We’ve been repeatedly noting that the fastest, fairest, cheapest, most efficient way out of the current credit and financial mess is Nationalization.

As we have seem over the past few weeks, the country’s biggest banks — Bank of America and Citigroup — are deteriorating rapidly. They will need far more bailout money beyond the $350 billion of taxpayer cash and guarantees they have already received.

Note that the money already dumped into the black holes of these two financial institutions far exceeds their net worth. And in exchange for this foolish investment, taxpayers have received just 6% of Bank of America, and 7.8% of Citigroup. This is absurd. How a 120% of a company’s market cap yields a single digit ownership stake is beyond my comprehension.

The solution to the banks problems, as well as this ridiculous investment posture, is relatively simple: Nationalize the banks, appoint new management, give them 6 months to spin out 10% of each of the separate viable pieces, with the taxpayer retaining the rest as passive investors. For Bank of America, they can spin out 5 major pieces: BoA, Merrill, Countrywide, a Toxic holdings company, and a Good holdings company. The derivative exposure gets wiped out, put into the toxic holding section.

Stock holders get nothing; Since bond holders would receive some pro-rata share in a liquidation, they get a convertible preferred in the new debt free firm, as well as an opportunity to lend to the new banks at an generous convertible rate.

The NYT looks at this question this morning. Excerpt:

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”

“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next . . .

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.”

The current bailouts have shown themselves to be expensive, ineffective, and replete with Moral Hazard and other corrupting abuses. Not only are we wasting vast sums of money, but all too often, we are rewarding the incompetent management teams that created the mess in the first place. Its time to move past them.

Nationalize Now.

>

Source:
Nationalization Gets a New, Serious Look
DAVID E. SANGER
NYT, January 25, 2009

http://www.nytimes.com/2009/01/26/business/economy/26banks.html

Category: Bailouts, Credit, Derivatives

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

72 Responses to “Nationalize Now”

  1. danm says:

    The day we get this nationalization is day 1 of hyperinflation… as it makes it easier to sweep bad loans under the carpet and inject large sums of money into the market.

  2. dunnage says:

    Who in god’s name thought the “investment” banks would lend? Who thought we would get an actual stimulus package? They’re digging up Friedman as we sleep.

    Japan: Quantatative Easing does not stimulate the economy, nor does it induce the Big Banks to loan. Very slowly it will help re-capitilize the leveraged zombies. In the case of Japan after half a decade of Easing the govt. had to force them to get up, make their beds, leave home and merge.

    Geithner is gonna do this on top of his other accomplisments?

  3. danm says:

    Just trying to be pragmatic:

    1. Who will run the system? Are competent people actually going to get chosen?

    2. Our leaders fear deleveraging like the plague… nationalization will permit them to peg both the rate and the credit spreads so they can lend to anyone at the price they want. You need to recapitalize… sure here is the money, we’ll do a bought deal. You need to refinance that debt, no problem, you can even get 4% since we like your company. I think moral hazard is THE bubble everybody is waiting for!

  4. droys says:

    If this things would be happened what do you expect? On your own great perception do you think these things will be a great idea???
    This blogs will generate more feedback because of its excellency.

  5. flipspiceland says:

    As long as the “players” are poised for hyperinflation, what do they care? They are likely already well-informed as to what is eventually going to happen and have made their ‘investments’ in sure things.

    We do not have “Jacksonian” leadership, able to command a government for the people. Our government is a part of a global consortium that looks after only a few, a very, very wealthy few.

    ‘danm’ is right. Competence however needs to be defined. Competent to insure the inerests of the people or competence to insure the privileged classes? The two cannot coexist. Guess which one triumphs in a global economy while out here in the provinces the serfs barely get by?

  6. constantnormal says:

    When banks become TBTF, such that conventional bankruptcies become long, drawn-out, messy things (case in point: Citigroup, which is effectively undergoing a bankruptcy re-org without actually filing), a faster, easier and simpler alternative is for the government to nationalize them, replace the management (I’m sure that Paul Volcker has some ideas of who can run a bank responsibly), wipe out the stockholders (nearly completed already) and bondholders (I haven’t checked, but if Citi and BoA bonds are higher than the very worst junk, government “guarantees” notwithstanding, somebody’s smoking something), and indicate that this is a “temporary” situation, until they can be brought to market via IPO as public companies once more — say in a decade or so, sooner if possible (read the NYT piece on Sweden’s experiences in that regard).

    The case for nationalization has been presented here before, and people who find themselves violently oppsed to the concept should at least read the background material and try to wrap their minds around the notion of nationalization as a streamlined form of reorganization.

    No advocates of nationalization want the government to run the banks for very long, as the government would make a terrible bank manager.

    It’s just that the people running the banks today are demonstrably worse. We MUST get the bozos out of there!

    Incredible that the government could ever be seen as lesser bozos, but the facts speak for themselves. The TBTF bankers are 24-point all-caps BOZOS and should be removed before they do something else too stoopid to be believed.

  7. mburfien says:

    If either one of these banks or both were to be nationalized, do you believe that it creates an unfair advantage for them? If you have a local bank that really has not been part of the current crisis and you have one of the spun off nationalized banks in your town, why would you pick the local bank? You have the option of banking with the government which means all of your money would be insured. Nationalizing these banks would be rewarding them for their actions. Where do you draw the line between trying to save the banking system through nationalization and bringing down many other banks at the same time?

  8. VennData says:

    Just fine Charlie Gaspirino a buck every time he says “ya know” and use those billions to re capitalize the banks.

  9. constantnormal says:

    The same strategy should be applied to AIG, Freddie and Fannie. Nationalize them all, clean house internally, and zero out their debts. Also bust them up into smaller companies prior to returning them to the wild.

    We could have a strengthen, reinvigorated, and above all else, FUNCTIONING economy by 2011 if we took this course immediately, and there would be far fewer taxpayer trillions sacrificed along the way.

  10. danm says:

    The case for nationalization has been presented here before, and people who find themselves violently oppsed to the concept should at least read the background material and try to wrap their minds around the notion of nationalization as a streamlined form of reorganization.

    No advocates of nationalization want the government to run the banks for very long, as the government would make a terrible bank manager.
    —————
    Nationalization will most probably happen. The problem is every time they IPO public assets they do it under book value and create 1 or 2 more Rockefellows.

  11. constantnormal says:

    @ mburfien — re: unfair advantage

    Just how much of an “unfair advantage” do you think it gives the dinosaur banks to have the taxpayer shoveling in more capital than their market caps? How tough is it for reputable mortgage lenders to compete with Freddie & Fannie, who are issuing low-rate government-guaranteed mortgages?

    But if we don’t support these behemoths, they threaten to crash and bring down the system.

    So the thing to to is to deconstruct them, either through formal bankruptcies (with all the attendant chaos and uncertainty) or by taking them over and running them in a nationalized form while the deconstruction takes place.

    Take your pick — I’m pretty much numb to chaos and uncertainty by this point anyhow — but the existing status quo is unacceptable.

  12. constantnormal says:

    The idea behind nationalization is NOT to run the nationalized companies indefinitely under the protection of the government, it is to allow a faster, more efficient reorganization to take place while putting a lid on the amount of chaos and confusion in the marketplace.

    A simple statement of intent to bring the nationalized corporations back into private ownership within a specified amount of time (not too long, or it loses credibility) should make clear the intent behind nationalization.

    The thing that CANNOT be done is to allow increasing multiples of the companies’ market cap to be poured in via taxpayer debt. That path sinks the nation.

  13. constantnormal says:

    Make that “public ownership” not “private ownership” . Insufficient caffeine at this time.

  14. phb says:

    @mburfien – Nationalizing them hardly rewards them, in fact it takes away their autonomy and ability to act. If I were a shareholder of a smaller community bank that had kept my nose clean during the real estate bubble, I would be cheering for nati0nalization for the larger banks. As a borrower, who would you rather deal with, local lending committee or a nationalized lending standard program that a monkey runs? I am guessing local credit unions/community banks are salivating at this prospect…

  15. Machiavelli999 says:

    I think the legit argument against nationalization and the reason they don’t do it is because eventually they want to get private capitol in here to recapitalize these banks. When you start nationalizing one bank after the next and wiping out the shareholders, private capitol will be afraid to invest in any financial institution that is not completely backed by the US government.

    So, I guess the concern is they do not want to “crowd out” private capitol in the long run.

  16. danm says:

    So the thing to to is to deconstruct them, either through formal bankruptcies (with all the attendant chaos and uncertainty) or by taking them over and running them in a nationalized form while the deconstruction takes place.
    ——————————-
    I believe in capitalistic-socialism with good government. Utopia I guess. Bu the US government is totally out of control. If they can actually deconstruct for the good of the people and not for a few elite, I will never again question the existence of a God.

  17. wally says:

    Said before, said again: We don’t need to ‘save’ the banks, we need to change the banks.

    Especially, we need to get basic banking functions that are critical to the economy separated fully and completely from the idiots who chase leveraged fictional returns with other people’s money and put the whole economy at risk by so doing.

  18. constantnormal says:

    @ danm — how about selling the IPO’d shares to Social Security? That way, at least the people would get the benefit of low-ball IPO prices.

    (wait for the howls and screams from the retirees, who believe that there is any sort of “security” in Treasuries while the government is running the monetary printing presses at warp speed)

  19. danm says:

    As a borrower, who would you rather deal with, local lending committee or a nationalized lending standard program that a monkey runs? I am guessing local credit unions/community banks are salivating at this prospect…
    ———-
    The banker who makes me a 4% loan over the 11% one.

  20. Mike in Nola says:

    Does this mean I have to give up my dreams of a million dollar office makeover?

  21. dead hobo says:

    Sorry, but crap + crap still equals crap. It doesn’t matter who owns it. A piece of sh*t doesn’t stop being a piece of sh*t just because someone new has possession. Having the government own any part of either would just be another example of Uncle Stupid at work.

    In the old days, people had to sell off assets before they could go on public aid. Today, I suspect that would be considered dehumanizing. Your post is unclear if you want these companies to sell off 10% of themselves, 10% of some of their parts, all of their identifiable parts, or just want Uncle Stupid to buy 10% of whatever they want to get rid of.

    I suggest they do what the text books say business does in cases such as these. Sell the company to whoever wants it however they want it, liquidate as appropriate, let the stockholders take it up the ass. Put a ‘For Sale’ sign in front before the bankruptcy court shows up.

    I’m sure extortionate demands from bank management are polluting the back rooms. Uncle Stupid fixes us or we shut down the world economy by killing ourselves via bankruptcy. It’s a variation of holding one’s breath until they turn blue.

    Perhaps the FDIC should just go in and put one out of it’s misery. Others might just start putting a little more effort into competent management sans extortion. Having the FDIC do the work would be less harmful overall than having a bankruptcy court do it and cost no more than another bailout from Uncle Stupid.

    I’m not kidding. Why isn’t the FDIC kicking ass now? These losers have had their chance and been shown extreme generosity in the process. Now it is time for Uncle Stupid to sic the FDIC on at least one of them and show management the true meaning of public humiliation.

  22. danm says:

    @ danm — how about selling the IPO’d shares to Social Security? That way, at least the people would get the benefit of low-ball IPO prices.

    ——————-
    SS is entering crisis mode now. These IPOs won’t have any value for a t least a decade! If these are put into portfolios before any value is seen, you will get a revolution!

    Not to mention that you don’t want to own financials in inflation unless everything on their books is variable or floating rate… I’m thinking that once all the crap is written off, all you’ll have is millions of fixed mortgages at 5%! With inflation on the way, I would not touch that with a ten foot pole.

    If we get huge inflation, nationalization is a sure bet.

  23. constantnormal says:

    Interesting how Barclays, faced with likely nationalization, decided that they don’t need any more public assistance.

  24. constantnormal says:

    @ dead hobo — “Now it is time for Uncle Stupid to sic the FDIC on at least one of them and show management the true meaning of public humiliation.”

    OK by me — I nominate Bank of America (Citigroup is too far along in deconstructing themselves for it to have much value in the Dept of Moral Hazard Lessons).

  25. Graphite says:

    Wouldn’t outright bankruptcy, with FDIC backstop of the depositors, be a better way to accomplish this than the roundabout method of a few years of government management? If the presence of the FDIC cannot mitigate systemic risks during bank bankruptcies, then what is the point of that agency anyway?

    The irony is that, after several decades of constant interference in the free market by bailout artists, nationalization is a better way to approximate the free market outcome (bankruptcy) than the “solutions” currently being pursued.

  26. dead hobo says:

    And about the CDS problem regarding those who bought them simply to bet on an outcome with no skin in the game other than a premium …

    The author of that article has it right. Those who weren’t hedging actual loans have no insurable interest. As a matter of insurance law (non applicable here, unfortunately) you can buy insurance on an outcome only if you have an insurable interest. The problem appears to be with those who bought contracts and had no insurable interest.

    The remedy is simple. Congress should pass a law that permits the sellers of the contracts to either pay off as agreed in case of default OR immediately refund premiums in full or in part, much as you would get a refund in part if you canceled an insurance policy prematurely. This eliminates a big problem at a relative low cost, and with reasonable equity.

  27. Transor Z says:

    Looking for thoughts here: assuming nationalization happens, should a version of Glass Steagall be re-enacted as part of the plan to prevent TBTF g0ing forward?

  28. phb says:

    @damn – and who is giving you the 4% versus 11% after nationalization? Free enterprise will be an interesting thing to watch in the next couple of years as profiteering off of this mess filters down the ranks a bit…

  29. rob says:

    Barry I’m shocked at you! Why nationalize, just liquidate the bastards! Does anyone really think another institution won’t step in and snatch up the failed assets? Oh come on! Have a fire sale, clear the slate, and let’s get on with it! No taxpayer money involved and it’s over with in a week! MAN UP!

  30. SWMOD52 says:

    From Rueters online: Goldman Anaylyst comments

    Analyst Richard Ramsden re-launched his coverage on U.S. large-cap banks with a cautious view and warned investors to avoid Citigroup Inc (C.N) stock as there was no core earnings power clarity and its equity value was unclear.

    My comment: A greeter at Wal-Mart has more value to society than stock analysts. Pathetic! I wonder how much he gets paid for this crap.

  31. dead hobo says:

    Transor Z Saids:
    January 26th, 2009 at 9:14 am

    Looking for thoughts here: assuming nationalization happens, should a version of Glass Steagall be re-enacted as part of the plan to prevent TBTF g0ing forward?

    reply:

    Nope, I think it’s a much easier problem to solve.

    SarbOx already requires management of publicly traded companies to report annually on the effectiveness of accounting controls and severe penalties are applied if they fail to do so. This report includes a report on all failures of internal control since the last report. The report on the effectiveness of internal controls is supplied to external auditors annually, and they are required to review it for accuracy.

    The Too Big To Fail problem is just a failure of accounting controls. If management allows a company to grow too big to fail, then this could be construed as a failure to appreciate the complexity of the business relative to the competence of current management. Controls should be in place to prevent this.

    For example, is a business process so complicated that it can’t be explained to a trained person of average skills? If so then a failure of internal control has occurred. Is an investment so cobbled together that it can’t be explained? This is a failure of internal control.

    Rules which are not being enforced are already in existence to deai with the Too Big To Fail problem going forward. The FASB and the SEC need to coordinate so that AS5 includes this theory of internal controls.

    Imagine a world where buying a mark to model investment that involves a three tranch system, doubled and tripled over would put a bank president in jail unless it could be explained by an average peeson with a few semester hours of college accounting?

  32. Darkness says:

    The cutting them up is the key long-term part of this. If they remain whole as is, with the same idiot culture, still too big to fail, we’ll just have to bail them out again in three years.

    Cut ‘em up. Cut ‘em up. Cut ‘em up.

    Then pass legislation forcing anyone too big to fail to break up. Along any lines they feel like, they just have to do it. At the end of this the only bailout ever needed is the standard fdic action, which seems quite orderly and efficient, all things considered.

  33. danm says:

    @damn – and who is giving you the 4% versus 11% after nationalization
    ————————
    If government is preoccupied with keeping leverage propped up, it’s not going to be offering market rates, it’s going to subsidize which means the incentive will be to keep rates and credit spreads low.

    Governrment, at this point, can print all the money it wants (I think they are joined at the hip with the Fed). It can keep rates low amid huge inflation… It all depends on whether or not the leaders care about the people.

  34. globaleyes says:

    Hell, I can barely RATIONALIZE the banks, nevermind NATIONALIZE them (wink).

  35. danm says:

    I guess my biggest concern right now is whether or not the US is headed toward a South American model or toward a more European one.

    Obama makes me think that he is aiming for a redistribution of wealth but I’m not sure the system will let it happen.

    Nationalization could go either way.

  36. Hal says:

    I presume Goldman and PIMCO would handle all the details?

  37. Hal says:

    A little OT:

    Barry-last week you were beating on airlines and businesses. rightfully so.

    Yesterday I was on a flight and a guy brought on board luggage that did not fit. He proceeds to start pulling out his underwear and stuffing it into the overheads. Then he picks up a second carry on almost as large and there is no place for that. He stuffs it someplace and then he starts putting in his oversize coat–which immdediately falls on another passenger.

    the passengers watching this are splitting a gut laughing at the guy. Until we all figured out he was delaying departure .

    Sad but true.

  38. dead hobo says:

    Upon reflection, it’s perfectly clear. We need to blame the accounting profession for emphasizing form over substance.

    Audits put a lot of emphasis on looking for material discrepancies in accounts receivable, bank accounts, inventory, petty cash, and other areas. In recent times, they have been asked to ensure the valuation of investments to reflect liquidation prices. They have been asked to test the effectiveness of internal controls so that it is unlikely, for example, boxed bricks are masquerading as goods available for sale or ghost employees are getting checks.

    Notes to financial statements are supposed to contain information on contingent liabilities. The concept of contingent liabilities is the control weakness. Is management so incompetent that their simple existence is a contingent liability for the entire business? This area need to be objectified in a way that allows investors to know if management is clueless and dangerous or if it is pretty good.

    For example, do they accept business that can’t be explained by people of average competence? For every intangible product sold, what is it, how does it work, what are the risks, is there a resale market, and more. Do they even know how the business works and how the parts inter-relate? To what extent did management understand the MD&A or how much is just the product of fluffsters?

    Auditors appear to be more interested in counting paper clips than reviewing the competence of management via objective criteria.

  39. greenie says:

    I have to disagree with the nationalizing talk. I may be the only one out there that still believes in capitalism and the need to step back and really think before we throw more money at these banks (and now home builders, schools, realtors, steel factories, car makers, auto sellers, porn industry, etc). I am not some crazy “ let them eat cake” type, but there comes a time when companies that continue to make bad decisions must fail.

    I was (and am) in favour of short term government assistance, especially when there could be systematic failure of the banking or investment system. For example the Treasury and Fed needed to assist and sure up the contra-party risk with Bear Stearns, if they did not the freezing of trading could have halted investments world-wide. Possibly the AIG investment was the same (not really convinced of that). However, I believe we should not create a system were the government will ride in on a white horse to save sick industries. It makes a bad precedent and the firms (investors) who ran their companies correctly will not get rewarded.

    There is a difference between a safety net and a guarantee you can’t fail. We learn from our failures and make us stronger, not only as companies but as people and a nation…nationalization will not help anyone learn not to make these mistakes again.

  40. bcasey says:

    Still way behind the curve. What we ought to be doing, not talking about, is shutting them down period.
    Seize the assets, lay the lower level employees off, and indict all the upper management. They can argue their merits from behind bars.

  41. willid3 says:

    i doubt any body is in any position to take over the TBTF banks. banks on that scale aren’t going to be cheap. and where will they get the capital to do it? private capital is running away because the entire banking systems is considered to be suspect. and these bankruptcies you seem to be in favor will take years, if not decades to complete. Lehman’s was much smaller than any of the TBTF banks. and less ingrained into the economy than it was. and it will be decades before that mess is resolved. if it is.
    and if one of them does go bankrupt, the bank runs will start on the others. if a TBTF bank isn’t safe, then none of them will be treated as such. and the regional banks are starting to look as being in trouble also as they were into CRE loans since they couldn’t compete with the investment banks and mortgage brokers.

  42. Swampfox says:

    Couple of things:

    1)It strikes me that the foxes are in charge of the banks, the regulators, the Fed, the government, etc. I believe most of the folks reading this blog would agree. If that is the case, why would we put our trust in nationalization? It seems to me that things will be even more open to looting and manipulation at that point.

    2) Since I think TPTB will nationalize, I decided to do a bit of reading up on the matter and to think about what it actually means for preserving wealth. After reading a portion of this IMF report on bank crises, http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf, I realized that the nationalization might go well initially, avoiding banking holidays, deposit freezes, bank runs, etc., but that the potential for a large systemic collapse actually will increase once the banks are nationalized. The debt is still there, the potential for far greater abuse and corruption is there, and the government and currency have more exposure to the problem.

  43. Lukeaduke says:

    I don’t think it is an issue of nationalization or not. A quote from this week’s leader in The Economist on the best way forward that sums it up:

    “…nationalisation is not an end in itself, but a consequence of the policy that most rapidly returns the banking system to health. It is a heavy cost, but there is no alternative. If taxpayers own a bank, pretending that they don’t only exacerbates the harm.”

  44. Patrick Neid says:

    Nationalize them for what? So we can permanently institutionalize the loss and the moral hazard going forward? Isn’t one Fannie Mae enough as management takes extreme risks, gets rewarded handsomely and then leaves with cash in hand as we get stuck with the bills. Yes that’s right, lets add Citi and BofA now and countless others during the next cycle. Meanwhile lets tell the sheeple it’s just temporary and who knows we might even make a profit on it. We heard that stupidity just a few months ago.

    Shut them down. This continual stream of straw-men—they are too big to fail crap—is just excuse making by people who have not a clue. In fact they have never trusted the market as they even now continually search for scapegoats to prop up their pets theories on how to intervene. How many trillions do we have to waste before we get it?

    It’s pathetic.

  45. Mannwich says:

    I think we “nationalize” them to shut them down and start over. The sooner the better.

  46. jbarnes says:

    I would argue that the fastest, fairest, and most efficient way out of the current credit and financial mess is bankruptcy. The cheapest I would leave open for debate.

  47. sslee says:

    They are NOT going to nationalize the banks. Institutional holders ie, pensions, etc… have already lost too much with the lower share price.

    It will not happen.

  48. DL says:

    Well, it’s either nationalization or bankruptcy. Whatever it takes to stop bleeding the taxpayers.

  49. donaldofr says:

    Barry Wrote : “How a 120% of a company’s market cap yields a single digit ownership stake is beyond my comprehension.”

    This is akin to responding to somebody who is selling a BMW for $50k with : “I’ll pay you 100K if you just let me use it on the weekends!!”

  50. Kelja says:

    Nationalize the Banks.

    Do it and we’ll see Dow sub-6000 and a $USD below .65. And that’s being conservative.

    Hold on to your hats.

  51. DL says:

    Kelja @ 12:32

    “Dow sub 6000″

    Maybe so. But a far better outcome than pouring trillions of dollars down a black hole.

  52. Jeff L says:

    These companies (Citi, BoA, AIG, GM etc) are so big we MUST let them fail. To do otherwise is morally, ethically and logically just wrong. We should stop pouring good money after bad and push them into Chap 7. Let’s pay the price (economically, socially etc) now, as steep as it may be, pay it upfront and get it over with. Otherwise we continue down the Japanese road and will be nowhere in 20 years.

  53. Kelja says:

    Let’s just change what it says on our currency to ‘In Government We Trust’. That sums up the general thinking of pundits today. Everyone says, if we didn’t do it or don’t do, look what might happen. They never consider the opposing thought – now that we did it (or will do it), look what might happen. What I’m awkwardly trying to say is that it’s the medicine that kills us.

    What happens when the banks are nationalized? The government will have more to say about the private lives of its citizens than ever before. The stock market and dollar smashed.

    What happens when the government starts buying the long treasuries?

  54. RangerTurtle says:

    Make one or two brand new National Banks and fund them with 350B$. Let all the pre-existing banks go bankrupt, or stand on their own.

  55. call me ahab says:

    I couldn’t agree with you or the NYT article more- I think it would cause all financial stocks to fall in the near term- in the long term it will stabilize the market.

  56. DL says:

    Kelja @ 1:03

    There are 3 options:

    (a) nationalization, (b) bankruptcy or (c) continuing to throw endless amounts of money at the banks.

    Which of the three do you endorse?

  57. Kelja says:

    DL @ 1:47

    I agree our options are limited. As with most problems, this one could have been far less serious if something was done much sooner. But – as all the politicians and business leaders would say, “Hey, we didn’t see this one coming!” And I say, “Ha!”

    As to the 3 choices. (C) is not working and should not have been tried in the first place. Both (a) & (b) will cause much gnashing of teeth and wailing – market turmoil. But of the two, I choose (a) as the best choice. At least with that choice, we retain a quasi-capitalistic system and the concept of moral hazard is retained.

  58. ottovbvs says:

    DL Says:

    January 26th, 2009 at 1:47 pm

    It’s a) or c). With due respect to my fellows who cheerfully suggest b) I’m afraid you have a screw loose. The problem with a) as a few have pointed out is the impact on the ability to attract private capital into the sector. There are also some other issues which can be basically described as:
    + Cascade effect, or a load of banks lining up to be nationalized
    + Psychological effect when the greatest banks in the US are seized by the state. You’ve effectively destroyed belief in the US financial system for a generation. I’m not too worried about the dollar because so many others are in the same boat and China is basically in the position that it can’t allow the US dollar to tank. Quite honestly god knows what the market reaction would be, I tend to think not too bad but who knows.

  59. super_trooper says:

    Being a Swede, having lived in Sweden during the time early 90s banking crisis (have lived in the US the last 10+, there’s a reason I don’t own a house), I have seen this train before. We are currently facing a depression. You can reach a L shaped recession if you take care of the banks. We’re looking at a dragged out U shaped recovery of banks are nationalized (managed by professionals and sold by law 3-10 years from now). The sooner you take the pill the better. Unemployment rate quadroupled in Sweden. But Sweden slowly got out of it 4-8 years later by (i) strong global economy (driven by export to US and EU countries), (ii) devaluating the currency 20%, (iii) healthy banks and (iv) eventually balancing the gov budget and (v) lower interest rates (the Swedish Federal bank increased the rate to 500%!!! to protect the currency in 1991, try paying back that loan!) and (vi) reaching the bottom of housing prices (they can oonly go so low).
    This crisis is worse!
    (i) the US can’t be dragged out of the mess by the global economy
    (ii) devaluation of the currency still has to happen (it go stronger with the crisis)
    (iii) still tring to deal with really bad banks.
    (iv) balancing the state budget will have to be dealt with in 3-5 years
    (v) interest rates can’t go lower
    (vi) bottom of housing prices will be reached by the end of the year

    Clean up the banks, split them up in pieces. That will force half decent banks to either raise new capital or risk the same faith. There’s no time for the Government to play games with unskilled bank directors. no mercy, screw the stock holders, there’s no value in citibank in its current form. And nothing magic will happen the next 6-12 months, it’ll just get worse. Stopp acting like communists and feed the establisment with taxpayers money. Take the companies over, restructure and sell them out. Be a socialist (like Sweden) and save the economy.

  60. super_trooper says:

    Regarding solving the the banking crisis in Sweden vs USA.

    Sweden never had to deal with credit default swaps. I have absolutely no idea what the losses coult be with this instrument and if you could cover the losses if you set them aside. So, depending on this number the US could be completely f*&ked.

  61. Thisson says:

    What about option d: put all the bad private sector debt onto the public sector’s balance sheet, and then default?

    Isn’t that the “big plan” ?

  62. Darkness says:

    “the concept of moral hazard is retained.”

    We don’t want to retain moral hazard. That’s exactly what got us into this mess in the first place.

    From Wikipedia: Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

  63. Kelja says:

    damn it, meant (b) -wish I could edit!

  64. Transor Z says:

    Stiglitz just posted an editorial on CNN.com that sounds to me like he is advocating nationalization:

    http://www.cnn.com/2009/POLITICS/01/26/stiglitz.finance.crisis/index.html

  65. Pat G. says:

    “Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets.”

    This conundrum

  66. WaltFrench says:

    Maybe you could spell out what would happen to the rest of banks’ balance sheets. How about loans or other obligations? Would Uncle Sam repay them in full, rewarding investors who took risky bets with full returns? What would be a fair discount rate?

    How about the truly egregious CDS positions? Trillions of ‘em floating around, we hear.

    If we’re really going to talk nationalization of banks that have run themselves into the ground, we need a few more details. Time’s a wastin’!

  67. Mark A. Sadowski says:

    I’ve been dumbfounded by the number of seemingly intelligent people who are going into all sorts of intellectual contortions trying to come up with a solution to the credit crunch when nationalization is the obvious and most simple solution. First, either the taxpayer takes the entire hit or the bondholders and shareholders share the cost. Since making the taxpayer foot the entire bill results in a moral hazard problem, I say wipe out the shareholders and bondholders. Second, this would not be forever so all those worried that this is socialism need to take a tranquilizer. Third, we did it before in the S&L Crisis and it worked pretty well. Stiglitz is not the only Nobel laureate who favors nationalization. So does Krugman:

    “A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.”

    http://www.nytimes.com/2009/01/19/opinion/19krugman.html?_r=1

  68. Mark A. Sadowski says:

    Paul Krugman also favors nationalization:

    “A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.”

    http://www.nytimes.com/2009/01/19/opinion/19krugman.html?_r=1

  69. Jono says:

    Yeah. nationalization worked really well in the Soviet Union, lets see if we can wipe out the economy this year and crush its spirit.

  70. Mark A. Sadowski says:

    @Jono,
    The real choice is between my spirit (and tax dollars) and the bank shareholder and bondholder’s spirit. They messed up so let them take their loss. It’s called capitalism. In the good years, they were rewarded for their risk taking. Ownership cannot be a one-sided bet. Otherwise its just corporate welfare.

  71. Mannwich says:

    @Jono: Oligarchy hasn’t exactly worked out well in today’s Russia, so let’s not copy that model either. Please refrain from the false choice you offer.

  72. Let them go bankrupt and then let any company that wants to be a bank apply to be one. As long as they adhere to the rules of banking there will be banking, liquidity and competition galore. This, of course, would mess up the cabal and thus never would fly but it sure would speed the healing