User 366653

We Need to Break the Banks

Nice idea. Now, consider reality.

Assume the government takes control of Citigroup. Wipe out the common, preferred, and junior debt holders. Maybe even the senior debt. Great idea: destroy that last vestige of confidence that the average investor has in the financial markets.

What is accomplished?

First: Bloodshed on Wall Street that will make last September look like a sunday school picnic. Citi is six or seven times the size of Lehman. Do the math. Dow 3,000? 2,000? Who knows?

Second: the "toxic assets" on Citi's balance sheet don't go away. In fact, they become dramatically more toxic, along with the balance sheets of all the other banks, because the accompanying financial crisis will obliterate any residue of hope left in the markets. The cascading effect should pretty well finish JPM, BAC, WFC, and most, if not all, of the other banks.

Third, THE U.S. GOVERNMENT WILL BE RUNNING THE SECOND LARGEST BANK IN THE COUNTRY (and, quite possibly, the largest, third largest, fourth, and so on). At least temporarily, but probably for several months, until our system simply fails. The government will have three choices for disposing of the carcass of Citi: turn it over to JPM or BAC or WFC (if, by some miracle, one of them survives the above referenced bloodbath), split it into a couple of hundred divisions, and try to sell the pieces to one of the few regional banks still in business - or try to manage the company as a quasi-governmental agency, like, for example, Fannie or Freddie. Or the Postal Service. Have you stopped laughing yet?

The problem is very simple. "Bailing out" the banks is the worst possible solution, except for all of the other solutions.

This scenario is the reason that Roubini and Krugman and the other prominent proponents of "nationalization" or bankruptcy NEVER take the time to explain what happens next.

On Mar 23 08:58 AM Amouna wrote:

> We need to get rid of zombie institutions and let the free market
> forces purge the system of failures. We need to re-allocate capital
> efficiently and let the undeserving institutions fail. THis is the
> only way we can restore confidence in the markets and build a sounder
> foundation.
>
> Right now, the markets want a radical solution, and they want this
> solution. All stabilization plans devised by the government have
> proved worthless.

Graphic Representation of Citi Arbitrage Carnage

How does this guy come up with such unbelievable theories? Immediately after the Feb 27 announcement, this author theorized that the public preferred shareholders might get dramatically worse conversion terms than the government, even though the info released by Citi at the time made it clear that the public holders would get somewhere around 7 shares of common for each share of preferred. Now, he wants us to accept that the government would conspire to change the terms of the deal at the last minute. Conspiracy nut?

Accounting Rule Changes Creating False Rally in Financials

Some of the comments here are missing the only point that matters:

If a change to mark-to-market has a positive psychological impact on the market, it is a good idea. Period. We are way beyond the point where ideological differences matter. What we need now is to take steps to insure that our financial system survives this crisis, and that investors regain confidence. If we have to suspend some rules in order to do this - then let's do it. Let's face it - this isn't an exercise in theoretical finance - it's the REAL WORLD!

I for one would rather see our economy recover, and listen to the critics complain about how we "kicked the can down the road", than to watch a complete collapse of our system, and listen to the purists tell us that we should be proud that we stayed true to our principals, and, By God, we should be able to recover within ten or twenty years.

For all you opponents of kicking the can down the road, remember - what we're talking about with these "toxic assets" is not much different than maintaining a margin account with your broker.

Suppose you have a $100,000 account, and you margin it out to purchase $200,000 worth of stock. Friday, you get a margin call from your broker, (who happens to be your brother in law) who tells you that you have a $3,000 shortfall. He tells you the money is due now, but, because you're married to his sister, he'll stall the margin department til monday. He just "kicked the can down the road". If, on Monday, the market is flat or lower, you have to cover the call, probably by selling some of your favorite stocks at a five year low. If the market goes up enough to cover the call, you're saved. If the market continues to improve, you have a chance to recover some or all of your losses. Your brother in law just kicked the can down the road and saved your @#$@.

I submit that "kicking the can down the road", risking collapse of our economy at some future date, beats the hell out of destroying our economy today.

Congress Pushes M2M Reform: Suspension Unlikely, Revisions Guaranteed

Interesting comments from Mr. Reynolds. Did he explain how the toxic assets would magically disappear with nationalization of the banks?

Unless I've missed something, NONE of the proponents of "nationalization" have described how the process would work.

Here's the most likely scenario:

Let's assume we nationalize Citi, a $2trillion institution. First step would be to announce that the second largest bank in the country had failed. The news media might pick up on this- just a wild guess. It's possible that the headlines of every newspaper in the country would announce "Citi Fails". Boy, what a confidence builder that would be. I doubt if the DJIA would drop by more than two or three thousand points the next day. It shouldn't take more than five or ten years for investors to recover their confidence.

The FDIC would have to segregate all the toxic assets from Citi, and then try to find buyers for the toxic package, and buyers for the good stuff. (Curiously, we already have a company that owns all of the stuff) That process shouldn't take more than a couple of years. Well, maybe four or five years. Meanwhile, the very efficient folks that run the federal government will have a chance to show us what they can do with a bank. Loan approval by government committee should work well -it shouldn't take more than six months to get a car loan approved. Business customers of Cit probably wouldn't begin to sever their relationships until the second or third day of government operation.

How can anyone seriously consider nationalization?

'Nationalize Insolvent Banks': Buffett Didn't Get Roubini's Memo

Exactly the point I've been arguing with my friends and clients - All the proponents of nationalization or bankruptcy of the major banks are either academics (like Roubini and Krugman) or politicians, like Shelby and Dodd. Neither group has any clue about the real world - anyone who thinks the government can run a business efficiently needs to provide ONE EXAMPLE of a government agency running a business. They can't, because there isn't one.

Another problem - the proponents of nationalization/bankru... never explain WHY THEY BELEIVE that the toxic assets will perform better under government supervision. What happens? The bad mortgages just mysteriously correct themselves? What makes anyone believe that government management of CITI, for example, is any kind of solution? Simple common sense tells you the concept is irrational.


On Mar 12 10:43 AM raytayzmd wrote:

> ..."Roubini doesn’t know what he’s talking about when it comes to
> individual banks"?...such an understatement...Roubi... is an economist
> and, as such, his skills are limited primarily to looking things
> up in the library.

Waiting for the Government to Act on Banks

Today we learned that the SEC will consider holding a public hearing next month to discuss reinstating the uptick rule. With any luck, the rule might be reinstated within six months.

We also learned that FASB and SEC regulators will discuss the idea of refining the rules regarding mark to market. They first discussed this idea six months ago. It's remotely possible that this issue could be resolved before Christmas.

What's my point? Government agencies spend months or even years studying a situation before making a decision. Ask yourself who in their right mind would maintain a business relationship with a major bank that was being managed by a government agency? IBM goes to Citigroup looking for a five billion dollar line of credit. The GS-14 manager tells IBM that public hearings will be held in May, and the loan committee will meet on the third Wednesday in June. Pretty good chance that we can help you by early August.

IBM goes to a bank run by business people, and gets the funding in ten days or less. So does everyone else. Citi/Govee goes further and further into the hole.

This is what Nationalization will do for the banking system. Great idea?!

I find it interesting that, so far, EVERY proponent of nationalization that I have found is either an academic or a politician. I mean no offense to academics or politicians - God knows we need both groups - but these groups operate in a theoretical world, where economic models and financial calculations are neat and tidy on crips paper. Managing a bank, or virtually any business, requires a different skill set, and is best done by business people with a specific background.

Financial Times Debunks Citi's Memo

Lots of speculation in this article.

The author wonders how much of the revenues are generated by Smith Barney.

I can give you a pretty good approximation: annual revenue for Smith Barney last year was about $7billion, which represented about 5.5% of total Citigroup revenues. Assume that the company is lying, by double-counting Smith Barney (seems crazy to me that they would be so stupid), and they may have over-reported by around three percent. Doesn't seem like a big deal, does it?

By the way, this is the same author who told us two weeks ago that the Citi preferred shareholders were going to really get screwed, possibly only getting two or three shares of common per preferred share. Correct number is 7.3. Could be that he writes first, and researches later.

Citi's Balance Sheet Is Just Too Big to Fix

I really enjoy all this talk about shutting down Citi and/or B of A. All so neat and tidy - just nationalize the bank, let the government run it for a while, and everything will work out. I just have a few questions, which never seem to get answered by "nationalization" proponents:

Do all the toxic loans just magically disappear? How does nationalization make the balance sheet stronger?

Where is the evidence that a government-managed institution would be any better than a privately run institution? Does the government have some mysterious expertise at running a bank?

Too Big Has Failed: KC Fed Prez Says We Need Temporary Nationalization

Here's a point that seems to elude all the "let them go broke" or "nationalize them" crowd:

THE BAD LOANS DON'T GO AWAY! I have still not seen any proponent of nationalization or bankruptcy describe what happens next. Please - instead of spouting platitudes about how we need to punish all these bad guys, how about trying to explain how such a foolish plan would work.

Right now, we have a bunch of banks operating at maybe 70 or 80% of normal because a significant minority of their assets are problematic.

If we "nationalize" (so far, no one has even defined what that really means), or let several of the big banks fail, we'll have a bunch of crippled banks being run by government bureaucrats. Additionally, the FDIC will have to borrow hundreds of billions from the treasury to cover their losses, and we will have the opportunity to watch as the tresury and the fed and FDIC scramble around trying to figure out how to run these institutions.

I guess at that point we will evolve from "zombie banks" to "Catatonic Banks".

Bank Liabilities: Why the Discussion Isn't Explicit

You may be right - our system may be unsustainable. We have two choices - try to sustain it, or give up.

I'd rather try to keep our financial system intact. I'm still waiting for someone to walk us through the scenario where you nationalize all the major banks and insurance companies, or simply let them fail, and everything just magically works out. Can't someone just explain how that process would play out?


On Mar 08 08:56 AM Leftfield wrote:

> I appreciate the article and comments; it's been very informative.
> Trouble is, our system seems unsustainable to me. Misallocation has
> been propped up by unprecedented leverage and we're being asked in
> many of these comments to be realistic and bail out the worst offenders.
>
>
> I'm self employed and I've had a difficult life keeping up with ridiculous
> taxes, healthcare and countless other costs inflated by a system
> which rewards the most overpaid in too many cases. Which seem to
> be those in the systems that are most inefficient and overpriced
> because they can write the rules or profit from increasingly artificial
> rules.
>
>
> There are many regional and smaller banks getting hurt in many ways
> by the present situation who are well managed and are being ignored.
>
>
> I don't see why saving the big players is absolutely necessary. Toyota
> was once small but did most everything right, GM the opposite. My
> kids and I are supposed to save GM now.
>
> Large banks, hand in glove with DC politicians have been the biggest
> instigators of unsustainable costs everywhere. Promises have been
> made everywhere that can't be kept without inflating the dollar into
> worthlessness. Now it takes countless unaccountable $trillions to
> keep it going, the perpetrators say. No guarantees.
>
> I'm not convinced that among the ultimately hard choices we're stuck
> with, propping up the worst offenders makes much sense at all.

Bank Liabilities: Why the Discussion Isn't Explicit

To your first comment - who cares what my name is? In what way is it relevant?

Second - yes, I remember Nat City and Wamu, but they were fleas compared to C and BAC. You haven't addressed my question: how will the FDIC cover the overwhelming losses associated with the mega banks. And seriously - how many years would it take to find buyers for what is left?

Third - great idea - have the state insurance commissioners, who usually have a staff of a dozen or so examiners, manage all the insurance companies. That ought to work really well!

Fourth - Photosynthesis is, to the best of my knowledge, not related to economic conditions (I learned that in Botany 101). What did end, however, was the last shred of confidence in our financial system. You may choose to believe that people will be happy observing the growth of a weed in the gutter after they lose their job, their house, and their retirement plan - I'd rather keep my job and let you study the weed.


On Mar 07 10:24 PM Jimmy Lathrop wrote:

> user 366533 or whatever number you are hiding behind:
>
> Remember National City? They got bought by PNC.
>
> Wamu? Absorbed by Chase
>
> The insurers? They'll be taken over by the state insurance commissioners
>
>
> Did photosynthesis end when Lehman Brothers declared bankruptcy?
>
> I remember eating a salad with dinner, maybe it was hoarded.
>
> The bottom line is that the politicians can't be in office forever
> and they will want jobs in the industry. You want to help them have
> a soft landing, knock yourself out.

How About Adjustable Principal Mortgages Instead?

I still like my idea better. Here it is again.

Like the author, I have sent this idea to everyone I can think of. Unlike the author, I have gotten no response.

Here is my plan to help solve the bank crisis. It would apply to the nineteen largest banks, and would work as follows:
The government would insure each bank's entire existing portfolio at the current value, subject to all applicable regulations and FASB valuation methodologies in force prior to adoption of FASB 157. New loans and investments would be subject to the same regulations, but wouldn't be insured by the government.
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 preferred stock representing an additional three percent of base level equity value to the government, for up to ten years.
The bank would have the right to cancel the insurance at any time after three years.
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 stakes would be non voting. Confidence in the entire financial sector would most likely improve dramatically and immediately.
The value of the bank's common stock would probably appreciate immediately, resulting in a profit to the government/taxpayer. While this plan would dilute the existing common, it is very clear that the prices of most bank stocks reflect the risk of armageddon. Fifty percent dilution is not a problem if your stock has gone from 50 to 1 or 2 or 3. If you assume that profits could return to half of "normal" over the next five years, the newly diluted stock has plenty of upside from here.
The value of the bank's preferred stock, trust preferreds, and debt would immediately increase dramatically. Credit ratings would be restored to legitimate investment grade. 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.
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). Since implementation of this plan would certainly hasten the recovery of our national economy, 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.

AIG Bailout Beneficiaries

As to your point: I agree that some of these firms have no shame. Indirect bailout is still bailout.


On Mar 07 02:21 PM WMBANZAI7 wrote:

> I am sick and tired of hearing about Barclay's and Douchebank snapping
> their suspenders over not needing to be bailed out. Is this not a
> bailout?
> Meanwhile they run around hiring people away from the other banks
> that have been bailed directly.
>
> What a sorry state of affairs.

AIG Bailout Beneficiaries

I find it intesting, and somewhat amusing, that so many people are now shocked that AIG used bailout money to make payments to their counterparties.

I vividly recall that the whole purpose of helping AIG was so that the company could continue as a going concern. The assumption of any company that is not in bankruptcy is that they will honor ALL their contracts. Do the critics now want to honor only those obligations that they deem appropriate? Maybe we should have had a special bailout that would only help those deemed deserving by our congressmen and women?

What the hell - let's just let AIG fail. When they are unable to meet their commitments to thousands of companies and tens of millions of individuals, we'll just send a little note to those unfortunate folks telling them that they should never have been so foolish as to trust the largest insurance company in the country with their money.

In fact, maybe we should just listen to all the advocates of "nationalization" and "let them all fail", and just shut down the entire global financial system. That'll show all those greedy policy holders, retirement plans, and investors. Only then can we protect the taxpayer.

Oh - I forgot - the taxpayer IS the policy holder, the retirement plan recipient, and the investor.

Bank Liabilities: Why the Discussion Isn't Explicit

On your two points:

First, I think "the market" is missing something: Trust preferreds have seniority over straight preferreds. Therefore, it would be hard to imagine that C or anyone else would orphan the trust preferreds by eliminating the dividend without offering the option of conversion to common as a way out. I've noticed an interesting phenomenon - BAC preferreds that are still paying dividends are priced at levels comparable to C preferreds. Even the most pessimistic doom-and-gloomers don't put BAC in the same bucket as C.

To your second point - you are absolutely correct in my opinion. Allowing any of the top ten or so banks to fail would be a fatal error, which would likely lead to systemic failure. It might not be possible to reopen the NYSE for months or years.

I am still waiting for a proponent of "let the chips fall" to explain how the FDIC will handle the hundreds of billions in losses of the first failure, and the trillions that would result from the second, third,....eighteenth, and so on. I'm also curious as to where the money will come from to pay unemployment benefits to the tens of millions of unemployed, and to provide food to the fifty million or so people that will be living in the streets.

Those who are worried about the costs of rescuing these institutions might want to weigh those costs against the catastrophic expense of the alternative.

Let's hope Geithner finally figures out that he's the Treasury Secretary.


On Mar 07 07:55 PM r cohn wrote:

> It is interesting that trust preferreds in c have fared worse than
> the non-cumulative preferreds.Many trust preferreds in c have almost
> no chance to be converted into stock..Last week the preferreds got
> creamed.Evidently investors fear that almost all banks will do conversions
> similiar to c.
> The risk of a domino effect in letting the market sort things out
> is very real.Holders of credit default swaps have a real interest
> in forcing the banks ,insurance cos,etc into receivership.My guess
> would be if a number of major banks went under there would be such
> panic thst the markets wold have to be closed for an indeterminate
> period of time