As previously noted, the dilly dallying around with these horrific banks and their grossly incompetant management must come to an end.

Sometimes the market gets it just right: The selloff in the financial sector might very well be the cumulative conclusion reached by a preponderance of traders that this sector cannot be rescued by mere recapitalization alone. The market, looking to open down 200 points, and cloosing in on those November lows, may also be sensing the inevitable nationalization.

The Brits, soon to nationalize Barclays, have the right idea: Go Swedish. Wipe out shareholders, bond holders, and all the bad debt and junk paper these firms hold. Zero it out, spin out the assets with clean balance sheets.

If the behavior of these corporate executives is nothing short than egregious: Their embarassing attitudes, foolish excesses, sense of entitled greed is annoying but tolerable when its on their ownshareholders dime; when the taxpayer is footing the bill, it is utterly unacceptable.

To paraphrase a Mellon, its time to liquidate the banks, liquidate capital, liquidate shareholders, liquidate bond holders . . .

>

See Also:
Sweden’s Fix for Banks: Nationalize Them
CARTER DOUGHERTY
NYT, January 22, 2009

http://www.nytimes.com/2009/01/23/business/worldbusiness/23sweden.html

Category: Bailouts, Corporate Management, Markets

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.

67 Responses to “Time to Get Swedish”

  1. mikesic says:

    Why do we have to nationalize? Why can’t we use pre-packaged bankruptcy scenario that was discussed for the autos? Wipe out equity holders, give new shares in the banks to the bond holders. Or use prepackaged bankruptcy proceedings to sell off good assets to good managers etc. System is broken but nationalization will put us down a slippery slope that we might not be able to pull ourselves out of.

  2. mike j says:

    mikesic:

    Prepackaged BK would result in massive losses for depositors. Nationalization avoids that. I think. Someone correct me if I’m wrong please.

    -Mike J

  3. nl says:

    Depositors would be protected. Here’s are some real-life examples of prepack BK for banks:

    http://www.newworldeconomics.com/archives/2008/101208.html

  4. The little-guy depositors are protected already via FDIC insurance. It would be the big guys that could be hurt in a BK (>250,000 on deposit).

    Roubini is correct in observing that the US banking system is effectively insolvent. The sooner we quit kidding ourselves and start accepting reality, the sooner we can get past it. Shareholders have already been practically wiped out. Let’s just get on w/ the inevitable liquidation. Zombie banks are worse than dead ones.

  5. Hal says:

    correct a mundo–

    the goal was to keep the banking system going.

    The shareholders and bondholders have made a bad investment.

    The top execs have screwed up.

    Clean house and start over–keeping the customers and the VALUED employees whole.

  6. globaleyes says:

    That’s right; zero ‘em out; make ‘em pay; show ‘em how we DO things around here.

    What am I talking about?

    Answer: Nationalizing the banks and blaming bankers for the kind of financial ineptitude that dethroned American Capitalism.

  7. mikesic says:

    I agree with liquidation of bad banks or at a minimum the shrinking of others. I just think they’re better alternatives to nationalization. Once something gets nationalized, it almost never goes back. Just like a govt program never disappears. I am a little surprise that Barry would want full nationalization. Especially since they have done such a good job with TARP, TALP etc..

  8. wally says:

    Exactly. We don’t need to save the banks; we need to change the banks.

  9. ottovbvs says:

    BR: Why pick on Barclays. They haven’t so far taken a penny from the British govt. While it’s very likely Royal Bank of Scotland and Lloyds might get taken over by the govt, that’s not really true of Barclays. It’s not impossible, but only an outside chance at the moment.

  10. phb says:

    The Curmudgeon – You da man! Love your comments and observations, mainly because I tend to agree. What is your thinking on the outstanding debt owned by the zombie banks? Rather than just ignore the 800-lbs gorilla in the room, isn’t necessary for some type of “re-assessment” or loan re-set to return to a normal business cycle?

  11. flipspiceland says:

    I would love to own a bank.

    I’d take the deposits that folk put in, pay them 2% interest, lend their money out, less some reserves, at 6% and make a nifty 4%. I mean how hard can this be?

  12. SWMOD52 says:

    If they did nationalize the banks would that be a positive for the market as a whole or would it just be more negative news?

    Also, if this talk of nationalization becomes greater and greater the maket is going to take these stocks to zero on it’s own. Right now it looks like a short C could be a 5 banger in no time.

  13. TDL says:

    Much has been said about the Swedish experiment, but Stefan Karlsson (a young, Swedish economist) posted about the topic a while back. It turns out the Swedish action was neither as widespread nor as successful as made out to be.

    http://stefanmikarlsson.blogspot.com/2008/09/myths-facts-about-swedish-bank-rescue.html

    Regards,
    TDL

  14. I-Man says:

    @ BR:

    Your prose is getting very extraordinary BR… Well said:

    “If the behavior of these corporate executives is nothing short than egregious: Their embarassing attitudes, foolish excesses, sense of entitled greed is annoying but tolerable when its on their own shareholders dime; when the taxpayer is footing the bill, it is utterly unacceptable.”

    Epilogue for “Bailout Nation”?

  15. Paul Jones says:

    Just Say No! to any taxpayer funded aristocracy!

  16. Vega says:

    Awesome post.

  17. GreatWarrior says:

    Steve, I read this from somewhere else, but I wish you can verify this.

    Someone posted that his friend’s young sweet 29-year old daughter in the bankrupt Citibank just got a bonus of $92K for year 2008 performance.

    Yes, $92K bonus from a bankrupt C to a sweet young girl, on top of her over-paid position and role to screw down Citibank.

  18. GreatWarrior says:

    By the way, that $92K is from all of us the USA TAXPAYERS!!!

  19. I-Man says:

    Although it sounds great on paper… I-Man has doubts as to whether we could ever pull this off in the US:

    “Since the whole idea was to eventually put Securum out of business, managing it required a deft touch that rewarded financial success with incentives for employees but also stressed their work’s nature as a public trust.

    “I think people felt a tremendous responsibility for the taxpayer,” Mr. Thunell said. “But it was extremely stimulating from an intellectual and business standpoint because you were doing completely new things.” ”

    A government entity having “tremendous responsibility for the taxpayer”… although I’m a bit appalled at my own pessimism here, I just dont see it happening… that is UNLESS, the right people were picked for the job. But sadly, that will never happen. I dont know, Barry, why dont you apply?

  20. Mannwich says:

    This was/is inevitable since the day TARP was put forth. Let’s get on with it please.

  21. JohnnyVee says:

    Pre-package BK or nationalization–take your pick. But get on with it so focus can turn to the real economy or what’s left of it.

  22. awilensky says:

    Could someone please explain, really, why a government would provide billions to a bank with hardly a procedure for a physical application, while SBA and local econ dev loans are like a rectal exam?

    Also, why does the Phed not insist that dividends stop immediately upon receipt of gov funds? No brainer, right?

  23. Ventura2012 says:

    Doesnt the credit default swap exposure make it impossible to nationalize the banking system. Would the liabilities on these weapons of mass destruction immediately double the US national debt.

  24. Mannwich says:

    @Ventura2012: Not if the feds just cancel those CDS contracts in the process. I think you hit the nail on the head though. The heart of this problem likes all of the CDS exposure. They can’t “print” enough money to cover all of these failing contracts because every day brings new failures. We haven’t even begun to see the CRE defaults reach a critical point yet but we will. They know this, which is why the banks are hoarding the bailout cash.

  25. I-Man says:

    @ Ventura2012:

    Good point, I hadnt considered that aspect.

    But arent they going to just void all those CDS’s anyway? At least it appears that way. Sure was a lot of jawboning about putting them on an exchange and opening them up to the public eye… but from the looks of ICE and CME lately, that idea didnt gain the traction with the Fed that they thought it would.

    Whats taking them so long if they are going to put them on an exchange? Hmmm… maybe a debate about whether they should just blanket void them???

  26. r says:

    Oh Barry, Take a deep breath and think about what you are proposing.

    When CEOs of banks screw up, they’re gone! When the govt screws up, they get reassigned or promoted.

    Compare the list of bank and mtg CEOs who have lost their jobs with the list of senior govt officials who were fired (I can’t think of any).

    It’s going to be OK. Just need some time to work things out.

    The real crime is the govt giving billions (OK, soon trillions) to the banks to enable their awful behavior. If they didn’t, the flushing would be much more swift and just. The taxpayer hasn’t spent a dime on Lehman since they went poof.

  27. Pat G. says:

    Nationalization is not the answer. The banks can reorganize under bankruptcy protection AND write down their bad assets in the process.

    “The market, looking to open down 200 points”

    Yep and then magically at 7900 it bounced. You have to wonder who’s protecting that “line in the sand”. And more importantly, why?

  28. @ phd

    “What is your thinking on the outstanding debt owned by the zombie banks?”

    Reply:

    Treat it like you would the debt of any failing institution–the FDIC covers the depositers up to $250,000, after that, get in line. Senior secured debtors get theirs first, etc. Quit pretending a bank is some special sort of institution whose failure would damage the economy. Banks have always failed, and as long as their business model is fractionally-reserved borrowing short to lend long, always will.

    In other words, allow them to fail just like any other business. In essence, most have already if they weren’t lying about their balance sheets. In receivership or BK, the bank’s debt can actually be written down and off to its true value, which would result in a much stronger entity if it survives.

  29. Bruce N Tennessee says:

    Maybe instead of nationalizing banks, we should lower rates below zero…did everyone else see this today? We are going and thinking where “no man has gone before.”

    http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090119_561565.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis

    Rates: When Zero Is Way Too High

  30. Pat G. says:

    @ Curmudgeon

    Exactly. I would argue that the banks are currently damaging the economy due to the unprecedented amount of taxpayer money they’re getting (debt creation) and the lack of confidence they’re creating.

  31. thedocument says:

    I agree that taxpayer money should not be dumped down the banking black hole. It seems little more than an outgoing administration trying to save their friends. There are plenty of healthy, mid-sized banks that could have taken the depositors if the big boys were allowed to fail. However, the pain was going to be socialized one way or another because of the hit on the economy. Unfortunately, we’ve taken the politically-expedient course rather than the economically-proper one, and we will be weaker for the effort when we come out of it.

  32. Bruce N Tennessee says:

    It is still deleveraging of debt, and not a liquidity crisis….by the way, Mish had some nice things to say about you and CR today, Barry. I hope you saw them.

  33. Ventura2012 says:

    @I-Man

    I am not sure cancelling the CDS would work, alot of banks, hedge funds are holding them at market value and were not necessarily the writers of the contracts. It does seem sometime of intervention in the CDS market will happen though. A very slippery slope to walk down when legal contracts are negated..definitely no easy solution to this problem. I am just afraid a nationalization with this CDS exposure could cause a run on the dollar of epic proportions.

  34. Pat G. says:

    @ Ventura2012

    “I am just afraid a nationalization with this CDS exposure could cause a run on the dollar of epic proportions.”

    That’s going to happen anyway as soon as everyone realizes that the dollar to which they’re scurrying, isn’t much better off than either the pound or the euro from which they’re running.

  35. Mannwich says:

    Kudlow wants tax cuts for “the investor class”. “Capital is on strike”. Gee, I wonder why? We need to cut taxes on “capital gains”, he says.

    Says this would solve the problem. What a friggin’ idiot he is…….God, I hate this man.

  36. Ventura2012 says:

    @Pat G

    “That’s going to happen anyway as soon as everyone realizes that the dollar to which they’re scurrying, isn’t much better off than either the pound or the euro from which they’re running.”

    I think you could replace everyone in your sentence with China….they hold the key to the US fate right now in my opinion.

  37. Hal says:

    these should be managed bankruptcies.

    Make sure they come out of BK–ie United (albeit still in trouble) and other airlines went into BK where they kept operating, the customers felt little difference. The suppliers took a little hit on existing debt but kept their customer. Shareholders and bond holders got hosed–but thats ok–and execs should get hosed rather than showered with bonueses

    the execs you want to keep shoud have a long term bonus plan that would nicely compensate them for staying AND turning the place around.

    And hedge funds and bansk shoudl not compensate hi level employees short term for taking risks with OPM.

    But–thats the shareholders responsiblity –not the govt–its the Boards responsibility–not the govt.

    gold going nuts now.

  38. Moss says:

    @manwich:

  39. Mannwich says:

    OT: CNBC trotting out the idiot troika of Wesbury, Lavorgna and Liesman. I’m going grocery shopping. Can’t stand it anymore…..

  40. call me ahab says:

    @ SWMOD52

    I think the market is coming to the conclusion that the banks are worth ZERO anyway. Initially I think nationalization would cause a huge sell off. However in the end it will quicken the process of recovery. Additonally with nationalization management would be fired as they should be. Shareholders and management made large $$$ on the way up so there is no reason they should beneift from any government largesse now due to their failures.

  41. phb says:

    @ Manwich – Come on now…CNBC is the Disney Channel for the investment community – couple of cute girls, silly story lines, strange older characters, and cartoons (ie Cramer). IT is what IT is!!!

  42. Pat G. says:

    @ Ventura2012

    Here’s a clip I took from a MSN article from a couple of weeks ago. “Many of the foreign governments who hold huge amounts of US dollar Treasury debt, such as China and Japan, have announced plans to spend money on their own ailing economies. Should these foreign central banks divert to domestic initiatives some of the funds used to buy US Treasuries, serious upward pressure on US interest rates will result. Should they actually sell parts or all of their holdings they will likely put serious downward pressure on the US dollar. Last week, a Chinese official claimed the US dollar should be phased out as the world’s reserve currency. In the short term, as dollar carry-trades continue to be unwound and questions of political will and falling interest rates haunt the euro and some other currencies, the US dollar may be the recipient of some upward appreciation. But with the American government appearing increasingly to be in panic mode, a run on the US dollar could develop rapidly into cascading devaluation. Even if no such panic run materializes, the long-term outlook for the US dollar is one of high risk and low return.” So, I agree completely with you.

  43. Moss says:

    @mannwich: agree with Kudlow assessment. Now he has his lapdog Westbury on. The tunnel vision is remarkable.

  44. Mannwich says:

    @phb: I’ve finally throw in the towel and am switching to Bloomberg for good. They’re the least worst of all of my TV options right now.

  45. batmando says:

    repeating comment from a day or so ago, but wouldn’t an added benefit be the gov’t having total access to all the nationalized banks’ dirty laundry and major perp walks ensue?

  46. Mannwich says:

    That’s “thrown” in…..man, so many careless errors lately!

  47. johnbougearel says:

    Our policymakers are too wrong-headed in their thinking to make this happen on their own. Their only goal is to save teh financial sytem, to restore financial stability at all costs, “damn the torpedoes, full spead ahead” is the only course they know! Truly I say unto you, the time for us to mutiny of the captains of the sinking Titanic.

    The government suffers from mistaken goals at taxpayer expense. Irving Fisher’s debt-deflation theory needs to be seriously addressed by our policymakers. Specifically, Fisher said that “over-investment and over-speculation are often important [as causes of the Great Depression]; but they would have far less serious results were they not conducted with borrowed money.

    The government is insisting taxpayers over-invest in private companies burdened with over-indebtedness. All casual market observers may not know precisely what to do fix the mess but understand clearly that the clog in the over-indebted financial system today can not be solved by throwing public debt on top of it. The financial system is drowning and these policies will only serve to further drown the American public already overburdened with too much of their own debt.

    If the government is to insist on being part of the solution they must remove themselves from being part of the problem. And that means if they are going to insist on expropriating taxpayer dollars to alleviate the economic crisis, then by god, they had better invest our monies into sectors of the economy that are not clogged, that are not drowning, that will provide a return on investment.

    This is the stupidest course of action imaginable. Banking crises have been escalating since the 1970′s, and the fail and bail interventionist response has begun to lose its viability. Pursuing the same market intervention policies then and expecting the same positive outcome/resolution as in the past needs immediate discussion in the new administration. These ad hoc remedies do not address the underlying structural problems that wounded the financial system so badly in the first place. The policies we are pursuing are mistaken goals. Structurally, the wound is still oozing, no matter how big the gov’t bazooka is or how big a TARP they put over it. (Paulson is proud to say he and FDIC Sheila Bair has done a lot work exploring what they are calling an “aggregator bank.” It will be called TARP II, no doubt. No, scratch that, I think we should call the aggregator bank, TARF—short for the Troubled Asset Relief Fund, as it rhymes so much better with BARF).

    These policies are not working; pursuing them is akin to staying the course and sailing into a worsening storm. Frankly, I’d like to ask when is the Fed and Treasury going to get a grip on reality, stop sailing the ship into the ever-worsening storm. There is more of that storm where it comes from if we stay on this course. And in the end, that debt-financed storm will prove to be a bigger bazooka than anything the Treasury of Fed can fire at it. And you know why it is that the storm’s bazooka/torpedoes is/arre bigger than ours: for the simple reason that that storm grows every time we finance it with more debt and more borrowings – ala Fisher.

    This is truly the definition of insanity. We truly need our policymakers/captains to modify their course and behavioral response to this crisis. See the storm for what it truly is: a ginormous debt-financed storm. Do not fire more debt and borrowings into it anymore please, it will only grow larger! Throw the public borrowings in another direction, cast your nets to the other side of the boat.

    The time to march on DC is now, in the first 100 days of the newly reconstituted Obushma administration

  48. CaptainNed says:

    Before we rush full into nationalizing banks, why don’t we all slow down and take a look at the condition of our local, small-town banks. At least in my state they’re all just fine. They never played in the subprime or Alt-A markets; they never bought anything more exotic than Fannie/Freddie callables, or maybe Agency-issued CMOs, and, most importantly, they weren’t trying to build nationwide empires on borrowed money.

    The problem in banking is not banking itself. Banks that stuck to the “old-fashioned” fundamentals are doing just fine. The problem is egomaniacs with lots of borrowed money trying to splash their name on every Main Street in America. The solution is to end the concept of nationwide franchises, repeal the National Bank Act and Home Owners Loan Act, and return banking to a locally-owned and locally-regulated business.

  49. DL says:

    Even that left-winger Robert Reich says we should let the failing banks go bankrupt.

    Nationalization is O.K. with me as long as it doesn’t cost the taxpayers anything (beyond paying off the depositors). But if it costs something, then we should go the bankruptcy route.

    In any case, if the stockholders and the bondholders (of the failing banks) get wiped out, that’s a step in the right direction.

  50. I-Man says:

    @ mannwich:

    Just turn it all off bro… that shit is a disease. I have found peace and fulfillment in my daily blog readings, Financial Times, IBD, and International Herald Tribune… and of course, the tape itself.

    Erin Burnett is kinda cute though… :)

  51. blogpost12 says:

    More Swedish skepticism (http://www.motherjones.com/kevin-drum/2009/01/nationalization.html & http://www.marginalrevolution.com/marginalrevolution/2009/01/what-the-swedes-did-and-did-not-do.html):

    First off, here’s what they didn’t do:

    * They didn’t act all that quickly. The real estate crash and the resulting credit losses began in late 1990, solvency problems started to become acute in late 1991, and a variety of treasury guarantees and capital injections were tried for another year after that. (Sound familiar?) It wasn’t until late 1992 that the Swedish government finally took serious, systemic action.

    * They didn’t nationalize the banking system. Only one bank, Gota, was taken over, and that happened only after it had collapsed. And aside from Gota, only one bank received a substantial amount of capital injection: the state bank, Nordbanken, which had much bigger problems than most of the private banks.

    * Generally speaking, they didn’t fire existing bank management.

    So what did the Swedes do? The main thing was simple: in late 1992 the Swedish government guaranteed all bank obligations throughout the system. They did this immediately for Gota after its collapse, and two weeks later for everyone else.

    What else? Not too much, actually. An agency was formed to dig into the portfolios of nearly every major bank, and this resulted in a capital requirement guarantee for one bank that was never used. In addition, the shareholders of Gota and Nordbanken were mostly wiped out.

  52. deanscamaro says:

    I think I am beginning to like other countries solutions to these kinds of problems. India threw the CEO of that high tech company that hid their problems in jail. China sentances those guys who tainted the milk products to death. We don’t know how to deal with greed, illegal activities, etc. We just pat them on the head and say “You shouldn’t do that” and let them go about their lives.

  53. DeDude says:

    The private sector has clearly demonstrated its inability to take care of capital markets. Since society needs a functional capital marked that can provide capital to where it is needed, and with appropriate control of and premiums for risk, it is time for society to take over this function. Other functions that the private sector is incapable of handling in a cost effective maner and for the benefit of society as a whole should be next – health care is one that comes to mind. If the private sector wants to compete with government that is fine, let them do so. If they can provide better services at lower cost that is just great (although no cherry-picking should be allowed). The only thing the private sector has ever proven itself better at doing than the public sector is to line their own pockets with other peoples money.

  54. phb says:

    @Mannwitch: I hear you bro, but Bloomie TV gets a little boring too. I think the approach of reading for yourself and hitting the mute button works best. That way I don’t miss the eye-candy and still keep current.

    Until next post…

  55. Transor Z says:

    @ Mannwich:
    Here’s a nice little CRE default for you from here in Beantown. (Not to be confused with the Prudential building, which is the one they use office lights to write “Go Sox” on.)

    http://www.boston.com/business/articles/2009/01/23/hancock_owner_defaults_on_loan/

  56. Baille Beag says:

    @Transor Z

    Nobody who actually lives here calls it “Beantown”.

  57. Transor Z says:

    @ Baille Beag: Well I actually live here and I just did. But thanks for your valuable input. How about GFY — is that something we say here in Beantown?

  58. Mannwich says:

    @Baille Beag: I’m from Boston (lived there 29 years) and have called it “Beantown” from time to time.

    @Transor Z: Yes, GFY, was/is something that they/we say in Beantown. It’s not a very nice thing to say but it’s widely used!

  59. Transor Z says:

    I rest my case. :-)

  60. duncanst says:

    Transor Z and Mannwich,

    You’re both full of shit.

    I’ve lived in Boston over 50 years……only newspaper writers (morons) and faggots call it Beantown.

    Which are you?

  61. Reminds me of a line from “An Officer and a Gentleman” when the drill sargeant (played by a black, er, African-American guy whose name eludes me right now) is inspecting the officer candidates for the first time:

    “Where you from, boy?” He says to the recruit

    Reply: “I’m from Oklahoma, sir.” (Any good military man would know instantly that this is Hollywood military because you never, never address a drill sargeant as “sir”–he’s not an officer, he’s a “drill sargeant”).

    Drill Sargeant’s reply: “The only two things to come out of Oklahoma is steers and queers. So which one are you, boy?”

    Gulp. Nothing from the recruit, except a scared face, looking at the drill sargeant.

    “Don’t you eyeball me boy. You eyeball me boy and I’ll poke out your eyeballs and skull fuck you to death.”

  62. Mannwich says:

    @duncanst: Wow, the vitriol. Why so angry? That’s why I left Boston. So many angry ass people back there who revel in being miserable. Go eff yourself d-bag.

  63. try2bamused says:

    Get real. The chances of our policy makers “doing the right thing” are exactly zero. There has been way too much corruption, criminality and cronyism for way too long for these people to even know what the “right thing” looks like. I guess there’s always the chance that we’ll just get lucky and somehow muddle through. But I’m not in a gambling mood anymore, and I don’t think anyone else is either.

  64. royrogers says:

    who will run the new government banks ??
    Can you guess who will run them ??
    The same idiots that flushed them down the toilet will run them
    cause they have political clout

  65. dunnage says:

    Same People Syndrome

    You have the same people on wall street and in government. Has this ever been more apparent? Actually, no attempt has ever been made to lead people to think otherwise. Notice that your Sec. of Treasury and Fed Chair are not elected.

    I wish there were a difference. Nothing could trash the Investment Banks as well as the private sector.

  66. dunnage says:

    By the by— The Investment banks will never loan on their own. I wouldn’t. They are building bomb shelters, praying for time, and needing many many more Trillions.

  67. victorberry says:

    If you want to end capitalism for a generation, go ahead and destroy more middle class wealth by liquidating banks. Sure, as “small fish” investors, the middle class won’t lose as much in the short term as the upper class. However, ask the middle class later what they think about it when their pension funds can only pay half the implicitly promised (i.e., explicitly advertised) retirement benefits. Subsequently, how many grandparents will instruct their grandchildren to never invest in the American financial markets? [Note: How many grandchildren will actually heed the advice of their doddering, bitter, live-with-the-kids grandparents is another story.]