Why the U.S. Prefers Quasi-Nationalization of Big Banks

Steve Waldman writes an excellent blog called Interfluidity on financial matters and has a very good post concerning the pressure that was put on Ken Lewis (BAC) by Henry Paulson and Ben Bernanke to complete the acquisition of Merrill Lynch.

The allegations which have been documented, and are available all over the web, are that Lewis was threatened by Paulson and Bernanke that if he failed to complete on the acquisition of Merrill at the end of last year then he (Lewis) and his board (i.e. the Board of B of A) would have been dismissed.

This is a very troubling allegation and as Waldman points out what makes it most egregious is the complete lack of accountability that was enjoyed by Paulson especially during the last quarter of 2008.

An assertive Treasury secretary has tremendous leverage over zombie bank managers. Instead, what we have is control without accountability. An informal, unauditable, hydra-headed set of private managers and public officials controls how quasinationalized banks behave. Neither taxpayers nor shareholders have reason to believe that decisions are being taken in their interest. The informality and disunity of control impedes the kind of hands-on, detail-oriented supervision and risk management that ought to be the core preoccupation of bank managers.

Waldman is right to insist that the issue highlights the absurdity of the "twilight" zone which many major banks in the US currently occupy. They have neither been nationalized or taken through receivership by the FDIC, nor have their current management been fully held to account for their stupendous mismanagement.

Why has the US government tolerated this Twilight Zone existence for Citigroup (C), B of A and others?

There are several reasons why "quasi-nationalization" has been chosen as the preferred route and the fact that Administration officials can intimidate current management, as evidenced by the revelations now appearing with regard to Bank of America, without having to take on full control and responsibility is certainly one of them.

Another is that it avoids having to deal with the debt-holders and the third is that it prevents triggering lots of CDS contracts.

Seen in this light it is not surprising that the government is doing all it can to avoid putting those troubled banks into receivership. Only in the fullness of time will the error of this approach be confirmed.

Comments

[ironpants:]

In reality, the gov't wants more discipline and control over banks.

Only shorts say the gov't would like to 'nationalize' the banks.

Summers, Geithner and others have stated repeatedly that they don't want the gov't to try to run (i.e. 'nationalize') the banks.

What's your positions in the aforementioned securities?

Apr 24 07:00 AM

[minieconomics:]

As I see it, there are a number of problems with full nationaliation in terms of the accounting, the responsibility for future losses and actions, the competitive pressure on the 'friendly' banks and, possibly the biggest problem, the future lack of independence in the New World Order scenario.
In respect of accounting, the Treasury is under huge pressure on the fical deficit front with a deficit, without the rescue packages, of between US$2 and US$3 trillion. Yes this is far higher than the 'street' estimates, but look at the recent trend in the UK and the USA and extrapolate using the 1991-3 experience and the understanding that problably the majority of the excess refinancing of mortgages went into the fiscal coffers.
Nationalisation of these banks would also cause a huge increase in the outstanding national debt at a time when the authorities ae under great pressure to safeguard the dollar as the reserve currency and keep the overseas investors. Its preferred choice is to offer unlimited guarantees that, erroneously, do not appear in the National Debt
There is an obvious knowledge of the 'powers at be' that the bank losses do not stop with the toxic bonds or sub-prime and that the real economic hits are just starting to appear and therefore the Government does not want to be forced into supporting a large part of the economy.
There are a number of banks that are 'too close' to the Federal Reserve and hence the Treasury and Government and they would not wish to be nationalised or have increased competition from National banks.
The recent policy of the Government of the United States is to contract out vital aeras of security etc to private companies like Blackwater. If the stories of the NWO are to be believed then it is obvious that the USA will head towards anarchy and the new controllers will not want ,or be able, to work with the National Government and therefre these 'close' banks are better positioned in the private market. There is also a possible future liability in respect of the mis selling of toxic bonds and if the banks were nationalised the US assets held overseas could be embargoed.
Just a light question, how is it that in this day and age, Kenneth Lewis is both the President and CEO?

Apr 24 10:54 AM

[normthefedup:]

Do you realize the incredible damage that full nationalization of major banks would have on the thousands of retirement funds in this country? Or the complete panic that would result in the stock market not to mention the run on banks that unknowing citizenry would almost certainly do? Articles like this one simply prolong the agony.

Apr 24 11:15 AM

[Leftfield:]

Putting the taxpayer on the hook with no clarity or real accountability by our failed leaders, DC and Wall St. is the main reason. Pulling a heist on taxpayers covered by smoke and mirrors is the easy way out for them. If the economy doesn't miraculously sprout industries and jobs and recover in a timely way, coverups will at least be well advanced. Taxpayers $ multi-trillion financing of a plethora of bad schemes by the perps who failed in the first place takes advantage of the only party with a credit card left who is conveniently the least aware. Whatever happens, they will say, "It would have been worse without these programs." I wonder why Caribbean US bondholdings are up 83% this year?

Apr 24 11:42 AM

[Airelon Tra...:]

I'm not a short. In fact, I'm a * * very * * public shareholder of Bank of America.

You're wrong. The author is correct. End of story. The market has the most discipline and control. Not people coming in, telling the banks how they should be run (I was a shareholder BEFORE the acquisition that was done in TWO DAYS) - and then having NO accountability for the consequences.




On Apr 24 07:00 AM ironpants wrote:

> In reality, the gov't wants more discipline and control over banks.
>
>
> Only shorts say the gov't would like to 'nationalize' the banks.
>
>
> Summers, Geithner and others have stated repeatedly that they don't
> want the gov't to try to run (i.e. 'nationalize') the banks.
>
> What's your positions in the aforementioned securities?

Apr 24 11:45 AM

[Shakaama:]

I guarantee this is all The Federal Reserve Bank's doing. At the heart of the matter the bankers want to control the entire economies of many nations, including the U.S. economy. If you disagree, please see Argentina. And, if you still think that's some isolated case please see other South American countries and other 3rd world robust once rich nations. They are now trying to visit the same strategies on U.S. soil. The only thing is, the previous stuff was just practice. The U.S. economy is so huge that local economies can nearly be autonomous to the goings on in Washington.

In the end they want even small businesses to have to answer to Bernanke. If you think this is far fetched, in Argentina by changing bank rates, credit rates, interest rates, they wiped out entire city economies overnight. Shops that had been in business for decades closed down, industries closed down, there was no intermediary market credit to make payroll or buy supplies.

Apr 24 12:00 PM

[lsully999:]

You are all missing the point - completely; your perspective is not broad enough.

What the B of A/Lewis story tells you (in fact, confirms) is: the primary purpose of gov't is to preserve the state; nothing else, period. Remember: Lehman just failed and the WORLD (not just the U.S.) was on the brink of a financial meltdown of nuclear proportions. Under those conditions, do you really think the national gov't gives a rip about Lewis or B of A shareholders (like the lunatic Mr. Finger) ? In normal times, perhaps; in times in crisis - absolutely not. Nor should they.

As much as you may not like it, central govt's are required to preserve the general welfare of the public first and foremost; that is why terrorists are tortured and bank CEO's are whipped like Missouri mules. Most people - including many who post here - look at things and say: why ? Thank god they don't run things. A better perspective: what would the alternative yield - and how would the population react. [Would you really (and I mean: really) want Merrill to fail if it meant a truly lost decade ? Do you really want Citi, or Bof A or another major bank to fail ? And if you say yes, you have not completely thought thru the maco-economic ramifications, you care only about your own self interest or you are a nihilist - which, clearly, the fellows at Tech Talk are.]

Viewed through that prism, everything is clear - and as it should be. And you should really quit complaining.

Apr 24 01:09 PM

[Gedankonomist:]

By "quasi-nationalization" I'm assuming you mean it in the same way as when Germany "quasi-nationalized" IG Farben and Volkswagen back in the 1930's. Fascism. This is what this country has come to.

Apr 24 02:16 PM

[palosverdes...:]

The new FASB rule is "Mark to Fantasy". So much for transparency of the banks. I'm curious to find out when these toxic assets do get off the books.

Apr 24 07:37 PM

[morph366:]

Difficult to know how to respond to some of these comments. The article was intended to highlight the ambiguity - which has lead to such unfortunate matters as the Paulson, Bernanke, Lewis fiasco - of the current policy towards the banks. Why that hits such a raw nerve and should trigger such apoplexy from some of the commenters slightly baffles me.

Apr 25 05:05 AM

[morph366:]

Specifically in regard to some points
Re: IronPants question - I have no short positions at present in any major US bank.
Re: Airelon Trading - that was exactly the point being made
Re: minieconomics - I think you are tracing the more sinster aspects much further than I would want to go
Re gendakonomist - no by quasi-nationalization I meant a situation like that for Citigroup where the governments has a signifcant stake, can influence policy, but where it has avoided the full responsibility of cleaning up the balance sheet, replacing the current management and board and avoiding Citi from becoming a zombie bank for years to come -- this has absolutely nothing to do with fascism

Apr 25 05:24 AM