In this morning’s WSJ, William Isaac, the 1980s FDIC chair, argues against nationalization of the insolvent mega banks. Isaacs oversaw the nationalization of Continental Illinois National Bank and Trust Company, and uses that as the basis of his opinion.

Unfortunately, it makes for an awful comparison. In his OpEd, Isaacs overlooks so many dissimilarities between the present situation and that of 1984 so as to render his argument meaningless. Continental has but one parallel to the current situation — it was a large and insolvent bank. On all other counts, the situation was extremely dissimilar to the bailouts circa 2008-09.

We discuss below those differences, but first, let’s see what Isaac has to say:

“People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization — government seizing control of ownership and operations of a company — is not a viable option.

Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country’s seventh largest bank.

The FDIC purchased Continental’s problem loans at a big discount and hired the bank to manage and collect the loans under an incentive arrangement. We received 80% ownership of the company, which increased to 100% based on the losses suffered by the FDIC on the bad loans.”

The comparisons between 1984 and the present are worlds apart, as are the dynamics between Continental versus Citi or B of A.

Let’s begin with Continental, which went into FDIC receivership in 1984, came out of receivership in 1991, and was ironically purchased by Bank of America in 1994 (their track record of lousy acquisitions goes back decades). Continental went bust due to a fatal combination of an aggressive growth strategy and a very poor purchase of loans from PennSquare. When Penn went bust, it dragged Continental along with it. Isaacs somehow fails to mention that Continental had a rather corrupt senior management, with kickbacks for approving risky loans; some of Continental’s execs ended up doing jail time for fraud.

While management of our current mega money center banks are incompetent and have failed to adequately account for foreseeable risk, no one is alleging that they are criminally corrupt.

Continental was also unique in that it was the very first major bank rescue plan under the concept of “Too Big to Fail” (TBTF). It was novel, a case of first impression, and there were no prior experiences to rely upon. In virgin territory, there was simply nothing in the FDIC playbook to explain how to handle the event.

In its eventual look back at the era, the FDIC wrote that Continental wasn’t Too Big to Fail; rather, it was more accurate to say it was “too big to liquidate.” At present, I know of no serious commentators who are suggesting a Lehman-like liquidation for the mega money centers.

“Regulatory options were also limited by “Continental’s peculiar characteristics: Although very large, it had proportionately few core deposits, no retail branches, and little franchise value.“  (History of the Eighties, Lessons for the Future, page 253).

The two situations couldn’t be more dissimilar. Unlike Continental, Citi and BoA have massive assets, enormous deposits, a huge number of retail branches and extremely valuable franchises. The comparisons between Continental and C/BAC are simply absurd.

Further, any suggestion that these entities become wards of the state indefinitely is not on the table. We are contemplating a very short period of time — months, not years. Not a single person is suggesting a 7 year holding period — that was how long Isaacs and the FDIC kept Continental a government owned entity.

Also insane: While the Continental shareholders were wiped out, all creditors and preferred shareholders came out whole — a ridiculous notion directly subsidized by the FDIC to the tune of $1.6 billion dollars. In the current situation, the idea that creditors, bond holders and preferred shareholders won’t be given a severe haircut is patently ridiculous.

Lastly, politicians in DC are already dictating executive pay, marketing expenses, employee trips, dividend policy advertising sponsorships, etc. These firms have, for all intents and purposes, already been nationalized.

Let’s compare 1984 to the current situation: We have already poured $90 billion into the two big banks, plus agreed to insure another $450 billion in assets. Now compare that to the relative pennies we spent on Continental. Any suggestion these two are remotely parallel is utterly ridiculous.

Continental was the first major bank rescue of the modern era. Since then, we have learned how to accomplish these workouts through the entire savings and loan crisis, along with the Resolution Trust Corporation (the government-owned firm which disposed of failed S&L assets); the subsequent government takeover of the Bear Stearns (immediately flipped to JPM), the 80% nationalization of AIG, the full blown takeover of Fannie Mae and Freddie Mac; the seamless transition of Wachovia, and Washington Mutual by the FDIC; What is effectively a 75% takeover of CitiGroup and Bank of America.

And that’s before we even get to the current issue of systemic risk, or the drag on the overall economy of having two massive Japan-like zombie banks hanging around. Given that we have already spent 300% of their market caps in terms of capital injections, and are on the hook for another 1500% of their valuations in terms of insured paper, these two banks are becoming vast money pits, ginormous black holes into which vast sums of taxpayers wealth disappear, never to be seen again in this universe.

Former FDIC chairman William Seidman notes that we have not only encourage moral hazard, we have incentivized the banks to keep coming back to Uncle Sam for more cost-free taxpaper money:

“It’s the question of, ‘What’s the best way to get this system cleaned up and going again?’” William Seidman, a former FDIC chairman said in an interview. “In my view, you have to nationalize some of the banks to do that.  The alternative is they’re losing money, they come back to say, ‘We’re too big to fail, we need money.’ They’ll do that every month.”

It would be fair to state that Mr. Isaacs was dealing with a problem of first impression. We have since learned a great deal through trial and error — especially Seidman’s role as first chairman of the Resolution Trust Corporation.Seidman oversaw far greater liquidations and nationalizations than did Isaacs. And at present, the FDIC is liquidating 2 banks per week without any fuss or muss.

Let’s not ignore these hard lessons and experiences for foolish reasons of ideological purity.

>

Sources:
Bank Nationalization Isn’t the Answer
WILLIAM M. ISAAC
WSJ, FEBRUARY 23, 2009, 11:19 P.M.

http://online.wsj.com/article/SB123543631794154467.html

Continental Illinois and “Too Big to Fail”
FDIC

http://www.fdic.gov/bank/historical/history/

http://www.fdic.gov/bank/historical/history/235_258.pdf#search=’Continental%20Illinois’

Obama Bank Nationalization Is Focus of Speculation
Linda Shen
Bloomberg, Feb. 23 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=anGxzRYhVF_Y&

Category: Bailouts, Credit

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.

56 Responses to “Citi & BofA Ain’t No Continental Illinois Bank”

  1. VennData says:

    But… but, red-scare rants makes such great television.

  2. thehman says:

    Barry – did you even read the 2nd half of the article? he wasn’t comparing continental to the current situation – “So, you might wonder, what’s so bad about nationalization? It appears to have worked well at Continental.” The article is about how different the current situation is from Continental. Nice selective excerpt to pull from the article. I hope readers will read the full article for their own opinion.

  3. This wasn’t a selective quote, it was the first 3 paragraphs.

    And the reason I include a link and the full citation is to encourage people to read the full piece.

    If you want to prove the situations are so different, try again.

  4. thehman says:

    They are not parallel. His first 3 paragraphs are trying to build credibility; although, you would think a FDIC chairman could stand on that alone. The rest of the article is actually about what makes the current situation so different. I wish it was as easy as throwing citi under the bus but believe it quickly rotates to most of the other major banks as well. The theory is basically burn it all down to start renewal which conceptually is correct but the reality is that you are placing a bet that the spiral does not imperil society as we know it. Policies are trying to take the “financial armageddon” scenario off the table and playing for time. The Japan scenario may be sub-optimal but last I checked Japan was still at peace with society fully intact – not a bad outcome when you start lining up the problems we are facing.

  5. I believe that is a false comparison: A Japan like recession/lost decade, or financial armageddon? Those are out choices? Why isn’t there a middle ground in your world?

  6. Tangentially,

    buying some of these, now, low-priced, ‘Distressed’, Equities is a good way to put yourself into, at the minimum, the document flow of their proceedings..

    I know that by buying FirstCity Bancorporation’s cumulative convertible preferred, it was my Bank @ College, while it was ‘on the ropes’, and its subsequent, -ly proved improper, “Takedown” by the FDIC, through its ‘resolution’ into FCFC–beyond the 40x-return, I learned a tremendous amount..

    though, if for nothing else, it may turn your interests toward: http://www.scripophilynews.com/

  7. “Why isnt there a middle ground?” –BR

    b/c the conversation is dominated by the intellectually dishonest–relying on FUD to cower the less informed, as opposed to to laying out the facts of the matter, for all to see, and using that basis as a constructive foundation from which building a consensus, based on respect, is achievable.

    sorry for the R/O..

  8. Scott F says:

    Seidman is THE MAN.
    Isaacs made a lame argument.

    Thanks for the brutal takedown !

  9. Cybernaught says:

    It’s all about transparency. Until the market gets it, it will force the issue via the price of the common stock.

  10. Dan Duncan says:

    Isaacs is simply stating that those who harken back to the nationlization of Continental as a successful example of natinolization are mistaken. According to Isaacs, the facts are too disimilar.

    Barry is stating that Isaacs’ referfence that “he’s been there and done that” is irrelevant…because the facts surrounding the nationlization of Continental are too dismiliar.

    OK then.

    This post and the article contained within it are muddled.

  11. thehman says:

    If you can be assured of the middle ground is 99% probability or higher – my guess is that the draconion sceanrio is at least 10%-15% given all the other related issues. The stocks prices are fundamentally irrelevant now when looking at the sizes of the balance sheets. The stock price is about fear of the unknown and can cause the run scenarios despite all the FED and FDIC lifelines. The market is screaming “nationalize it” “nationalize it”. If I was Treasury Secretary – I would say OK – I am going to play by the rules and say I am a buyer of any and all common shares of the 10 largest banks at yesterday’s close. You pick – you want them nationalize then sell me the shares. This would call the market’s bluff and effectively halt the stocks which at this point are which only destabilizing. It also let’s “market discipline” decide on the winners and losers instead of an imaginary stress test that the market will only pick apart anyway when revealed. My gut feeling is that very few if any shares would actually be bought by the govt in the plan but would put pressure on banks to raise capital and do what is necessary to begin the turn.

  12. Greg0658 says:

    back again .. like an interstate bridge collaspe, can’t take my eyes off the carnage and cleanup

    systemic risk = economic system in danger from its inconnected self
    … so if then … we are just watching recapitalization of the favored others
    … nothing to see – move along please (as the cuffs are gunslinged) …
    so the system survives … as thehman points out .. maybe best

    Spock “survival of the many outweigh the survival of the one” from Wrath of Kahn
    too bad a genesis machine doesn’t come outta this tho

    back to the real world from dreamland .. channel flippin last night .. HistoryCh telecasts mobs of the world

  13. Chris Whalen says:

    ‘WHAT WE GO HERE IS FAILURE TO COMMUNICATE

    Issac’s third paragraph in Barry’s excerpt is the correct way to manage “Open Bank Assistance.” I should volunteer to be his editor. Much of the confusion in this debate/discussion/panic is over terms. We all know what must be done. Juts cant FIRKJINBG articulate it.

  14. grumpyoldvet says:

    Mark @ 7:26

    Agree with your comment 100%. Generally enjoy your posts but the commas drive me to distraction.
    At any rate we need honest dialog and not fear mongering using “socialist” leftist” etc in describing what needs to be done.

  15. “While management of our current mega money center banks are incompetent and have failed to adequately account for foreseeable risk, no one is alleging that they are criminally corrupt.”

    I am alleging that they are criminally corrupt. Paying out 3.6 Billion in bonuses in the shadows while bagging the taxpayers and congress for $20 Billion as an essential loan is CRIMINALLY CORRUPT

  16. magellan says:

    According to the website for Mr. Isaac’s firm seguragroup.com, Mr. Isaac makes his living by advising and representing the banking industry. No surprise, that’s what most regulators do once they leave Washington. I wonder if he got a fee to write this piece, or if he just knows he can collect later.

    Also, In his May 2008 WSJ opinion piece, Mr. Isaac put the word “crisis” in quotes, as if to say we didn’t really have one. Instead, he went on to blame the perceived problems on a hysterical media, partisan politics, and on mark-to-market accounting.
    http://webreprints.djreprints.com/1957200258812.html

    Sorry, bit I’m not impressed by more unsophisticated ramblings from yet another hired gun for the banking industry.

    Jim

  17. wally says:

    Was Continental Illinois a gambling company organized nominally as a bank? That’s what the largest US ‘banks’ are today.

  18. Marcus Aurelius says:

    “While management of our current mega money center banks are incompetent and have failed to adequately account for foreseeable risk, no one is alleging that they are criminally corrupt.”
    __________

    I’ve been saying it since day one, and I’ll keep saying it until somebody’s ass gets looked up into, with a microscope, by the authorities (If there is any such authority in existence, and any evidence of the crime is still extant). We have been swindled. Taken by – not to – the banks (and then to the cleaners).

    Milken, Arthur Anderson, Enron, and Madoff should be lessons to us: The possibility – even the likelihood – that crimes of huge magnitude cannot or could not have taken place are unrealistic in the most generous assessment, and foolish in the worse.

    Mark my word: We have been robbed by the very largest of the players, and our government has been complicit, if not just negligent, it the crime.

    I base this accusation on the fact that huge amounts of wealth have gone missing (not imaginary dollars – but the real thing), while in the care and custody of the very entities we have trusted (and who, BTW, have a legal responsibility regarding same) to exercise diligence and fiduciary duty to safeguard. That we so easily and foolishly trusted them is not, in itself, a crime.

    Heads should roll.

  19. Marcus Aurelius says:

    Please excuse my gammer and typos. Why is it that I only catch these things after I have submitted my comments? Oy.

  20. ottovbvs says:

    thehman Says:

    February 24th, 2009 at 6:57 am

    Couldn’t agree more. Throughout the article Issac emphasises the differences between Continental Illinois and today while BR criticises him for not pointing out the differences. Neither, as BR implies in his last couple of sentences is there any hint of ideology in this piece…..after all if Isaac were against nationalizing banks on ground of ideology alone he’d hardly have been a big player in this event over 20 years ago. The problem is that BR and the nationalizers never actually lay out all the downsides of this course and they are legion. Isaac touches on the obvious one of shorting. The govt nationalizes BAC and Ci, and the shorters move on to WF and the dominoes keep falling. This is an enormously complex problem and if the govt nationalizes and it’s a mistake, it could wreck the entire financial system not just of this country but globally. Of course then all those now screaming for nationalization and dismissing Geithner as an incompetent will be the first people to start screaming about what a mess it is.

    BR you may remember that definition of a first class mind being one that can carry two conflicting ideas at the same time and still function efficiently. I’d be much more impressed if the nationalizers would lay out all the downsides, which after all is why the govt is not taking this action, rather than indulging in lot of ad hominem attacks on people like Geithner or vague generalizations like comparing us with the lost decade in Japan. Geithner, Bernanke, Bair, Summers and co are not a bunch of dummies. They are avoiding nationalization for economic and technical reasons not because they are stupid or idealogues. So recognize this and acknowledge the risks.

  21. grumpyoldvet says:

    Slightly OT but I was listening this AM to CNBS and Sen Grassley (R-IA) was a guest host. While continuing the “we weren’t allowed into the negotiating room” blather he also chided Pres Obama for being downbeat on the financial issues. His suggestion…we need some more positive talk to lift our spirits. No dealing with reality just make your own reality. Wonder where I heard that before.

    And now Sen Corker (R-TN) speaking about not liking the word nationalization. So let’s call it Rock Candy Mountain or Marshmallow Skies…does that make it sound better.

  22. dead hobo says:

    First, let me say that it doesn’t make any sense to feed a dead dog. Throwing cash at CitiBank with the hope it will do something nice with it is incompetent. Using Citibank as a tool might make sense if Uncle Stupid approaches C with a plan that has an actual beginning, middle, and end. Plus, the plan must be tied to actual, achievable goals that are met on a timely basis.

    C should live or die on its own or should be put down if it can’t survive on its own.

    Having said that, if C is put down, it should not happen until Uncle Stupid sees where that activity will fit into a broader plan that has a beginning, middle, and end. Plus, the plan must be tied to actual, achievable goals that are met on a timely basis.

    Calls to shut down C, such as mine yesterday, are still a form of empty suit sloganeering and magic bullet thinking. I messed up by not looking at the entire picture, and just looked at C as an island that had no interconnects to any other aspect of the economy. Putting C down without a plan that takes the entire banking system into consideration has the potential of a sucker bet. All slogan and no thought towards consequences. No heads on TV or print pundits ever seem to look past the end of their nose, preferring to act as if their latest great idea formed into a sound bite is enough to form a comprehensive plan. Then comes the impatient “I want it NOW” approach of a 2 year old throwing a tantrum.

    In fact, stories that provide possible definitions for ‘nationalization’ are appearing more and more. The WSJ has one today. I wonder if they read me here and took my sarcasm to heart. (about pretending slogans are plans)

    So, some kind of plan is necessary, but diluting the common stock of C seems brain dead. What does that give you? Spell it out. To my uninformed mind, it looks like how to make a zombie. This is a problem that needs to be fixed by people who should know how to do it. Shutting down C and selling it off may be the best option, but not without a plan that shows how the sale fits into the entire banking system and the likely consequences of a sale.

  23. bonghiteric says:

    As of Q208 Citi had ~$500B in foreign uninsured deposits–roughly 3x more than the insured deposits. How does “nationalization” work for those depositors? I have read precious little about this aspect but it seems more than a niggling detail. I support this administration but I fault Geithner for not simply saying “we are formulating a plan these xxx challenges are what we must consider…”.

    Barack needs to call George and get a primer on streamlining the message.

  24. ottovbvs says:

    dead hobo Says:
    February 24th, 2009 at 8:57 am
    Calls to shut down C, such as mine yesterday, are still a form of empty suit sloganeering and magic bullet thinking. I messed up by not looking at the entire picture, and just looked at C as an island that had no interconnects to any other aspect of the economy. Putting C down without a plan that takes the entire banking system into consideration has the potential of a sucker bet. All slogan and no thought towards consequences. No heads on TV or print pundits ever seem to look past the end of their nose, preferring to act as if their latest great idea formed into a sound bite is enough to form a comprehensive plan. Then comes the impatient “I want it NOW” approach of a 2 year old throwing a tantrum

    ……Thanks for the mea culpa…..It would also be a good idea to drop the Uncle Stupid shtick (or would that be Auntie Stupid in the case of Sheila Bair at the FDIC)…. These people are well qualified technocrats trying to fix a huge problem without causing the world to blow up…. And for anyone who thinks that screw ups aren’t costly I’ve got two words for you…..Lehman Brothers.

  25. dead hobo says:

    ottovbvs,

    No, Uncle Stupid is a good name. Individually, Uncle Stupid has some good people working for him. Uncle Stupid also has a lot of sub morons who present themselves well working for him. Together, they often do really stupid things that cost a lot of money. The end result is often so brain dead that speculation about ice cream stains on foreheads or organized crime is rational. Show me some recent history of a string of good decisions, or show me a conversion in the future that shows a collective competence and I will reconsider.

  26. constantnormal says:

    … no one is alleging that they are criminally corrupt …

    perhaps “criminally incompetent”?

    These firms have, for all intents and purposes, already been nationalized.

    If that is the case, why do we still have the same idiots running these enterprises?
    Could we not install different idiots? Maybe better idiots?

  27. hangtime79 says:

    Barry, dead on with the analysis.

    Here is my question. Mr Issac was pointing out all the differences why receivership (ha: I just changed the subject), but he failed to point out the similarities in how we are attacking the problem today to how Japan tackled their banking crisis. If you only had two options (again not saying that’s all the options but will use it for the moment), which would you rather pursue.

    Option 1: Very successful in completing its mission but worked on a much smaller scale. Has worked recently on smaller scale with other organizations.
    Option 2: Incredibly unsuccessful in its previous attempt, but was on a larger scale than Option 1.

    If I have one shot, I know which Option I am getting behind.

    H

  28. hangtime79 says:

    Also, what happens if we follow the course and take these capital injections to their logical conclusion? We end up with more GSEs. Just think instead of Fannie and Freddie who dictate then entire mortgage system will now have them for the banking system as well. Socialized risk, privatized profits – gotta love it.

  29. try2bamused says:

    This entire debate is laughable. C’s market cap is $11B. The feds could buy it with lunch money, but doing so would greatly reduce the wealth and social status of a handful of extremely rich and powerful people: top bank execs and a few big investors (you know who they are).

    Pride cometh before a fall.

    See you at SPX 150.

  30. Robespierre says:

    “While management of our current mega money center banks are incompetent and have failed to adequately account for foreseeable risk, no one is alleging that they are criminally corrupt.”

    This is because NO ONE has been investigated by the US government. Billions are lost, millions are given out as bonuses and there is not even a single investigation of these Masters of the Universe. How convenient…

  31. jlj says:

    Barry:
    Have I missed it or have you had anything to say on the site about the tax loss carry forwards/backwards implications of nationalization? If we don’t nationalize then wont the banks that take all the Fed money simply be repaying the Fed money through the use of those tax credits? First the banks make trillions through what turns out to be incorrect balance sheet accounting, then they take trillions from the Fed to keep their jobs, then they use the tax losses carried forward/backward to claw back income taxes paid or to pay no income taxes for the next 10-20 years! Now thats financial engineering at its best!!
    jj

  32. Darkness says:

    We have 20 bad banks. Why not test the nationalization methods/theory and start with #20 by size? If that works out throw a dart to see who’s next. Or better yet, put the word out that whoever asks for more government funds gets to be next. What do you bet they’ll find money elsewhere? And if they don’t, it *will* be time to nationalize. Think of it as a market solution to the problem of natural selection.

    40 billion market cap + 45 billion bailout => 20 billion market cap for BAC alone should already be nationalization (shareholders wiped out, leadership out on their asses…etc). The only reason it isn’t is we aren’t in a democracy, we are in a crony capitalist kleptocracy fast on our way to banana republic.

  33. dead hobo says:

    jlj Said:
    February 24th, 2009 at 9:48 am

    Barry:
    Have I missed it or have you had anything to say on the site about the tax loss carry forwards/backwards implications of nationalization?

    Comment:

    Uncle Stupid, the gift that keeps on giving. You have a point. Doing a takeover and piecemeal sell off would pay for itself by not having to honor the carry forwards. Add that to the list of reasons to do it.

  34. ottovbvs says:

    dead hobo Says:

    February 24th, 2009 at 9:14 am
    No, Uncle Stupid is a good name.

    …….The problem is when you start calling exceptional people like Geithner, Bair, Summers et al stupid you look…..well…. rather stupid yourself .

    “Uncle Stupid also has a lot of sub morons who present themselves well working for him. Together, they often do really stupid things that cost a lot of money”

    …….Versus those working in the private sector like Fuld, Neil, Prince, the Enron crowd, Chainsaw Al, etc etc I suppose.

  35. ottovbvs says:

    Darkness Says:

    February 24th, 2009 at 9:49 am
    “We have 20 bad banks. Why not test the nationalization methods/theory and start with #20 by size? If that works out throw a dart to see who’s next.”

    …..The scientific approach?

  36. dead hobo says:

    ottovbvs Said:
    February 24th, 2009 at 9:59 am

    dead hobo Says:

    February 24th, 2009 at 9:14 am
    No, Uncle Stupid is a good name.

    …….The problem is when you start calling exceptional people like Geithner, Bair, Summers et al stupid you look…..well…. rather stupid yourself .

    Comment:

    I’ve been called worse for better reasons. Show me a track records, first. When the rabble has a consensus that Uncle Stupid is finally doing some things right and the markets approve, then I will start to forget the idiocy, criminal stupidity, and incompetence from Uncle Stupid that got us into this mess in the first place.

  37. franklin411 says:

    Barry,
    Doesn’t this argue FOR the Geithner plan? The administration seems reluctant to nationalize, which is a good thing. But frankly even if it was gung-ho for nationalization, wouldn’t we need to have the results of the stress tests first? I like that approach: let’s have the experts go through every inch of their books with a fine toothed comb, and figure out who can survive on their own and who needs some help. When we have that data, we can make a decision.

    The most confidence inspiring aspect of the Obama administration has been that they’re realists. They don’t pretend we can have an instant-fix for complicated problems. They want to take some time to figure out the situation and see what we’re dealing with before they say what they’re going to do.

    Thinking with our things got us in this mess, and only thinking with our brains will get us out.

  38. thehman says:

    Thanks ottovbvs for the support. Will be interesting to see if Barry will actually reread the article to conclude his original diatribe was way off mark. Fair to debate the nationalization issue but his remarks displayed a biased axe which was completely unsubstantiated by what the actual premise was in the article. LET THE MARKET DECIDE ON THE BANKS – GOVERNMENT BUYS ANY OR ALL SHARES AT THE PREVIOUS CLOSE – SEE WHAT HAPPENS!

  39. dead hobo says:

    ottovbvs Said:
    February 24th, 2009 at 9:59 am

    …….Versus those working in the private sector like Fuld, Neil, Prince, the Enron crowd, Chainsaw Al, etc etc I suppose.

    comment:

    It’s unrealistic to think a monkey won’t throw its crap at people if given the chance. As a matter or routine, Uncle Stupid should have made sure that the people were protected from their filth by a layer of protective glass. Instead, for some idiotic reason, Uncle Stupid not only removed the glass, but made sure the monkeys ate a lot of fiber on a regular basis for a long time. Now, we have an e-coli epidemic to fix.

  40. wnsrfr says:

    Uh, please, this whole use of the big bank’s market cap as some sort of pure number is stupid.

    Right now, BOA and C share prices are both WAY lower due to the threat of nationalization.

    There is a really toxic closed-loop thing going on here…hey, if the feds wanted to, sure, they could just buy C by having Obama state that he thought it was a “probability” that C would be nationalized, then go into the market the next day and buy all the shares…cause they would be even lower.

  41. thehman says:

    Stocks trade up immediately on that plan – shorts cover and you have effectively halted the stocks. Also is clean, easy to understand, and puts the pressure on the market. No one would likely sell any of the shares of the stocks to the govt. But if they did – you know which bank should be nationalized without going through all this noise as well as it mitigates the banks from asking for more free give-aways.

  42. bcasey says:

    -no one is alleging that they are criminally corrupt.

    Yes if they were criminally corrupt their balance sheets would look a damn site better.
    Forget nationalization, I’ve been screaming this for weeks now, give the banks to the Mafia.
    They’ll straighten things out.

  43. DL says:

    Magellan (@8:29) may have nailed it. Many of the pundits and so-called analysts who publicly oppose nationalization probably have been incentivized to represent the banking industry.

    In any case, I’ve noticed that the vast majority of people who publicly oppose nationalization refuse to propose an alternative; or they’ll say something seemingly innocuous like “we should take the toxic assets off the balance sheets” of the banks. What opponents of nationalization really want is to shaft the taxpayers in a really big way so that the large banks don’t have to sell off assets.

  44. DL says:

    I wonder what Larry Summers thinks about all this. Publicly, of course, he has to oppose nationalization. But privately, he may have another view. He’s an academic; he’s got his own biases, of course, but he’s not really a creature of Wall Street. Maybe he’s whispering something in Obama’s ear that’s different from what Geithner is saying publicly. (Not that Geithner has been saying much lately).

  45. mikesic says:

    WHat is Nationalization now? If it is a form of prepackaged bankruptcy where good assets are sold to good operators and the bad assets go to the FDIC to be sold to the Vulture capitalists with equity holders being wiped out and debt converted to new equity then I’m for it. If it entails, the gov’t running these institutions over an extended amount of time then I’m against. Words have morphed into something they were never intended to mean. Clouds the picture and increases the uncertainty.

  46. magellan says:

    Sorry for the bad link in my previous post – (Magellan @8:29)

    The website for Mr. Isaac’s firm “The Secura Group” is http://www.securagroup.com (now part of LECG).

  47. Lugnut says:

    A government run nationalization of C or BoA would be the biggest cluster F ever. You just know the crew would unearth all kinds of wacky toxic level 3 crap that they’ve been hiding under the bed to keep their solvency ratios fuzzy. Never mind the CDS exposures and the uninsured deposits. Plus I don’t think the FDIC or whatver group would be in charge would have the horsepower to run an op that big (well).

    Say hello to your future Zombie banks that will drip fed a steady IV of Fed billions till we can’t generate money anymore.

  48. grumpyoldvet Says: February 24th, 2009 at 8:05 am

    ol’ gov,

    I was, in fact, thinking of giving up commas for Lent–we’ll see how that goes..

  49. bonghiteric says:

    @lugnut,
    Fuzzier and as toxic than Level 3 assets will be the commercial foreign loans kept on the books, unsecuritized. Oh, say something like Eastern European or SE Asian construction loans. Incomplete projects that are now valued far less than the original loan amount. No U.S. regulator will have any visibility into those books. Nah, not really comparable to the ‘ol CINBTC.

  50. Darkness says:

    The problem is that BR and the nationalizers never actually lay out all the downsides of this course and they are legion.

    And those against never see any upside. Such as post-autopsy, the spun off entities would be the most transparent thing going and could actually attract capital from investors. Until there is transparency, the capital will continue to wait it out and the government will be the only investor. That sounds like nationalization for the stoner-slacker crowd, not a serious solution.

    At least come up with *some* alternative for these guys other than indefinite status as the ultimate welfare queens.

    Here, I’ll toss you a non-nationalization idea: force the big banks to start cutting themselves up in to chunks small enough to fail, by whatever dividing lines they want: geographic, niche markets, whatever. I think everyone agrees they are too big. The dissolving process itself will perhaps create enough transparency to attract investors. Who knows. Could happen. But something has to happen. The status quo is idiotic.

  51. Thatguy says:

    From Otto:
    “…….The problem is when you start calling exceptional people like Geithner, Bair, Summers et al stupid you look…..well…. rather stupid yourself .”

    Where’s Rubin on that list? When you say exceptional… how exactly do you mean exceptional? Exceptionally blind? Exceptionally incompetent?
    I like Bair and have no reason to believe she’s bought and paid for or incompetent. She’s certainly held her own here… But Geithner and Summers??? Come on! Geithner was the fool who was supposed to be regulating these institutions at the FRBNY so that we didn’t end up with a financial meltdown. How’d that work out? How about Summers who was the Treasury Secretary that pushed through all the necessary legislation (ex. Financial Services Modernization Act & Commodities Futures Modernization Act) that made this fantastic meltdown possible in the first place. That IS exceptional.
    Quite frankly Otto, I’m tired of hearing your assertions with no backup whatsoever. You call them exceptional, but provide no proof. You say nationalization (let’s just call it receivership or bridge bank… whatever) has downsides but fail to point them out saying there’s no silver bullet. Great rhetoric but not a substantive argument.
    I think we can all agree that there’s no silver bullet, all most of us are looking for is the least suboptimal solution to the problem (defined as one that assigns the most losses to those that are the most responsible and the least losses to those that are the least responsible). Clearly, I think that nationalization is the one on the table that comes closest to this ideal.

  52. dead hobo says:

    I have an idea. Nobody has thought of this one yet.

    Since CitiBank has a market valuation of pocket change, why doesn’t BoA make a tender offer. It could take control for pocket change, figuratively speaking.

    BoA maintains C as a separate corporate entity upon the close of the deal.

    BoA puts C into liquidation bankruptcy and cherry picks the good assets. The rest goes out for sale. In fact, BOA could probably sell the whole thing at a profit if properly dismantled without filing for bankruptcy. This will only work if C is priced next to zero, as it is now.

    BoA probably will make money on the deal plus have some decent assets left over, such as retail banking, and 1 pile of crap is taken out of the economy.

  53. bman says:

    Darkness, It’s hopeless, ever since the Bush administration started feeding us lines like, “The alternative is unthinkable.” we have been headed straight to hell in a handbasket.

  54. jameskostohryz says:

    Nationalization is simply not necessary. The arguments are based on a lack of understanding of how banks work. This following example lays out a model of bank operations and demonstrates that massive bailouts are not necessary and that talk of nationalization of the banking system is a horrific over-reaction. All that is required is for the government to change current regulations so that banks be allowed to carry all assets at acquisition cost and be allowed to charge off troubled assets over time.

    http://www.minyanville.com/articles/C-bank-jpm-bac-wfc-bailout/index/a/21280

  55. moonmullins says:

    Jeez Barry, did you even bother to read Isaac’s article? As others have pointed out here, Isaac identified several differences between Continental in the 1980s and BofA and Citi today. Perhaps because you’ve stuck your neck out on the opposite point of view you felt compelled to disagree with him. Interesting that Dick Bove, Meredith Whitney, Bill Siedman, Rodgin Cohen and many, many others all agree with Isaac – they believe nationalisation is a terrible idea. The best idea for repairing our banks is through the net worth certificate program, a program that worked very well here in the U.S. some 20 years ago. It would fix the bank’s balance sheets at a far more reasonable cost to taxpayers while likewise encouraging the private sector to invest, something your beloved nationalisation idea wouldn’t do.

  56. Darkness says:

    jameskostohryz, excellent plan. Next, following that same tactic we can just send Madoff back to printing off fake trade sheets and collecting money from new investors. Problem solved!