Jim Rogers: It's Better To Let Financials Fail 19 comments
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Jim Rogers, author, adventure capitalist and international investor, on CNBC yesterday:
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I've read numerous columns and watched countless interviews like this, 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.
It seems to me that the government is looking to replace the bankruptcy courts when the best job is instead done by filing Chapter 11, re-org.
For the government plan to work, the values of the bubbled assets need to be revived. Does that mean 10, 20, 30 years? Surely the same government will not even be around by that time to realize that this choice was not feasible.
Unfortunately, most us will be around and we will only have us to blame if we don't ask for these companies to go bankrupt now. Take the medicine now - it tastes bad, but the downside if it's not taken, is that the virus could mutate in a worse shape.
Mr. Rogers, like Nouriel Roubini and others, claims that nationalization or bankruptcy of our major banks is inevitable, and the only right thing to do. He doesn't bother to think through the ramifications of such an event, or to explain how our economy will deal with such a devastating event.
If we had followed his advice, Merrill Lynch, Wachovia, Bear Stearns, Citigroup, and AIG would all have failed by now. We know what happened when Lehman folded - and these institutions cumulatively are approximately 15 time the size of Lehman.
Mr. Rogers conveniently forgets a couple of examples from the past where "zombie" banks were allowed to operate until they un-zombied.
In the 1980s, BAC had nearly no net capital for a couple of years. The govt. told BAC that they could keep operating, but they had to get their cap. ratios up by a particular date. They did it, and avoided a big problem.
Same thing happened in 1990 with Citigroup.
So please, don't pretend that the solution to this problem is to shut down one or more major banks.
Mr. Rogers objects to the government spending hundreds of billions over the next several years to support the weakened banks, but he conveniently forgets to mention that bankrupting or nationalizing Citigroup would cost the FDIC hundreds of Billions of dollars RIGHT NOW. Allowing AIG to fail could easily cost the economy close to a Trillion. Add BAC and a few others, and, to quote Everett Dirkson, now you're talking about a lot of money. How can anyone seriously believe that that's a reasonable solution?
....
.... let Economy Fail
.... let Country Fail
.... let Planet Fail
....
Please....use the BRAIN...but not to carry the hair !
....
If Financials need a Big Bad Bank.....then.... Welcome Big Bad Bank
but....let Financials Fail ?????
...
please, be serious
...
We need to do all necesary to recue and stabilize Financials !!! It's the first Step
Let's also prepare for war while we're at it as I don't think other nations will appreciate a unilateral decision on our part to cancel out their investments in our banks.
I have presented my plan KNOWING that a lot of people won't agree with it. But, it is a PLAN.
Roubini, Rogers, and, so far, every other proponent of "nationalization" or bankruptcy, conveniently neglect to explain their plan. My guess is that there's a good reason - they either haven't thought about a plan, or they tried and failed to come up with one.
On Mar 03 07:39 AM ResourceWise wrote:
> User366653 has taken the trouble to spell out an overview of his
> plan, so should be lauded for it - whether one agrees with every
> detail or not. Other commentators need to move beyond slogans e.g.
> nationalize, wipe out existing shareholders, moral hazard, etc and
> should actually explain how their plan will work, what risks it would
> mitigate and what the long term prognosis will be.
crudeoiltrader.blogspo...
When we let all these institutions fail, and another million or so people lose their jobs and homes, and go on unemployment - and when the FDIC has to "borrow" two or three trillion from the Treasury to cover the immediate losses, and when thousands more commercial buildings are vacated, what would be our next step?
As I have said, the people who believe that we should just let the chips fall as they may, never seem to explain how we rise up from the ashes after the collapse of our entire system.
On Mar 03 08:32 AM Ray's Stock World wrote:
> I absolutely agree. Let them fail and send GM and Chrysler with them.
> Billions of dollars late of course. There is plenty of responsible
> banks to replace them.
>
>
>
> crudeoiltrader.blogspo...
On Mar 03 09:21 AM User 366653 wrote:
>
>
> As I have said, the people who believe that we should just let the
> chips fall as they may, never seem to explain how we rise up from
> the ashes after the collapse of our entire system.
>
The shareholders won't suffer that much when they have already lost 99% of their investment, what's another 1% if the bad banks/insurers get nationalized?
Is this not the same mentality as the current "Stabilization"?
On Mar 03 07:06 AM Finmaster wrote:
> ....let Financials Fail....
> ....
> .... let Economy Fail
> .... let Country Fail
> .... let Planet Fail
> ....
> Please....use the BRAIN...but not to carry the hair !
> ....
>
> If Financials need a Big Bad Bank.....then.... Welcome Big Bad Bank
>
> but....let Financials Fail ?????
> ...
> please, be serious
> ...
> We need to do all necesary to recue and stabilize Financials !!!
> It's the first Step
Most of the money that buys the legislation comes from the Funny Money Fractional Reserve and Financial Engineering System.
Until this link is explored and exposed catastrophe will repeat; Only the sector will change.
Que Bono; Follow The Money.
On Mar 03 01:07 PM y3115y wrote:
> Then who is going to give law makers the contributions they need
> for re election?
No, the process will not be comfortable. The momentum can not be stopped now.
The unfortunate thing is that the short sighted are spending all our resources to maintain power rather than prepare for what is coming. Slow will be the dissent until all means are exhausted.
We will soon understand just how much liberty has been lost.
Kindness is never wasted. Charity will soon be in short supply. Your neighbors will be your only shelter in the coming event. Do not discount the power of community.
On Mar 03 09:21 AM User 366653 wrote:
> Just one question;
>
> When we let all these institutions fail, and another million or so
> people lose their jobs and homes, and go on unemployment - and when
> the FDIC has to "borrow" two or three trillion from the Treasury
> to cover the immediate losses, and when thousands more commercial
> buildings are vacated, what would be our next step?
>
> As I have said, the people who believe that we should just let the
> chips fall as they may, never seem to explain how we rise up from
> the ashes after the collapse of our entire system.
>
> On Mar 03 08:32 AM Ray's Stock World wrote:
Let them fail. The financial system will reorganize in 6 months. Creative destruction. It's the only way out.
On Mar 03 06:28 AM User 366653 wrote:
> I've posted this before, and this is a good place to do it again.
>
>
> I've read numerous columns and watched countless interviews like
> this, 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.
>
>