Death To Zombies: Nationalize Banks Now

I suspect the whole "public fear of nationalization" is just something cooked up by Bank of America's PR department to save BOFA shareholders the pittance they have left. In case it isn't, however--in case there are still folks out there who think "nationalization" means state-owned banks in perpetuity--Paul Krugman explains today why this isn't the case.

Nationalization does not mean "government-run banks." It means temporary seizure and restructuring. Customers are protected. Depositors are protected. Jobs are protected. The government puts the valuable parts of the bank back in private hands as soon as it can.

The FDIC is already "nationalizing" two banks a week: It grabs them, chops them up, and sells off their parts, solving the problem once and for all. And it's what we should do to Citi, BOFA, et al, now instead of later, so we can get started on the road to recovery:

Here's Krugman:

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge -- in fact, they would have failed already if investors didn't expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can't risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can't afford, fiscally or politically, to bestow huge gifts on bank shareholders.

Let's be concrete here. There's a reasonable chance -- not a certainty -- that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn't remotely large enough to cover those potential losses.

And then Krugman sums up the Obama administration's approach, which, sadly, is the same as the Bush administration's approach--most likely because the same general, Timothy Geithner, is hatching the plans.

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a "public-private partnership" to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis. (Krugman's full piece is here)

And how could this be done? By being honest about the results of the coming "stress test." Today's latest plan--the conversion of taxpayer preferred stock to common stock in Citigroup--would help Citigroup, but not the taxpayers. It's time to stop formulating half-measures and just bite the bullet and take Citigroup over.

See Also: The Hall of Shame (SLIDESHOW)

Comments

[beckpod1]

Take your credit cards..cut them up..put them in an envelope..­send them back to to their source...t­ell them to kiss your ass..and quit sending payments! The credit score system has to go..or else! You miss a payment on one..and all of your payments go up! Banks haven't been your friend for 30years or so...

[TheMadHedgeFundTrader]

So nationalize the banks already! Get it over with! Call it whatever you want: partial nationalization, temporary nationalization, socialization, liverwurst, or rutabaga. Just get it over with! This tortuous slow drip of on again, off again, stop gap measures is going to cost us more than if we executed the politically incorrect “N” word. Of course, a government takeover is the worst nightmare for many Republicans. But now that former Fed governor Alan Greenspan and many fiscal conservatives are on board, this shouldn’t amount to political suicide for Obama. The FDIC’s Sheila Bair already does this on an almost daily basis with smaller regional banks, like Washington Mutual, but for some reason the top nine “too big to fail” banks are sacrosanct. Their deposits have been effectively nationalized with government guarantees since last fall. The market is already selling us that many of these once hallowed institutions are now worthless. This is what Citigroup (C) at $1 and Bank of America (BAC) at $2 are telling us. Just wipe out the pitifully little the common shareholders have left, clean them up, and resell them in five years after the credit markets are restored. Every government that ever did this, like the UK in the eighties and Hong Kong in 1998, made a fortune. Not to drive a stake through the hearts of these de facto “zombie” banks really would risk a Great Depression II and an “L” shaped lost decade.

[Shortyfuse]

Nationalize Banks, nationalize electricity sources, nationalize internet and media source, federal reserves, wall street. etc. I am not talking forever. I just want it done until we get the robber barons in jail.

[ConfuciusSay-]

Technically, you can't really say "Death to Zombies" since they are _already_ dead. I believe the term in use is "re-deading". But whatever.

[adoseofsanity]

We are in this "mess" in no small part to government messing around in the housing and finance markets in the first place.....­......(Fan­nie and Freddie ring a bell).....­....and know some pretty much e everybody in DC) are arguing that the answer is MORE government­..........­...

A wise man (Einstein) once said: insanity is doing the same thing over and over again and expecting a differfent result....­.......if that is the case, there are alot of insane people in this country right now.......­.

[RonMar]

adose, so true. How dumb are we really? We have re-hired and first-time hired for the first real job he has ever had the people who created this mess, and now we expect them to fix it. Incredibly stupid not to mention the overtures he has made to Arabs, Muslims, Islamic jihadists, his appointments on which even he admits with two of them he "screwed up."
Somewhat like Diogenes seeking truth or an honest person, I am still lookng for one person who voted for Obama who can and will name one thing he has done right on or since January 20. Few have tried; all have failed.

[adoseofsanity]

The whole economic hysteria we are in, which includes this discussion, lacks on thing. A fundamental understanding of capitalism and a market economy.

In capitalism and markets, nothing is guaranteed. And, failure is the result of making bad decisions. And those that don't make the mistakes will be able to flourish.

All this is doing is protecting "us" from failure. Failure is NECESSARY. All this nationaliz­ation/bail­ing out does is prevent the inevitable­........an­d at a huge public cost. It will also extend this decline, and slow entrepreneurship and investment as job creators (people who like profit), are scared in the current geo-political climate given in no small part to what they see coming out of Washington.

That's CHANGE we can all see and believe in!

[Rule Of Law]

Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take "prompt corrective action" to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks.

[RonMar]

I believe the law was in effect and being used well until a run on U.S. banks that started on September 7. Banks closed to stop the run. Bush took corrective action. Obama was from that day on assured of election.
Anyone want to venture guesses as to who started the run? Anyone know who backed Obama with the big $$ hidden in his campaign funds not yet investigated by the federal authorities?
Are you suggesting we are now operating outside the law in a state of anarchy, chaos and lawlessness? I belive we are.

[argyle]

Democrats who hate banks are like Republicans who hate government.

Neither should be in charge of either.

Shareholders of BofA are your bank, most pension funds and large stable insurance companies.

You would bankrupt them to prove an ideological point.

Krugman is brilliant, but he's expressing an opinion here, and he's wrong.

[UKOH]

Krugman is not wrong.

As I European I have far more experience of nationalization than many Americans. I certainly agree that governments make very poor executives of companies when run for tax payer profit as a long tern objective.

However to call the current proposals "nationalization" is, as Krugman says, a complete misuse of the term. We are talking about a government led bailout and in the current economic situation there is little choice in the matter. Incidentally I would trust Obama to be acting CEO of the banks far more than the people currently doing it - do you not agree?

The point is to temporarily place them under government control so that they can be protected and restructure. Once they and the world economic situation has recovered they will be placed back into private hands again. This is NOT nationalization in any sense of the word.

[RonMar]

argyle, I believe you are wrong unless you can provide persuasive facts, truth, real history – evidence – to support your opinions about Democrats, Republicans, Krugman’s brilliance and his rightness or wrongness on this or any other matter.
Since opinions seem to count so much here rather than those other stubborn things as evidence I offer these opinions with a smattering of the other where they appear needed:
1. Democrats love banks, want to control them, also vehicle manufacturing, healthcare, media (Fairness Doctrine), guns, marriage, discussion of racial issues (please see Eric Holder’s “nation of cowards” remarks), energy, oil and environmental policies (ANWR+offshore or other drilling), the climate, infrastructure and technology development and research, employment, all businesses, assistance to needy people, religion, the Internet, euthanasia, abortion, etc.
2. Republicans love government of, by and for the people, states’ rights; to meet the first order of any government (national defense); individual and private science and technology; people of all races, creeds, colors and national origins including in the womb and newborns, old people; entrepreneurs; our Declaration of Independence and Constitution – the guaranteed freedoms and rule of law, etc.
3. Krugman is brilliant only in the British sense of the word, and right as much as Obama has been before, on or since January 20. I don’t know if being right can be a negative number. If so that is the number that applies to Krugman and Obama, you too if your post is an example of your work.

[TheMadHedgeFundTrader]

The Treasury moved to raise its stake in Citigroup (C) by up to 40% by converting preferred into common, yet another step down the road to creeping nationalism. With C trading as low as $1.20 on Friday, taking its market cap down to a mere $10 billion, does anyone care? The markets have already delivered their own judgment. Does this mean my ATM is going to start working with the same frustrating inefficiency of Amtrak, another poorly run government entity? The market cap for all 24 banks in the S&P 500 subsector has shrunk to $269 billion, less than the capitalization of Exxon (XOM) at $354 billion.

[EricPrentis]

The government turning its preferred shares paying dividends to the treasury into common stock in zombie banks is a terrible idea, instead, let these failed institutions go bankrupt and then have the FDIC reorganize their operations, that is the only fair way to proceed.

[tandrmcdonald]

As usual, the Republican party wants whatever benefits the banking industry. The banking industry wants whatever inflates its collective profit margin. The two are inextricably linked. If the banking industry falters, stumbles or falls flat on its face the ones who will howl the loudest are those to whom the industry makes the greatest contribution. Without a nice fat profit margin the banking industry honchos won't be able to harvest those juicy plums they drop in the basket of the Republican politicians. Without those juicy plums the politicians can't keep buying elections and perpetuating the system with more deregulation legislation. Nationalization would put a definite crimp in the status quo.
If at any point in the above paragraph you asked yourself what about the millions of ordinary citizens who put their money in the banks, you got the point. If the thought didn't occur to you, you must be a Republican.

[bighat]

Maybe, you have not heard. The Republicans are not in charge anymore.

Are you under the impression that if the banks are nationalized that the CEOs will be paid salary put forth by congress. All the plush chairs and furniture will be replaces by folding chairs and the tables that go with them. Credit scores will go out the window and loans will be made only to the demographics of the democratic party regarless of their ability to repay. How will this affect the very rich democrats and trust fund babies. Oh, I understand, Hollywood will still be able to get loans.

Maybe the high profit margins will be gone and all money will be loaned at 1/4 point over the cost of treasury bills.

[RonMar]

Henry Blodget: Death to Zombies: Nationalize Banks Now, and David Paul: Time to Stop the Nationalization Rhetoric, and Let the System Work certainly offer contrasting views; maybe even “fair and balanced” and “we report, you decide” - the slogan of another news/opinions source.
“Nationalization,” as expected, is an often-heard buzzword of the Obama administration and the Liberal Democrat-dominated Congress: nationalized healthcare, nationalized banks, “nationalized media” – California Attorney General Jerry Brown, last week. What else can we nationalize, preferably by legislative action or better yet referendum of the people?
Here is a partial list for consideration: gun control, marriage, sales taxes, mandatory discussion of racial issues (please see Eric Holder’s “nation of cowards” remarks), national photo and finger or thumb print ID cards, birth certificates, and all of these - police protection, fire departments and first responders, energy, oil and environmental policies, state and local parks, governments, infrastructure and technology development and research, employment, industries, small businesses, state National Guard units, assistance to needy people, religion, climate change initiatives, the Internet, euthanasia and abortion. Wait a minute – haven’t we already done the last one with Roe v. Wade and made significant “progress” on some if not all of the others?
Just think of the growth in Federal government we could have, cost savings or tremendous ballooning of costs, and settlement finally of an issue over which a War Between the States was fought from 1861-1865. And we might be able actually to see Obama’s birth certificate.

[LeeHInAlexandria]

This debate over nationalization is being controlled by those calling for the nationalization of the banking system. Did you know that not a single person proposing the nationalization system has ever offered a reason why it would solve our problems? They keep quoting how nationalization "worked" in Sweden, but those were just a couple of small banks by U.S. standards and mean very little or are actually irrelevant to the situation.

What will work is taking control of the banking system, not the banks. The U.S. government needs to regain control not of the banks, but of the system of banks, and needs to do it now. When has anything the Government run work??

The Federal Reserve should issue certificates of net worth to banks giving them as much capital as they need in return for notes from the banks promising to pay for the capital when times get better. The Fed has the ability to do this under its charter. Banks will then be able to finance on their own and use the certificates to insure that they are not wiped out by the gradual disposal of bad loans over time.

This system of forbearance was used successfully in 1989-1990 and can be used again. If there are institutions that cannot be considered solvent and are beyond redemption even after receiving the certificate (and given a chance over time to improve the situation), then they should be seized by the FDIC.

[bighat]

Read an article today about a bank in England called HSBC. While I dislike this company intensely, I had a GM card. I did like something they are doing today. They are not asking the govt for money. They are asking their own shareholders to put up some additional cash. No idea if it will work or not but it certainlly sounds better than nationalization.

I cannot believe the number of comments calling for nationalization. Maybe it is because the democrats control both houses of congress and the Presidency. More than likely that will continue for awhile. But one day the republicans will be back taking one house at a time and the Presidency. Kinda like what goes around comes around. do not believe all these same people calling for nationalization will be happy when the republicans start putting their 2 cents worth in.

What we forget in this country are precedents. Once a new precedent has been set it gets easier to implement the same things again.

[ProgressiveVoice]

Krugman and Blodget both refer to the FDIC taking over insolvent banks at the rate of two per week.

Excuse me, but isn't that the whole problem? Citigroup and BofA and the other big banks - aren't they insolvent? Isn't that what it means when you require a massive influx of capital to keep operating but don't have the credit or balance sheet "creds" to get a loan?

Let the FDIC do it's job; one it does very, very well. There is no need to debate "nationalization" or provide any more of the taxpayers money. There is a good working system in place; let it work.

[DeWayne]

If there has been anything proven by allowing 'Old Money' scheme's and schemer's buying off the US-Gov to establish laws that turn these parasites loose like a fox in a henhouse, is that the parasited-mind of this unbridled greed will sooner or later kill off the entire chicken population.

One person is correct, it will do no good to take over a bloodless corpse left over by demented parasites, every entity (not only Corp's) involved in this blood-letting needs have assets both domestic and foreign frozen until justice is done and crimes paid for.

Banks, Financial Scheme Megoliths, Oil & Energy Industry, all are a good place to start nationalizing, give the blood sucker CEO's $40,000.00 per/year living expense for 18-months (similar to unemployeed), after that they find a job or go hungry.

[bighat]

If you like businesses that are nationalized there are a world of countries whose business model should make you happy. maybe the land of the free not the place you should make a home.