by Frank James
Wall Street and financial institutions positively hate the idea of banks being nationalized and who can blame them?
Nationalization would wipe out shareholders, including top officials at the financial institutions themselves who presumably have much of their personal wealth tied up in their companies' shares.
It was largely because Wall Street so hates all the nationalization talk that financial stocks have taken a beating and the White House Press Secretary Robert Gibbs was compelled to come out yesterday to try placate investors.
But nothing Gibbs said takes nationalization off the table.
And with Republicans and dyed-in-the-wool free marketers like former Federal Chair Alan Greenspan saying temporary nationalization of major banks might be the prescription for the ailing financial industry, only someone completely unwise in the ways of Washington would take Gibbs' assurances to the bank, so to speak.
Here's Gibbs' exchange with reporters Friday:
Q Bank of America and Citigroup shares are being pummeled today on Wall Street because of fears they're going to be nationalized. Can you assure people that that step is not going to be taken and be avoided? And also, separately, on the automakers, you've had a couple of days to review their plans. Is there any early read you can give, and can you talk about the meeting at Treasury today?
MR. GIBBS: I believe the meeting is over at Treasury, and I will attempt to get something for you all on that, based on that ending -- and we've talked a little bit about that this week.
Let me reassure as best I can on your first question on banks, this administration continues to strongly believe that a privately-held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government. That's been our belief for quite some time and we continue to have that.
Later there was a similar exchange:
Q Back on the bank nationalization question. It sounded to me by your answer that you weren't quite ruling it out, you were just saying that the President strongly prefers not to do it. Is that correct?
MR. GIBBS: No, no, no. Let me be clear: The President believes that the bank -- a privately held banking system regulated by the government is what this country should have.
Q "Should have," but does that mean he will not nationalize banks?
MR. GIBBS: It's hard for me to be clearer than where I just was...
... Q And, Robert, you said you could never be -- you couldn't be clearer than that. You could say he will never nationalize a bank; that would be clearer. Can you say that?
MR. GIBBS: Well, I think I was very clear about the system that this country has and will continue to have.
Notice that Gibbs didn't say President Obama will never nationalize banks and how could he given that Obama himself as recently as last week refused to absolutely rule it out. Indeed, in a statement reminiscent of Lincoln saying he would do whatever it took to save the Union, Obama told journalists he talked to last week aboard Air Force One that he would essentially do whatever it takes to save the economy.
Obama said:
I think what you can say is I will not allow our financial system to collapse. And we are going to do whatever is required to get credit flowing again so that companies and consumers can do their business and we can get this economy back on track.
Cut through the White House spin and Gibbs' statement that Obama supports the privately held banking system isn't inconsistent with nationalization since no one is talking about the federal government running the largest banks forever. Instead, it would nurse them back to health as though they were oil covered seabirds, then release them into the capitalist wild again.
The idea is that a temporary nationalization would let banks' books to be cleaned up, with the bad assets, including non-performing loans and other bad assets, getting written down or split off from the good ones. The bad assets would eventually be sold at a deep discount to what banks had been carrying them at.
The bankers, of course, would prefer taxpayers to keep pumping federal money into their institutions. Even with the strings attached, they can live with that.
But for taxpayers, such infusions have often amounted to throwing good money after bad since experts suspect some of the financial institutions are basically insolvent, little more than zombie banks right now.
Banks also like the idea of the taxpayers buying their toxic assets. But problems in valuing those assets, and concerns that taxpayers would wind up overpaying have lessened policymakers' appetite for that approach too,
That's why an expert many more people are listening to these days, Nouriel Roubini, the New York University economist who predicted the current economic and financial mess years ago, thinks we're talking nationalization within months.
An excerpt of a Wall Street Journal interview:
So, will the highest level of government be receptive to the bank-nationalization idea? "I think it will," Mr. Roubini says, unhesitatingly. "People like (Sen. Lindsey) Graham and Greenspan have already given their explicit blessing. This gives Obama cover." And how long will it be before the administration goes in formally for nationalization? "I think that we're going to see the policy adopted in the next few months . . . in six months or so."
That long? I ask. "Six months from now," he replies, "even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.
Here's a video that explains some of the issues involved in nationalizing banks and why it's not a perfect solution but perhaps the only likely effective one we're left with.
Comments
Can't wait to see the spin from the rabid on this. Lindsey Graham has mentioned this as a good idea.......
Posted by: bill r. | February 21, 2009 12:57 PM
I'm sure the White House will run banks as efficiently and non-politically as they've run everything else ....
Posted by: Bruce | February 21, 2009 1:10 PM
Take over the banks. Wipe out the shareholders (the people who profited from the corrupt Republican deregulation practices). Take over the bad assets. Then sell shares in a few smaller brand new banks without bad assets. You rake in some money from the IPOs, and use that to offset losses on the bad assets.
This is fair and cleans up the system quickly.
Posted by: civil war guy | February 21, 2009 2:14 PM
bill r. - so did Repug hero Alan Greenspan.
The Repuglicans will still cry about it. That's their whole purpose of existence, in their minds they should always be in power, nevermind the fact that they can't govern worth a damn. If they don't start coming up with some new and better idea's they're going to go the way of the Whigs. Outside of their little partisan echo chamber they're considered a joke everywhere.
Posted by: Ned Flanders | February 21, 2009 2:22 PM
I'm sure the White House will run banks as efficiently and non-politically as they've run everything else ....
Posted by: Bruce | February 21, 2009 1:10 PM
No, we aren't talking about your fascist overlords Bush and Cheney here, RNC Brucie.
Posted by: freep the freepers | February 21, 2009 2:33 PM
The drop in stock prices is nothing more than bringing the value of these major banks stocks back to true valuation. The stock prices have been artifically inflated (yes even at only a couple dollars a share many of these mega banks are overvalued because THEY ARE INSOLVENT) in the hopes that the gov't would continue to pour money into them to prop them up. Now that the cat is out of the bag that nationalization is in the offing, investors are selling in their overbought positions.
Bank of America was made insolvent by the Fed. The Countrywide and Merrill Lynch deals have created a zombie bank. CitiBank became a zombie by mergers without government help.
Forget about waiting 6 months. The market knows B of A and Citi are zombies. The government is going to have to nationalize these banks much sooner and break them up into functional parts minus the deadwood.
Posted by: Zappa | February 21, 2009 2:47 PM
Yeah Bruce, let's just hand the reigns back over to the capitalist clowns that ran their industry into the ground. We can trust them to do the right thing.
Posted by: Bubba ✔ | February 21, 2009 3:06 PM
I don't see how Barack can NOT take over the banks.
On the Paulson giveaway, they just took the $$$ and paid themselves bonuses.
(It could have been worse: if they thought the had a "good year" even more of the $$$ would have gone into their pockets.)
Why would anyone give them any more money to do with as they please?
Either they go in to bankruptcy or operate as government entities, under direct government supervision and direction.
Then, perhaps, the credit standards might be a little higher?
No more ARMs and Liar Loans.
We're tired of all that tired Milton Friedman rhetoric.
No one believes it now. Not after all that's happened.
Posted by: ornery | February 21, 2009 3:45 PM
Then, perhaps, the credit standards might be a little higher?
No more ARMs and Liar Loans.
Those are long gone already. The reason nobody can get a loan now is because the banks have already drastically increased credit standards and all those liars can't get loans anymore.
Now you have to show you can pay the loan back and most Americans can't prove that.
Posted by: Pug | February 21, 2009 5:21 PM
How long they have been following traditional credit evaluation standards is subject to debate.
They still can't be trusted.
The big selloff is a frank acknowledgement that they can't be trusted and don't deserve any more capital from the private sector.
And they don't deserve any more taxpayer money either, unless they are taken over and become direct instrumentalities of they public.
Posted by: ornery | February 21, 2009 6:03 PM
Have the people who are advocating nationalization thought through the ramifications? Let's look at a few:
1) Many pensions and insurance companies hold bank preferred shares. If these are wiped out there will be an immediate need to pump capital into the insurers and all kinds of companies and municipalities will have to make additional large payments. What are the ramifications of failures in the insurance sector?
2) Would these banks be wound down or sold off? How would they be returned to the private market? By selling them to private equity investors? Why should that exclusive club get the benefit of a cleaned up, low-risk bank? And how are other banks - ones that stayed clean but were bitten by the recession - how will they compete with these clean-slate banks?
3) Alan Greenspan is a shill for Pimco and Paulson & Co. These firms are major holders of bank bonds. Go back and look at what Greenspan told the FT - he wants bondholders to be paid in full. That's right, he wants the US taxpayer to take a bath of more than $100B (the existing preferred plus insurance arrangements) and then to guarantee his firm's investment. Why don't you ask Alan if he supports a restructuring where the bonds take a 15% haircut. Think he'll like it then?
4) Why would bondholders and short sellers be satisfied with Citi and BofA being nationalized? JPM and Wells have lower tier one capital ratios than Citibank. There will be a domino effect as more banks are assaulted.
5) Are BofA and Citi really in such terrible shape? Each of those firms gave good consideration for in excess of $100B of insurance on a portion of their most toxic assets. They each have non-core assets they could sell and they each have revenue generating franchises. It is not clear to me that they are anywhere close to defaulting on an obligation.
6) Does the US have any liability in coercing or approving the BAC/MER deal? There is a very interesting Takings Clause argument here - that Treasury forced BAC to complete the deal to protect the damage to the FDIC insurance fun if the deal were canceled and Merrill failed. Nationalizing BAC - and thereby wiping out shareholders - would give a lot of impetus to this argument. A winner? Maybe. But it would certainly get to the discovery phase and do you think Treasury and the Fed really want their interactions with BAC and Merrill made public?
7) These banks are very large, complex institutions with huge numbers of assets. Wiping out the common shares would wipe out the wealth and deferred compensation of many, many employees. What incentive would they have to stay at the firm? Why wouldn't they leave, as quickly as possible, for other banks - foreign or less impaired banks - rather than enduring the uncertainty of a nationalized bank? How would we manage and wind down these complicated books? In reality, just as with Lehman, this would end up being a very long, expensive, and risky proposition.
8) Finally, who would believe the government interference would end with one round of nationalization? Investors would flee the banks or require much, much larger risk premiums. This will raise the cost of capital for the banks - and ultimately for American businesses and consumers.
In sum, nationalization is no panacea. Just like Paulson's ill-fated belief that the system would be safe if he let Lehman fail, the uncertain consequences of nationalizing large banks and wiping out entire classes of investors are just too massive and too difficult to contain.
The market has been worked into a froth by pundits pushing and agenda (like Roubini, Greenspan, and Soros) and by elected officials speaking off the cuff.
Treasury needs to very quickly reassure the markets that they will support our banks without wiping out even the common shareholders. This will encourage private capital to flow back into the banks and will allow them to start lending again.
Please stop contributing to the hysteria.
Posted by: Indigo | February 21, 2009 6:52 PM
There are many smaller, conservative banks, with solid loan assets to step in. They did not follow the deregulated WS greed and merger mania that got these monoliths in trouble. What is all this too big to fail crap? Toss the bad apples under the bus. Get off of these bailouts. And that goes for Detroit as well. We might also deport Dodd and Frank from their banking posts in Congress. Their hands are dirty too and it makes me ill to see them act like holy rescuers. However, it is a stacked deck against us taxpayers. We will take the hit. Damn lobbyists and business as usual, Flo.
Posted by: Bubba Porter | February 21, 2009 7:49 PM
Suddenly, they are blaming the poor for taking bad loans. What about Country wide and the rest of the banks? Do they not bear more responsibility for teaser rates like 5 year ballons with interests only payment? Why should we bail banks that made bad decisions. And, now they are blaming the poor people who can't afford it? If they haven't given them the loan first. . .this would have never happen.
Posted by: Lou | February 21, 2009 8:38 PM
Oh Bubba Porter; falling for the "blame it on Dodd and Frank" farce, even though they didn't have any power until 2007. Total crap. Do your homework.
Posted by: Flo | February 21, 2009 10:01 PM
There are many smaller, conservative banks, with solid loan assets to step in.
Posted by: Bubba Porter | February 21, 2009 7:49 PM
Really? There are small banks out there that advertise their political preference?
Try again, you clown...
Posted by: Bubba Porter | February 21, 2009 10:19 PM
Indigo, you've hit on the big dilemma Barack faces.
The bondholders and shareholders of the banks are not his "base".
His base is suffering with more pain to come.
How can he favor bondholders and shareholders of banks over his base?
Anyway, who said anything about returning rehabilitated banks to private ownership?
We're talking a permanent Bank of the United States.
No more "maestros" playing games with their friends at JP Morgan.
Yes, socialism is coming, courtesy of the Bush dynasty.
You see, W will have a legacy, after all!
Posted by: ornery | February 21, 2009 11:30 PM
Indigo,
1) How many preferred shareholders are there left holding BA and Citi? Any institutional investor holding large numbers of shares in those firms at this point should be sued.
2) My guess is Treasury would sell off the bad assets at pennies on the dollar to vultures and hedge funds and then IPO the remnants. Yes, it would have an advantage of sorts. But no more than any other clean bank - the existing management would be long gone.
3) Greenspan may be a corrupt putz. But that doesn't mean nationalization is wrong just because he supports it.
4) and 5) That's the trillion dollar question. Are Citi and BofA really insolvent? They each claim they're healthy. But nobody believes them. Hopefully the "stress test" can answer that. And if they are, in fact, insolvent, the Treasury will have to work out a deal with the bondholders (first dibs on the IPO?).
6) You might be right about liability. But that's immaterial at this point.
7) Where would these employees go in this job climate? Most of them would be thrilled to work for a government-run Citi or BofA than be filing for unemployment.
8) This is another good question: how do you time it? Hopefully Geithner will let the stress test run its course, nationalize the banks that need it, and declare the rest safe. Piecemeal nationalization would be disastrous.
Private capital will not flow back into the markets - bank stocks in particular - until investors are confident that the banks are healthy. Pumping them up with more capital is a waste of taxpayers' dollars.
It's time to take our medicine.
Posted by: Elrod | February 22, 2009 2:09 AM
Indigo, very interesting post. Well said and informative. Much more complex and I appreciate the education. Thank you.
Posted by: Bubba Porter | February 22, 2009 7:53 AM
B.P.10:19, disgraceful, hiding behind my name. Everyone sees it. Liberal bubbas faded with Carter.
Posted by: Bubba Porter | February 22, 2009 7:56 AM
I haven't gone anywhere. And I don't mind you hiding behind my first name because I doubt there is much confusion amongst us who have been here for three years now.
Posted by: Bubba ✔ | February 22, 2009 10:49 AM