In the view of many - including myself - nationalization of the big zombie banks in the U.S. would be the quickest and most straightforward approach to getting financial markets moving again.
The arguments against - "it's complex", "shareholders would get spooked", "it might be unfair" - sound like special pleading or an invitation to paralysis by analysis.
But there is a simple reason why nationalization won't happen except as an extreme last resort. The U.S. government's hands are tied by foreign investors.
I've written previously about China's observable influence on U.S. fiscal and monetary policy. I haven’t seen China's holdings of Citigroup (C) publicized, but they’ll be big. And there are others. Here is an extract from Sunday’s Reuters:
"Abu Dhabi is assessing its $7.5 billion investment in Citigroup as the bank's problems deepen and consequences of a possible nationalisation become clearer, according to sources close to the Abu Dhabi Investment Authority (ADIA).
ADIA invested $7.5 billon last year in Citi through convertible bonds that pay 11 percent in interest, but it must start converting the bonds into 235.6 million shares in Citigroup from March next year.
ADIA's returns as a bondholder have been unaffected by continuing troubles at Citigroup, but the dramatic fall in Citi's share price has eroded the conversion value of the mandatory convertible bonds."
Saudi Arabia is also a big holder of such bonds.
Repeat the story of exposure to all the big U.S. banks through shares or convertible bonds across the other big sovereign wealth funds (Dubai, Qatar, Singapore). The result is a lot of powerful overseas investors with strong interest in the banks not being nationalized.
Whilst they would certainly suffer from a U.S. collapse, it would be naïve not to realize they can squeeze the U.S. government by holding back on future bond purchases and thus forcing domestic interest rates up. A dangerous game for all concerned, but the U.S. has to buy time from these overseas interests as a consequence of its growing debt. Hence, no bank nationalizations.
To put it simply, through bad management, the U.S. has substantially foregone the ability to manage its economy in the interests of its own citizens.
Disclosure: no positions
