The Problems of Nationalization Still Remain
Yesterday the Financial Times ran an article which said Alan Greenspan was now in favor of limited nationalization. This was taken as a sign that the tide was turning in favor of nationalization -- a tide that may remain unstoppable. However, the inherent problems of nationalization still remain and important questions are still unanswered.
I originally wrote about my problems with nationalization in this article. There were three areas of questions. Who do you nationalize (there are over 8000 US institutions), how do you make the transition from private to public ownership with minimal disruption and how do you prevent the new owners from being same corrupt idiots the old owners were?
Let's assume we find an adequate solution to point number one -- who we nationalize. Let's now address the two other points.
How do me make the transition from private to public ownership with the smallest amount of disruptions -- especially at a time when the financial markets are hanging on by a thread? I originally wrote the following on this topic:
Once the last three questions are answered the next step is the actual nationalization of banks -- that is, making the transition from private to public ownership. Let's start by looking at the money center bank page from Yahoo finance. According to this page the total market capitalization of money center banks is $327 billion. Let's assume nationalization will involved 1/3 of these institutions. This total is pretty easy to get to -- simply nationalize Citigroup, Bank of America and Wells Fargo.
Where does the government's ownership interest come into play in the capital structure? Most people would argue that a nationalized interest would be superior to public shareholders. But that increases the the possibility of common shareholders getting hit hard -- if not wiped out. That means that $107 billion dollars of market wealth (the total market cap in our example) is threatened. Even assuming the best -- that common shareholders continue to hold onto their shares -- nationalization of these banks would stand a good chance of sending these shares into steep discount territory.According to Yahoo finance, 44% of Bank of America's,64% of Citigroup's shares and 58% of Wells Fargo shares are held by institutions. So nationalization cuts into the net asset values of a number of mutual funds, sending their values lower. Not only are mutual funds taking a hit so are most major averages. Financials compose 13% of the S&P 500 index.
The above concerns will impact a large number of people -- not just the idle rich but anyone who has any exposure to equities. That's quite a swath of people we have to consider. Their net worth -- which has already taken a beating -- will drop further lowering consumer confidence further, leading to lower consumer spending and lower GDP growth (at least that's the path the economy has taken over the last year and a half). The point is this: I don't see a way to do this that won't send the markets into a tailspin.
But most importantly, no one has addresses the central issue of who are the new owners. As I wrote yesterday on my blog:
In short, my concerns were primarily that we would trade one form of stupidity, ignorance and gross incompetence for another form of stupidity, ignorance and gross incompetence.
I outlined the following issues with the new management:
1.) A person in government (elected or not) leans on a bank to make a sweetheart loan to someone/an entity/a group not qualified to take out the loan
2.) A major campaign contributor gets a sweetheart "consulting" contract to service a financial institution.3.) A major campaign contributor gets a special loan package
4.) The issue of patronage enters the picture: campaign workers/politically connected people who are unqualified to work in the financial field or are minimally qualified get jobs in the financial field
5.) A bank that shouldn't have qualified for government assistance gets government assistance. Actually - that's already happened:
Troubled OneUnited Bank in Boston didn't look much like a candidate for aid from the Treasury Department's bank bailout fund last fall.
The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate.Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use.
Nonetheless, in December OneUnited got a $12 million injection from the Treasury's Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.
Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging thatOneUnited be considered for a cash injection.
.....
On Dec. 3, Rep. Spencer Bachus (R., Ala.) forwarded a Dec. 2 letter from Alabama bank regulators complaining about the complexities of applying for federal funds. Alabama banks later received billions in funds.
6.) Less than 50% of the banks return to profitability.7.) Of the remaining 50%, none of them achieve better than 80% of the previous institutional high of ROE. In other words -- the previous management made more money for shareholders
8.) Lending does not increase to pre-meltdown levels -- or to acceptable levels.
Most of the people who got us into this mess -- and that includes Congress -- are still in power. They would be the ones performing the nationalization. And no -- I don't trust them to do the right thing.
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Nationalization can indeed mean many things, and is certainly not a panacea.
But why don't we stick to the most basic aspects instead of making very hypothetical arguments about talents, abilities, incentives and all that - such arguments in my opinion are simply a terribly bad joke.
Those basics are: restructuring is needed, there's no reason why taxpayer should pay for it (since that would be blackmail) and there's no reason why it should be possible without firing a considerable number of people who didn't do their job and should have been fired long ago if only shareholders and boards and oversight functions had done what they're supposed to.
How about making small steps: why not fire those who cannot explain how the revenue they generate doesn't require any detox?
Because they are so talented?
And: are we supposed to believe that banks are up to this day unable to name the part of their business which would be best served by going into run-off mode?
The stress test should detect that among other things. And what exactly is it supposed to mean that banks shy away from the stress test? Aren't they doing that 24/7 anyway? Stress-testing themselves?
This is a joke: they are supposed to be the risk managers (read: grown-ups) in the room. Instead they cry ouch if you take away the candy.
The answer is do not do the nationalization because it makes no sense, is impractical is rife with unintended consequence. It is not a panacea but only an ideological hammer that thinks every problems is a nail.
Until there is a market for level 3 assets no credible, fair or reliable on valuation can be trusted, or should be depended upon for any reason.
Dont forget Nationalization means all shareholders, pensions and everyone else writing off losses on the taxpayers nickel as well as the banks writing off all of the assets themselves at par.
It is much cheaper to put the money directly into the banks, something I am not advocating, but it is cheaper for the taxpayer, faster for the economy and more practical for the nation than Nationalization.
We have an over reaction, hysteria and Nationalization is a last result and the worst of the bad options available.
When the Europeans take over a bank, the first thing they do is fire the managers. Has anyone studied whether these banks come up to previous levels of profitability? They also do it selectively. TARP funds seem to have been fired out of a cannon in the general direction of banks, and some things that didn't used to be banks but are willing to change their names to get some of the loot. Although Bonddad has shown us how some of the selections are made, and it's the usual Washington ugliness.
Agree. In addition, we already have a system via the FDIC that has taken over 14 banks this year alone. The real purpose of the TARP I funds was to restore credibility, bank transactions and avoid total disaster after letting Lehman go under, which is exactly Nationalization does. Not to restore all the damage that ensued. You would think we learned. Nationalization does not create confidence; it destroys it since it assumes all banks are insolvent. Even zombie banks are not insolvent.
Setting lending or profitability parameters when demand and reasonable risk are not aligned is another faux issue that is wholly disingenuous.
The TARP I was given to over 200 banks including forced upon the largest dozen or so presumably to hide the fact that a couple were in bad shape. Further, the most egregious players are already out, Mozilo, Fuld, Thain, Prince, etc. They still have not been punished, yet many want to punish the current people trying to help recover the system.
There are so many options to keep common in place, (even if diluted) and cash flow valuations until the mark to no market flaw (unintended consequences) resolves itself. Even using the Fed balance sheet to insure assets that are performing in return for a note until housing stabilizes, etc that would get the speculators out (stopping the standoff) and a credible and fair market to return.
"The above concerns will impact a large number of people -- not just the idle rich but anyone who has any exposure to equities. That's quite a swath of people we have to consider. Their net worth -- which has already taken a beating -- will drop further lowering consumer confidence further, leading to lower consumer spending and lower GDP growth (at least that's the path the economy has taken over the last year and a half)."
Huh?
Are you claiming that the Man in the Street is going to get hurt because his 401K has a few shares of an index fund containing Citicorp?
At any rate, Citi stock has already lost 94 percent of its value. The final 6 percent won't even be noticed by those 401K holders, not in comparison to what they already lost.
The Swedish model is the direction we need to turn, and I believe we soon will.
The question that should be asked is if someone robs a bank, are taxpayers required to drive the getaway car? We are all familiar with the scenario that has transpired. Loan originators and purchasers knowingly wrote loans based on falsified data. In many instances real estate brokers and appraisers colluded to falsify valuations. These loans were purchased by financial institutions. These institutions were well aware of the nature of these loans. Ratings agencies, whose profits were derived by the volume of securities rated, gave AAA ratings to loans they knew were substandard. The misrepresented securities were sold by these institutions. Billions of dollars in profits, commissions, salaries and bonuses were taken from the proceeds of these fraudulent sales.
Billions of dollars in these fraudulent loans remained on the books of these institutions in various accounts. Those in charge of these institutions and many in their employ engorged themselves at the expense of their fiduciary obligations. The question is are we going to allow that this should transpire? Are we to turn a blind eye to the greatest financial fraud in history? Are we to aid and abet this fraud by using taxpayer monies? If the answer to this is yes then the mechanism of continuing this fraudulent, unethical, malfeasant and reprehensible behavior is irrelevant.
1. Screw the stockholders! They have the collective power to decide who runs the banking corporations, and they've abdicated it. The only reason they own the stock is to see how much money they can make from it. All investment poses risk and that should be known before we purchase anything, meanwhile, our National interest should never take a back seat to stockholder concerns.
2. Incompetent or greedy management can happen anywhere as the previous administration proved. Why? Because there was no accountability.
3. If a bank can return to profitability, fine. If not, let it go. Any financial institution that can't manage itself should never be put in charge of other peoples' assets.
small stockhoders have next to no say. I get announcements of shareholder meeting where I can travel to a distant city to vote my few shares. Or I can give someone a proxy and hope they look out for my interest. One of the great problems with our business structures is there is controlling ownership on one hand and the small owners who have little say on the other. Controlling ownership essentially becomes management and skims the profit through management.
Given the example of Barney Frank in the post, I think the BEST reason for not nationalizing ANY bank is the corruption of our officials. Anyone who would support a certain senator or representative gets a loan and those who do not- do not. Giving banks to senators and reps that have shown such fiscal responsibility so far, is the absolute WORST thing that could happen.
Mr. Stewart,
You say: "Most of the people who got us into this mess -- and that includes Congress -- are still in power. They would be the ones performing the nationalization. And no -- I don't trust them to do the right thing."
"Most of the people" may include Congress, but most of the most aren't Members of Congress; they are members of the "financial sector".
It is the financial sector that got us into this mess, and no -- I don't trust them to do the right thing.
All the things you describe can and do happen everyday in PRIVATE Corporations! Simply look no farther than this CRISIS!
Government is not any worse and in fact GOOD government is more likely better!
_____________________________________________________
Sometimes the FACTS have to overrule what the Banking Community and Wall Street WANT!
FACTS:
1. Wall Street Banks are ZOMBIE BANKS with $trillions in Debt, much hidden "OFF-Balance-Sheet"
2. CEOs, Executives, and Managers have lived for 8 years in a "Financial Fantasy Land" full of corrupt ideas and to Wealthy to save. They lack the Morals and Ethics needed to make the right decisions for both the Banks and America.
3. They have used illegal methods to gain short term wealth and skimmed that wealth out of the Banks and into their pockets.
4. They refuse to allow the necessary "WRITE-DOWNS" on the instruments and are still trying to cash in on there Insurance Scams that bet Mortgage Derivatives would FAIL!
5. Without cancelling the Banks' and Hedge Funds' Insurance Scams and doing the “WRITE-DOWNS” this crisis could take five to ten years to unwind and America can not wait!
Finally, consider the Ethical and Moral Hazards of helping such complete Corruption save their own Wealth and Power. These Bankers and Hedge Funds are not INNOCENTS!
They should be investigated and prosecuted, NOT Helped!
I think your next article should be titled "The Problems Of NOT Nationalizing The Banks".
1) Who do you nationalize (there are over 8000 US institutions)? This is a red herring. The vast majority of these 8000 DON'T REQUIRE NATIONALIZATION. Start with the largest 10 and work done to have the maximum impact.
2) How do you make the transition from private to public ownership with minimal disruption? Model it on the Resolution Trust Corporation. Break up the too big to fail institutions into smaller, more manageable entities that can be effectively regulated.
3) And how do you prevent the new owners from being same corrupt idiots the old owners were? They can't be any worse..................
Right: "too big too fail" does not apply to all 8000. Also it seems that the bigger banks have been more prone too failure. Part of that may have been egomania driven growth and lack of manageability of such mega corporations.
Maybe some of you who have experienced a nationalized bank system can help me understand some things. I believe the US has over 8000 financial institutions. Do we nationalize all 8000? Or just the big three or four problematic banks? If we only nationalize a few, what happens to the others, like those who played by the rules, regionals or credi unions? I know you all abhor shareholders, but dont be so hard on them, many of those shareholders are saving for retirement so they can be somewhat self sufficient. What happens to them? Who will run the nationalized banks? Who will do the oversight? I believe one of the comments said that government can be trusted to run things without problems? Really? Then why are we in this mess? Does lack of oversight and a foolhardy belief by our government that the banks could self regulate mean anything? This is why the government has a low approval rating. Please help me with this, i want to understand why nationalizing is the answer.
If we nationalize the banks do we obligate their leveraged derivatives and toxic loans, bonds and so on? That is the tens of trillions of dollars question.
A fairer way would be to dissolve our present Federal Reserve and national banking system which has so ignominiously brought us to this bankrupted condition and create the American National Banking System. The broken banks would deal with their own debt. The laws of supply and demand would replace our currency weakening attempt to bail out fraud and swindle. Such attempt of repeated bailouts applied faithfully (and fanatically) will destroy our currency and our form of government.
A National Bank would license banks that were managed prudently and qualified to enter the function of lending money wisely.
We are told that most of our banking system is bankrupt, specifically our monopolistic institutions that have so damaged our economic system while corrupting our politics. A new banking system would immediately attract capitol and confidence. It could be run quasi-public-private for no profit such as the TVA. Money should be loaned for value generating enterprise, not as an end in itself as in the past 25 years of mercantelistism.
What ever happens, we must preserve our currency while we create jobs for our present millions of idled citizens. Most important, we must generate activity that brings wealth and value to a country suffocating with debt and hampered by the malevolent influence of foreign ownership and control.
It will be a sad sad day in America if this happens, TARP was bad enough
As a reader from Sweden, a country that had its fair share of banking meltdowns and resulting goverment restructuring in the nineties, i must say that i find your objections a bit contrived. Maybe its a cultural difference, americans just get more spooked by the idea of the state temporarily stepping in as corporate owners than europeans. But maybe its time to think outside the box of cultural conditioning? If whats got you into this mess was exaggerated belief in the wonders of free-of-all-regulations capitalism, maybe that also gives you an indication of where the solutions to the crisis can be found?
Protectiong the interests of the shareholders of corrupt and bankrupt companies would not be the first priority on my list in this case. More important it is to try to protect the clients of the banks, who cannot be blamed for its bad loaning practices and would be hit very hard by their banks collapsing. And your fears of goverment owned banks evolving into some kind of corrupt banana republics where incompetent politruks gets positions based on loyalty, and politicians reward donors with beneficial loans, paints a very bleak picture of America indeed. Is it your sincere belief that such malpractices would be permitted? I have not heard of a single case of improper bank practice resulting from our bank restructurings here in Sweden. On the contrary, a big improvement in the practices and corporate culture from the days of vulture capitalism.
keep our nose in sweden's business...........
Shareholders (which facilitated management running amok) have lost nearly or all their value when the Dutch government took over ABN-AMRO and part of Fortis. That is simply part of being a shareholder.
Dear Mr. Stewart,
Your love for socialism prevents you from looking for solutions outside of this scheme.
I did, and here is my solution:
http://www.huffingtonpost.com/henryk-a-kowalczyk/the-simplest-plan-for-hel_b_167642.html
FYI, I studied basics of socialism from hard-core socialists. Furthermore, I experienced it first hand on bloody streets of Gdansk in December of 1970 and bloody streets of Katowice in December 1981.
please go back to your ann ryan novel
I can see that my post wasn't clear.
Socialism, or some form of it without the totalitarian aspect that accompanied its application in some countries, is natural and necessary. Republicans rail against socialism even as they proclaim their born-again Christianity; this is ironic considering that Christ was a socialist.
Although I was a fan of Ayn Rand (I am assuming, Handy Allen, that you are referring to the author of numerous libertarian fantasy novels when you mentioned "ann ryan"), that was a teenage phase, which passed away, long ago, when I became an adult.
I studied the basics of socialism from hard-core libertarians. Then, I experienced it first hand on the foggy streets of Shetland.
Socialism is just christianity without the miracles. Gdansk and Katowice were the result of totalitarianism, not socialism. One can argue that totalitarianism is the natural result of socialism; one can also argue that it is the natural result of capitalism. In any case, that's a different argument.
It is my love of country, and of my fellow humans, that guides me as I look for solutions to this mess.
If you nationalize the banks then who will be in charge? Treasury, congress? I hope not congress. Most of those clowns have never owned a business or been involved in banking. Most of them are lawyers, which is OK because they write the laws. But what will happen when we have a bunch of lawyers managing huge financial corporations? It's scary, but I guess it's time for some really tough decisions.
There is a difference between owning a bank and running a bank.
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