent
> of the bank's common equity. For each year that the insurance remains
> in force, the bank would issue an additional three percent non voting
> equity to the government, for up to ten years.
> The bank(s) would be prohibited from using any accumulated losses
> to offset income taxes until the government insurance plan has been
> cancelled or expired.
> The bank(s) would have the right to cancel the insurance at any time
> after three years, but the government would retain its accumulated
> stake in the bank. The government can sell up to twenty percent of
> its position in the bank each year, through open market transactions.
> This right would be cumulative.
> The advantages of this strategy are:
> Virtually no up-front costs to the taxpayer. In fact, the taxpayer
> would immediately receive tens of billions in equity.
> Public confidence in the bank(s) would be fully restored immediately.
> The fear of government interference, as a result of "nationalization",
> would disappear because the government's equity stake is non voting.
> Confidence in the entire financial sector would improve dramatically
> and immediately.
> The value of the bank's common stock would appreciate immediately,
> resulting in a profit to the government/taxpayer.
> The value of the bank's preferred stock, trust preferreds, and debt
> would immediately increase dramatically. This means the bank(s) would
> now be able to raise new PUBLIC and PRIVATE capital, and would not
> need additional Government funds. In fact, the bank(s) would be able
> to use the proceeds of new preferred stock to repay TARP ahead of
> schedule.
> Because it is likely that the bank(s) would immediately return to
> profitability, and since they would not be allowed to offset profits
> with accumulated losses, federal income tax payments from the banks
> would certainly be substantially greater than otherwise. This would
> help to mitigate any future losses the government might suffer from
> the portfolio. State income tax revenues would also increase, relieving
> some of the stress on state budgetss.
> Furthermore, as compared to the plans already in place, and those
> being considered, the advantage of my idea is that virtually all
> the costs are POTENTIAL, and DEFERRED, rather than DEFINITE, and
> IMMEDIATE.
> Additionally, it is likely that gains in the bank's share prices
> would offset a significant portion of any losses that may accrue
> from the insured portfolio(s). It is also likely that the income
> taxes paid by the bank(s) would further mitigate any portfolio losses
> experienced by the government. Beyond these considerations, the fact
> that the implementation of this plan would have almost certainly
> hastened the recovery of our national economy would mean that the
> assests insured by the government would be more likely to improve
> in value than to decline any further. In any event, the government
> will be in a better position to absorb losses, since the TARP money
> will have been returned, and no additional TARP funds would have
> been dispursed.
> To summarize, my plan would "nationalize" the current loans of the
> banks, while leaving the banks intact, with no additional up front
> costs to the taxpayer. The "moral hazard" issue - helping the "shareholder"
> at the expense of the "taxpayer", is handled by making the taxpayer
> a shareholder. Confidence in the security of our financial system
> would be restored, and we could get on with trying to solve some
> of our other problems.
>
>

Mar 02 03:34 PM

[Deehena:]

Markham, you over simplify by saying "wipe out the shareholders." Perhaps you're not aware that banks also have bondholders but if so a smart guy like you should have mentioned that.

Mar 02 11:06 PM