Nationalizing Banks, AIG, Carmakers: The News And What It Means

UPDATE: A new USA Today/Gallup poll finds that a majority of Americans (54%) favor a temporary government "takeover" of major U.S. banks, but a much lower minority (37%) favor a temporary "nationalization" of the banks.

On Tuesday, President Barack Obama is scheduled to give a sweeping speech of his first year in the presidency, including details of how he will bolster the flailing economy. As Obama develops this plan, there are a number of important factors at work. Among the most critical are the fate of Citibank and the other major banks, the insurer AIG, and the Big Three Detroit automakers. Here is a rundown of some of the most pressing news, and its impact on the economy.

The news:

-The government's $150 billion infusion into AIG appears to be insufficient. According to CNBC, the insurer is preparing to report losses of $60 billion, one of the biggest quarterly losses in history. Click here for background on AIG and news of its financial meltdown.

-The government's $45 billion infusion into Citigroup also appears to be too small. The Obama administration confirmed it is talking to Citi about providing additional funds through the purchase of company stock, which could result in the government owning as much as 40% of the bank.

-General Motors and Chrysler are looking for an additional $22 billion on top of the $17 billion in government funds they have already received.

What it means for banks:

-The billions already spent to prop up banks like Citigroup have failed to staunch the flow of losses. Fearing a chain reaction if Citi fails, the government has announced it will continue to expand its bailout role.

-But the Obama economic team appears to be changing course, leaning closer toward nationalizing the banks. The Treasury Department and the Federal Reserve have announced the government is considering demanding direct ownership stakes in banks that might not otherwise survive the downturn.

-To determine which banks might be too weak to survive, the government is conducting so-called "stress tests" this week.

-If a bank fails the stress test--meaning it needs additional capital to shore up its balance sheets--it must raise funds. And with few private investors willing to invest in the banking sector now, it is likely it will have to tap government funds. Rather than just providing cash, however, the government now says it would make this investment by buying "preferred shares."

-Federal Deposit Insurance Corp. Chairman Sheila Bair spoke about the stress test Tuesday on CBS' "The Early Show.

-Preferred shares do not come with any voting rights, but do pay a dividend to the shareholder, in this case the government. If however, these banks can no longer afford the dividend payments--in the case of Citigroup it amounts to more than $2.25 billion a year--the preferred shares could be convertible into common shares. Common shares don't necessarily pay out a dividend, but would allow the government to vote on appointing key executives and participate in other strategic company decisions.

-Among the problems with the government owning common shares is that it dilutes existing shareholders. As the value of the current shareholders' stock declines, it will make it that much harder for the banks to access private money down the line.

What it means for AIG:

-According to the New York Times:

A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners.

-If AIG cannot afford this additional collateral, it faces credit downgrades. This would trigger certain covenants with trading partners that could result in the need to post even more collateral, triggering further downgrades, and so on. This could bring the company to the brink--the same position it was in last September before the government stepped in.

The difficulty of shoring up A.I.G. must weigh on the administration at this moment. The administration's banking statement amounted to a plan of action demonstrating a way to demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.

-AIG also faces a similar situation as Citi. That's because, according to the New York Times, AIG, in addition to looking for additional funds, is in discussions to convert $40 billion of the government's preferred shares into common equity. That would dilute current shareholders who are already facing massive losses.

What it means for the auto industry:

-The Obama administration is still considering how big a role to play with the Big Three Detroit automakers. On Monday, the Treasury named Steven Rattner, co-founder of a private equity firm, the Quadrangle Group, an adviser to the Treasury on the auto industry.

For more on nationalization look here.

Comments

[leonel]

12:12 AM on 02/25/2009

I'm trying to understand why the word "nationalization" is being used. Taking insolvent banks over to save their depositors has been ongoing for years, since the law was passed during the Great Recession, so why throw around this unneeded emotionally-loaded term? A few possibilities: 1. The media is truly now the "one-dimensional man" that was foreseen by Marcuse years ago, people with no memory of history, no memory of the meaning of concepts that were fought over years before.
2. Somebody, or bodies, planted this emotional label to distract the public and the media from focusing on the fact that the U.S. Treasury Department is groping for solutions to this humongous problem. A "red herring." Solid economists freely use the term now; they would not be easily mislead into using loose language, would they? The economists must mean, "don't be piecemeal, they're goners, do it now." Of course, they don't have to do all the work, this could sink the Treasury Department.
3. Maybe the "N" word was planted by the zombie bank themselves, or their vampire-banker controllers, to confuse me and everybody else!

[foius]

02:10 PM on 02/26/2009

First of all, "nationalization" has become the whipping boy code word for "old-school" capitalists who have outlived their usefullness. In todays' global economy, there are many industries that receive virtually unlimited assistance from their country. Is is so bad for the USA that we cannot attempt to shore up our failing industries(financial, auto, manufacturing) by nationalizing some of the more important (bigger) companies in those industries? If we expect to compete globally, our major companies must have the necessary government involvement to realize significant trends in these trying times. In the words of the civil-rights activist, Booker T. Washington, "Cast down your bucket where you are."

[Carolab]

11:12 PM on 02/24/2009

THE LANGUAGE OF LOO-TING

Any idea of "socialism from above," in the sense of "socializing the risk," is old-fashioned oligarchy " kleptocratic statism from above.

Real nationalization occurs when governments act in the public interest to take over private property.

The 19th-century program to nationalize the land (it was the first plank of the Communist Manifesto) did not mean anything remotely like the government taking over estates, paying off their mortgages at public expense and then giving it back to the former landlords free and clear of encumbrances and taxes. It meant taking the land and its rental income into the public domain, and leasing it out at a user fee ranging from actual operating cost to a subsidized rate or even freely as in the case of streets and roads.

Nationalizing the banks along these lines would mean that the government would supply the nation"s credit needs. The TREASURY would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today"s commercial bank lending policies.

http://www.counterpunch.org/hudson02232009.html

[leonel]

10:41 PM on 02/24/2009

Democrats need to beware of using the word "nationalization," traditionally that means government permanently controlling some sector of the economy. Instead the focus needs to be on the exact terms of how the money is handed out and accounted for. There has not been a public accounting of the money that Paulson spent. Don't forget that Congress is completely spending-crazy. This is in their DNA.

[Agent420]

08:28 PM on 02/24/2009

This is what happens when you put too many eggs in one basket. The banks were allowed to grow and grow, until now they are too big to fail. Government should work to keep banks small.

[armadillious2002]

08:00 PM on 02/24/2009

Subsidizing auto companies isn't working. Subsidizing buying will. Auto investment tax credits will do much more than pouring money into the auto companies. That is just substituting for absent buyers - what they need are BUYERS!

[Indedave]

09:11 PM on 02/24/2009

Completely agree, especially when so many would-be buyers fear purchasing a vehicle from a manufacturer who may not be there for parts and repairs in the future.

[DLBSR]

11:17 PM on 02/24/2009

Subsidizing auto companies isn't working, at least in it's present form. The problem as I see it is the current bailout initiative, currently over $20B and counting, did not structurally include the approval and participation of Main Street. We can nationalize these companies and restructure them to build the quality and high tech cars of the future while guaranteeing the industry will survive an thrive in the future. We can do all of this AND provide tax credits to purchasers of new vehicles AND return future earnings to Main Street to help pay for the many programs we are currently borrowing from China to pay for. Sound about right to you? See my additional comments on this thread.

[DLBSR]

07:41 PM on 02/24/2009

We must also nationalize the auto industry now. To take a test drive of an industry rescue model please go to:http://taxpayercommonsense.blogspot.com and click on Common Sense Rescue Plan For The Auto Industry. If you agree with the short overview of the model please email your senators and representatives and tell them to use this model to drive this industry to recovery. If we are not pro-active and fail to provide viable solutions to solving this crisis, congree will continue to throw billions more at the problem and never improve it.

[HamletsMill]

07:12 PM on 02/24/2009

We have been here before. It is deja vu all over again. This time we have to get it right.

STUDY CONGRESSMAN C. AUGUST LINDBERGH 1912
http://books.google.com/books?id=B9IZAAAAYAAJ

The writing in on the wall. Obama has 90 days to take the steps that are necessary:

(1) Ditch Geithner.

(2) Ditch Summers.

(3) Give Nouriel Roubini, Joseph Stiglitz, and James Galbraith total access to the Presidents's Blackberry.

(4) Nationalize all the NY zombie banks "too big to fail". The stockholders lose everything and the top management is fired in a nice Austrian School one-stop-shopping bullet to the head.

(5) Declare all Naked Credit Default Swaps involved with these now nationalized banks both as "protection sellers" and "protection buyers" completely illegal and all now null and void. All bets are now off. Everyone loses everything in retribution for recklesness.

(6) Nationalize the Federal Reserve. The 300 year experiment of the Bank of England fractional reserve banking system for private gain is over. Only the U.S. Government can now create money out of thin air and pay interest to no one. The new system of credit is to loan money to the real economy of Main Street and not the paper money empires of speculators and financial gambling casino operators.

STUDY ELLEN BROWN
http://www.youtube.com/watch?v=QU0XiklHPMc

[1sparrow]

07:04 PM on 02/24/2009

the first half of my life was spent at 6% sales tax. i leaned the six percent table by heart. after college i took a commission job at 6%. plus spiffs. they raised the sales tax to 7 % i think it was pre- reagan or early reagan. the point is the tax increase was TEMPORARY. a few years after that, they started the calif. lottery. "OUR SCHOOLS WIN", was the slogan. long story short the temporary tax increase to 7% never went away. what did go away was the 6% commission job . it went to five percent with reduced spiffs. all competing jobs did as well. the sales tax will approach 10% soon. the schools are in trouble still. tell your kids this maybe the end of free markets.

[ThePeacemakers]

07:20 PM on 02/24/2009

You never had "free markets".
Nobody loves government intervention like the multi-nationals. They just don't want YOU to use it.
Ask all the lobbyists they hire.

[Justinpassing]

06:11 PM on 02/24/2009

The Notational Event occurred on the day the leadership realized there was a crisis......... that was the moment marked as being officially "too late". It is seminal to a system that prides itself (for some god-forsaken reason) as being 'reactive' instead of 'pro-active', but the first requirement of 'pro-active' is competence so that disqualifies oligarchy and bureaucracy.

[DLBSR]

06:39 PM on 02/24/2009

When Washington learns of a crisis, the crisis is history.

[midbikecrisis]

05:37 PM on 02/24/2009

Congress has the legal authority to shut down the Federal Reserve. Government has the authority to
to issue money without paying interest to the bankers. This will take away the power to control our government from bankers!

In the words of Thomas Jefferson...."If the American people allow the banks to control the issuance of their currency, the banks and corporations will grow up around them and will deprive the people of all property, until their children wake up homeless on the continent their fathers conquere

[naragsek]

05:32 PM on 02/24/2009

Is AIG an example that trying to bailout these failing companies is not working? AIG has received a $150 Billion rescue package from the government and still is reportedly asking for more help.

When these failing companies are still going under despite multi-billion dollar rescue packages is it time to reexamine the current economic initiatives being promulgated today by the government?

http://www.weeklypoint.com/2009/02/24/aig-fears-60-billion-loss-begs-for-more-taxpayer-money/

[Bedingo]

05:08 PM on 02/24/2009

I hope that Mr. Obama and Mr. Geithner and their coterie of advisers will put their heads together and realize that the only solution is to buy 51% of the banks. This will allow the Government who is representing the taxpayers to have a say about the management decisions.

Especially annoying are those jerks who have run the banks into the ground and insist on lecturing the taxpayers, as the CEO of the Morgan Chase did recently about mortgage holders who are under water. Listening to these oligarchs is enough to make anyone sick. They make Babbit look like a decent American.

[JonathanStuartLeibowitz]

05:11 PM on 02/24/2009

There's only one 'bank' that needs to be taken over by the government. And that's the Federal Reserve system.

[stuckintx]

04:45 PM on 02/24/2009

I want to hear four words out of our President's mouth...STRINGENT REGULATION AND OVERSIGHT.

We American's do not trust the private sector, to which we are bailing out, to run itself ethically. De-regulation is the common denominator in all of these industries who now have their hand out. Try building a Lego tower with the top being 400 - 500 times (top salary) bigger than the bottom (lowest wage worker) and see what happens. Regulation is necessary to construct better foundation prevent collapse. Otherwise, just go out of business.

The gov't would be no different than a corporate raider who bails out a business and then walks in with every last bean counter they have. They cut the fat into a lean operation and then back in to health. They watch every penny back into profitability. I say nationalize!

OVERSIGHT, Mr. President. Tell these greedy idiots to sit down and shut up, the grown ups are home.

[JonathanStuartLeibowitz]

05:09 PM on 02/24/2009

Oversight won't solve the problem. It may help a little, if it's done really well, but the real problem lies somewhere else. These bubbles are systemic, mega-inflation is systemic. They are allowed to happen, but not because of lax oversight of any market. The real deal is the Federal Reserve system and the practice of fractional-reserve banking which creates money out of thin air. It's not a malfunction of the system. The system IS the malfunction.

[slarabee]

04:05 PM on 02/24/2009

I am not sure that nationalization of these corporations is a good or a bad idea but one thing has become increasingly clear; as bad as the government is at management, they could not do much worse than the schmucks that have been running them into the ground for the private sector.

[noesis]

03:50 PM on 02/24/2009

" I think the 'human game' was up a looong time ago, when the high priests and traders took over. And now we're just playing out the string." - George Carlin