Help Wanted: Swedish Model to Kill Off Zombie Banks
No, it's not a classified ad from a porno magazine. The Swedish Model I'm referring to is not a beautiful blond with long legs who entertains overpaid bankers at a plush resort retreat paid for by the taxpayers. And the Zombie Banks are not characters from a George Romero movie.
The Swedish Model is the financial plan by the Swedish government to successfully rescue its country from a financial meltdown in the early '90s under which several of its largest private banks were nationalized, recapitalized and reorganized, and then sold back to new private shareholders. The Zombie Banks are banks like Citibank and Bank of America which are functionally bankrupt but continue to walk around like the living dead because they have received blood transfusions of TARP funds which exceed their market value and not been forced by government regulators to account for their true financial liabilities.
A broad consensus on both the right and the left seems to be emerging in support of nationalizing Zombie Banks as quickly as possible before they can eat up more banks, creating more Zombies, and bringing on an even bigger and longer-running financial disaster. Republicans Senators like Lindsey Graham and even John McCain say nationalization should be on the table. After initially rejecting it, Democratic Senators like Chuck Schumer and Chris Dodd are coming to accept it. Mr. Free Market Fundamentalist himself, Alan Greenspan has suggested it. Liberal economists like Nobel Prize winners in Economics Joseph Stiglitz and Paul Krugman strongly support it. Conservative economists like Adam Posen of the free market-oriented Peterson Institute support it, too. NYU Business School professor Nouriel Roubini, known as "Dr. Doom for being one of the first to predict the financial meltdown, has written an Op-Ed column in the Washington Post advocating it. Even current Fed Chairman Ben Bernanke seemed to acknowledge on Wednesday that nationalization of some Zombie Banks may be all but inevitable and simply cautioned that they should be re-privatized as quickly as possible.
It seems that only Wall Street bankers themselves, along with Barack Obama and his top economic advisors, Tim Geithner and Larry Summers, continue to voice support for keeping Zombie Banks on taxpayer-subsidized life support. Obama Press Secretary Robert Gibbs said Friday that the Obama administration continues to "strongly believe that a privately held banking system is the correct way to go." The Washington Post reported that Geithner and Summers "think governments make poor bank managers". They must think that their mentor, Clinton Treasury Rob Rubin--who made more than $110 million (not counting stock options) before stepping down last month, and who urged Citibank to take greater risk in the subprime mortgage market in order to increase its profits--is the model of a good bank manager. At the moment, Geithner, Summers and Obama look a bit like the lead characters in "Weekend at Bernies", hauling around a corpse hoping no one notices it's dead.
If Obama wants to have a successful Presidency and prevent the present recession from turning into a 1930s style depression, he would be better served to stop taking advice from long-time Wall Street servants like Geithner and Summers and start studying the contrasting approaches to Japan and Sweden to their respective financial crises in the '90s. Japan acted slowly, followed an approach much like Paulson's and Geithner's, and experienced what has been termed a "lost decade" of economic stagnation. Sweden acted quickly to take over its Zombie Banks and returned to financial health relatively quickly, while returning a significant portion of the government's investment to the taxpayers.
With a bipartisan consensus for temporary nationalization emerging, including conservative Republicans Senators like Graham and McCain and centrist Democratic Senators like Schumer and Dodd, Obama should stop dragging his feet and get out in front of the parade carrying a big sign reading, in Prof. Roubini's words, "We're All Swedes, Now."
No, actually I take that back. In order not to spook markets, Obama and a small team of financial commandos needs to orchestrate a sneak attack on the Zombie Banks. If it's not done in one feel swoop, capital will flee non-Zombie banks, turning them into Zombies, too and aggravating the problem.
Speed is essential, but Obama and company need to get all of their ducks in row first: Quickly stress test the 6-10 largest banks, determine which are truly insolvent and must be nationalized and which have the ability to continue as going concerns with a little help. (Maybe Citibank and B of A get nationalized, while JP Morgan Chase and Wells Fargo remain in private hands.) Hold top secret bipartisan meetings with key Republicans and Democrats in Congress, including Graham, McCain, Schumer, Dodd and Frank to insure that when the plan is announced there will be some political cover from important conservative Republicans. Organize a media roll-out, which includes supportive statements from key Republicans, to sell the plan to the public. Then Obama announces a televised prime time address which he uses as a teaching moment, employing his formidable rhetorical and analytical skills (much as he did in his Reverend Wright speech) to give the American people a nuanced explanation of both the depth of the financial crisis and the reasons why temporarily nationalizing a handful of the largest banks, using something akin to the Swedish model, is the best way to solve the crisis and assure that vital credit keeps flowing to businesses and consumers--And announces which banks are being taken over and which banks will not be taken over. The shareholders of the banks being nationalized will be wiped out, but those of the other banks will be reassured, thus preventing a "run on the bank."
Anyway, that's how I hope it works. If Obama, Geithner, Summers and Sheila Baer can engineer such a strategy, perhaps the financial crisis can be resolved and the economy will recover within a few years. If they persist in defending a purely private banking system combined with a private/public hybrid aggregator bank--whether because they truly believe American cultural values will reject anything else or because they are too close to Wall Street bankers to consider wiping them out--there's a serious danger that the recession will turn into a depression and Obama's presidency will be a failure.
It's time for audacity...and a Swedish Model.
UPDATE: The Wall Street Journal is reporting that Citibank is offering the Federal government a 25%-40% ownership stake in the bank. While few details are reported, this looks like a very bad deal for the taxpayers and a windfall for Citibank shareholders and management. The Federal government has already injected $45 billion of capital into Citibank and guaranteed Citibank against over $300 billion in losses on some of its toxic assets, while Citibank's market value is less than $20 billion. If Warren Buffet did the same, he would end up owning Citibank several times over and would receive the upside when assets are sold off. The taxpayers should be treated no worse.
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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.
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. The stock market hated all of this and fell 251 to a new 12 year low at 7,114.
Need some more characters and titles, people.
Freddie MacKreuger?
Jason Profits?
"Nightmare on Wall Street XVIII"? (No-- too obvious.)
How about "Journey to the Center of UBS"?
The more I think about the successful and failed attempts to get out of a failed financial system like this, the more I think that it's management, board, and shareholders that need to be recycled.
For successful interventions, the recycling was done by national governments taking the banks over and replacing management outright, and replacing shareholders and board by eliminating the claims of previous shareholders.
For unsuccessful interventions (think Japan - and even Roosevelt's intervention during the Great Depression), it took about 10 years for "natural" turnover in management, board, & shareholders to do the same thing and get out of the way of running a successful system again.
The existing shareholders, boards, and management all gambled - and we all lost. Time to get them out of the way.
"this looks like a very bad deal for the taxpayers and a windfall for Citibank shareholders and management."
Exactly. But Obama and the national democrats will do it anyway because it favors their largest contributors, the financial services sector.
As long as they have the premise of being the "party of the people" lodged into media discourse, they will continue to act so. There is little downside to this strategy, the Republicans are worse.
It is not time for the Swedish model to kill off the private banks.
Lookout for the setup here.
When the private banking monopolists went down to Jekyll Island and wrote up the Federal Reserve Banking Act and it was then proposed in Congress, the bankers took a position AGAINST the Act.
Just as the FRA failed the American people over this hundred years, so will the proposed nationalization place the people's government on the wrong side of this workout.
Neither a fish nor foul banking system.
Government interference screwed it up.
Get the government out of the banking system.
No, one problem with the Swedish solution is that the world financial system was NOT riding on the outcome of what the Swedes did. The scale, the structure and the interdependence of the global financial system says we cannot repeat that somewhat audacious-sounding move here in the US.
It is not necessary.
What is necessary is to have an alternative to the private bankers' money system.
It is the money system that is broken, NOT the banking system.
Debt-free, government-issue money, as advocated by Friedman and practiced by Lincoln would serve us much better than the grand clamor for nationalization.
Greenbacks.
Let the banks stay private.
There is a new proposal making the rounds for solving the financial crisis known as “desecuritization.” There are $1.4 trillion in CDO’s outstanding backed by Alt-A and subprime loans in the form of 3,700 individual securitizations. Over 68% of the loans backing these bonds are current. Mark to market rules are forcing the banks to carry this paper on their balance sheets at 50% discount. This is where the $700 billion figure for the first TARP comes from. The problem is that mark to market is a meaningless accounting fiction when there is no market. If you break up these securities and place the underlying loans back on the banks’ balance sheets, the good mortgages can be valued at 100% of face, and those behind in their payments can be discounted to maybe 70% because they are still secured by the value of the underlying homes. This would boost the value of the entire asset class assets from 50 cents to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. It sounds like a workable plan, and therefore is unlikely to ever see the light of day.
Are you sure this is not what is happening?
The stress tests have been announced, and obama's comments and those of the folks who work for him could be interpreted as "don't panic," palblums so that the tests can be done without spooking investors...
Sweden had small insolvent banks and a weak currency. Not a few Zombie (still solvent) banks in a country of thousands of solvent financial institutions.
We already have an FDIC that converts banks already as a last resort. There are so many other options before this ideal of Nationalization, what is the rush? We need to fix the housing crisis first anyhow. Lastly, the government will never get its money back if we bankrupt the banks as is proposed here. The basic and catastrophic flaw in the Swedish system and even other Nationalization scheme is that makes the common worthless for even larger and more systemically important banks than Lehman. A huge mistake that everyone would take back if possible. Have we learned anything?
If you want to call equity ownership Nationalization and call it a victory, fine. It is here. However wiping out the common will be catastrophic in confidence and as a practical matter. Unintended consequences got us here and the assumption that a government bank instills confidence in the system is pure fantasy.
The only people that want the bankruptcy version of Nationalization quickly as is advocated here are short selling hedge funds that have borrowed money to bet against America. Further, the people listed in the article only as a last resort, after the many programs already underway have failed, support the bankruptcy version of Nationalization. This is not likely, given our history.
People have very short memories. After the Savings and Loan disaster our government pretty much nationalized those banks. They didn't call it nationalization, but it was what happened.
Actually, I think hiring a Swedish Model for the banks WOULD be a better solution. At least it owuld mkae it more pleasing to the eye. To be fair you could have a male and female so that there is a little something for the ladies.
I think we need to use an actual Zombie movie solution for the Zombie banks. You do not see people coddle and feed zombies, they chop them up. Likewise I think we need to break these banks up into smaller entities. They are obviosuly to big now to manage. Plus, if smaller banks fail there will not be the whole "too big to fail" thing we keep being told about.
http://federalistblogs.wordpress.com
I don't believe the USA will follow models of other countries. The stuff that happens here does not
happen in other countries and I believe some dark forces are behind all of this.
That's why our education system is such a mess.
An interesting question is what happens to Merrill Lynch if you nationalize Bank of America. I assume Morgan Stanley would continue to run Smith Barney. While the government has taken over banks in the past, running an entity like Merrill would be a new animal. I think in the end this has to be done, but it is not going to be pretty at times.
Citi and BofA will be the first casualties failng the stress test. Watch for Goldman to probably end up owning some of the most prized assets of those two.
Miles, you wickedly decieved me and several others with your title. Titilated by the thought of nude blondes, I just had to click. Your plan worked. But wait! All is not lost. We can have a nude parade! The emporers of our finacial system have been shown to be far from wise, indeed totally naked. The wonderous clothes dont exist and never did. The biggest con in fairy tales has nothing on this scam.
A parade of nude bankers may be a hideous sight, but transparency is the missing ingredient of the capitalist system. With so many hidden deals and shady practices, there has been a culture of obfusication, hiding one's tracks, smoke and mirrors to keep all the balls in the air.
The banks need to be dragged kicking, screaming and naked to the market place to display their assets (shudder). Some will be found wanting and should be humanely shot. Some will be found in need of chastisement, and a little tar and feathers and new management may be required. A few might be innocent and able to demonstrate prudence and restraint in the bull market. They should be rewarded so the meek shall inherit the market share.
I'm all for this parade. Make the bankers parade from NY to LA, and allow the American people to line the route and pelt them with garbage.
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