Why the Market Wants Banks Nationalized

Back in late 2007, real estate mogul Sam Zell said to CNBC’s Maria Bartiromo that what caused the market declines was uncertainty. He said that if the market had visibility going forward about Fed Policy and pricing of the toxic paper, no matter what the pricings would be, the market would rise a great amount because the uncertainty in asset prices going forward would be eliminated.

Of course, back then the market declines were miniscule compared to today and that it was unthinkable such financial giants as Bear Stearns and Lehman would go under, and many iconic mega banks would be under the nationalization risks.

However, I believe that Zell’s comment about uncertainty still holds its ground. Basically, many traders and investors know that, except for financials, asset prices are undervalued, with many firms trading under or little above book value. However, people also know that we quit trading on fundamentals a while ago and realize that although fundamentals would dictate otherwise there might be room for S&P going down to 500 - 600 range.

I think that the reason why the market has battered down the megabank stocks like Citi (C), BoA (BAC) and WFC is related to this uncertainty argument. Nobody cares about what these banks are worth anymore. People are tired of arguing over whether these banks have any common equity left in them. However, people also realize that if these entities go under, the effect to the real economy would be disastrous.

That is what the market is trying to tell the government by battering the stocks to “just nationalize these things and get it over with already.” Traders realize that the main reason markets fail to recover is the uncertainty over the fact that if the government makes a mess of the banking sector, the repercussions to the real economy might shake the core fundamentals and cause a severe depression.

One more note: I think it is a good idea fundamentally to nationalize the banks anyway. The main reason these entities exist are to create the added value from deciding who is worthy of getting credit and who’s not and at what interest rate. Since with their irresponsible, bonus motivated, actions these institutions have lost track of their main purpose, it is maybe better the government takes over the job of credit evaluation and sourcing from the banks. The way things are currently, the reserve money that banks originate the loans from comes from the Fed and taxpayers anyway. So I think it is a good idea the government takes over the responsibilities of the banks until these institutions get themselves together and realize that their main purpose is providing credit, not financial engineering.

If such nationalization occurs, the asset prices will stabilize in the medium term and the toxic assets on the balance sheet of the banks will gain value. When the government privatizes these things again, the taxpayers will make a good profit.

However, such action should be taken before unemployment rises too much and creates a real systemic downturn. If the government hesitates too much in nationalizing banks, and acts too late, the unemployment will jump to unthinkable 15- 20% range.

Every financial guru out there in the U.S. will tell you that employment is the backbone of financial stability. If the government insists on meaningless, inflationary stimulus packages rather than getting a grip on the core broken philosophy of the banking system, then the recession will spill over from just a huge decrease in assets prices to a huge decrease in real economy. And I promise you nobody will be laughing then.

Disclosure: no positions

Comments

[wobatus:]

These organizations exist to make money. You are confusing the putative "how" they "should" make money with some sort of societal obligation.

Mar 05 10:31 AM

[ab1387:]

I pray no one listens to you.

Mar 05 10:38 AM

[ecliptix543:]

Your argument defeats itself. If they are under no societal obligation, then why should society be obligated to pay for their mistakes and utter incompetence?


On Mar 05 10:31 AM wobatus wrote:

> These organizations exist to make money. You are confusing the putative
> "how" they "should" make money with some sort of societal obligation.

Mar 05 10:47 AM

[Buckoux:]

It was the government that precipitated this financial calamity that is now upon us and this moron expects that more government incompetence will save us? I hope he doesn't breed and if he does or has, his offspring should be removed from his malevolent influence.

Mar 05 10:50 AM

[Bulldawg88:]

The market is not saying that at all. It is trying to tell Government to shut up and get out of the way. Government intervention has caused "most" of this mess and it is time for them to stop it.

Mar 05 10:51 AM

[ironpants:]

The only folks who want nationalization are short-sellers and those who have sold CDS and have a vested interest in the failure of our ENTIRE SYSTEM for their gain.
When the hell is the SEC going to wake up?
The government can't be THAT corrupt, or can it....?

Mar 05 11:06 AM

[rraintl:]

Please, lets get away from ideological dogma and get down to facts. Bankers in the US are not private enterpreneurs. They are private businesspeople, licensed and regulated by federal and state govenments to act in a professional and responsible way to invest the money of the depositing public in appropriate assets, mostly loans. Profit extracted in this process generally encourages investment in these institutions, bolstering capitalization and tweaking performance. The current situation is obviously out of whack. Bankers and shareholders have failed in their fiduciary responsibilities. Licenses need to be revoked, management changed and shareholders will loose. Books need to be cleaned up, appropriate rule changes need to be made, and the banks recapitalized. (nationalization?). And we need to get on with it already!

Mar 05 11:19 AM

[psyche:]

This guy wants New Deal Socialism in this country,I love the way he takes a comment from years ago and twists it into what he wants to hear.He is not a writer he is a propagandists

Mar 05 11:32 AM

[bonjovie:]

i think its a good idea

Mar 05 11:54 AM

[PainfullyAware:]

Those that give up liberty for safety deserve neither.

The magnitude of what we are experiencing could not have manifested without collusion of many entities; primary at the core - governments.

Nationalization just shifts the responsibility and has a detrimental effect of Privatizing Gains And Socializing Losses. (almost cilche' now isn't it)


The Complexity Of Corruption Is Vast.

So far it seems as though governments would rather be enablers rather than regulators. (Don't Let The Party End !!! The Lights Will Come Back On If We Wait Long Enough)

The Party Is Over !!! We need to clear the building, Clean up, Repair what the vandals have done, and put in place some countermeasures to stop the vandals from ruining the next Party. (Anybody for a return of Glass-Steagall? How about Full Accountancy; No Shadow Banking?)

Mar 06 01:28 PM