In an otherwise worthwhile commentary called We Can Do Better Than a ‘Bad Bank’, George Soros too easily dismisses the nationalization of insolvent banks:

“It is estimated that an additional $1.5 trillion would be required to adequately recapitalize the banks. Since their total market capitalization has fallen to about $1 trillion, this raises the specter of nationalization, which remains politically and even culturally unpalatable.”

Why not (temporary) nationalization?

If your financial institution is insolvent, if the risk management has destroyed your company, if the management team essentially gutted your bank, then why-oh-why maintain this silly fiction that these are viable entities? Its only going to make the ultimate cost that much greater.

Look, we’ve already nationalized Fannie and Freddie, Bear Stearns and AIG. Can we please stop pouring money into these giant black holes with very little to show for it? (Paying 100%+ of the market cap of a company for 8% of its stock might as well be nothing)

Anyway, here’s some more of Soros commentary:

“The Obama administration should come out of the gate with a comprehensive economic program that has two pillars in addition to a fiscal stimulus package. One would prevent housing prices from overshooting on the downside by making mortgages cheaper and more available and reducing foreclosures to a minimum; the other would enable banks to resume lending by adequately recapitalizing them. It would take several months to implement the program and a further period before it impacts the economy. But in the meantime, people could see that there is a way out, and that would help mitigate the severity of the downturn.

Adequate recapitalization of the banking system now faces two seemingly insuperable obstacles. One is that former Treasury Secretary Henry Paulson has poisoned the well by the arbitrary and ill-considered way he implemented the $700 billion Troubled Asset Relief Program (TARP). As a result, the Obama administration feels it cannot ask Congress for more money at this time. The other is that the hole in the banks’ balance sheets has become much bigger since TARP was introduced. The assets of the banks — real estate, securities, and consumer and commercial loans — have continued to deteriorate, and the market value of bank stocks has continued to decline.”

Good bank or bad, we still have a vastly undercapitalized finacial system. Temporary Nationalization and pre-packaged chapter 11 reorg is the fastest most effective way to deal with what ails the sector: toxic assets and not enough cash.

>

Source:
We Can Do Better Than a ‘Bad Bank’
GEORGE SOROS
WSJ, FEBRUARY 4, 2009

http://online.wsj.com/article/SB123371182830346215.html

Category: Bailouts, Corporate Management, Credit, Derivatives, Politics

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.

48 Responses to “Why Not Nationalization?”

  1. JasRas says:

    Nationalization is sounding better all the time, even if M. Whitney was just on Bloomberg saying it was a bad idea. Of course, she said the “bad bank” concept is a bad idea too.

    The imminent problem I see a a possibility is if a solution is not presented soon, perhaps bank will create their own version of a “bad bank” by purposely doing refi’s on questionable mortgages with the sole purpose of then selling the “clean” mtg to Fannie or Freddie. A banking version of money laundering, but with mortgages. A recent article on Minyanville by Shedlock got me thinking that this could be a problem that will surface. Maybe I am crazy and there are too many checks and balances in place to prevent this from happening. However, desperate people/organizations often do desperate things.

  2. dead hobo says:

    I am not smart enough to know the best way to deal with this problem. If smarter minds than mine think this is a good idea then ok by me. Only I have one condition. The executive team and the boards of directors of the banks that are fixed must be fired. No bonus. No severance benefits unless their contracts are iron clad. Gone. Not just the CEO. Not just a couple of unlucky sacrificial lambs. All must go.

  3. M.G. in Progress says:

    Toxic assets are “lemon” products and lemon banking: who is going to buy a lemon? Why support to lemons? Too much asymmetry in information not to say little information on these assets…Under these circumstances any deal is doomed to fail. Good bank is the only solution. Read more on my blog.

  4. ben22 says:

    Barry,

    How confident are you though that it would be temporary?

    I think that is where everyone is getting hung up, people who can’t admit the banks are no longer viable are in denial but is that better than the govt getting more involved?

  5. rktbrkr says:

    I keep reading more about guarantees. We’ve already guaranteed a half trillion of bad loans by CITI,BAC and AIG and all they’ve done is keep bankrupt firms operating. How are these guarantees valued against TARP or other federal funds, zero cost – is this cash basis accounting? What if CITI chose to cash out $300B of bad loans for a few pennies on the dollar? They eat about 10% of the loss and tap Geithner on the shoulder and say “you owe us $270 billion pal”! I don’t think this is possible or CITI stock would be soaring.If bank management needs permission to take action that would activate the guarantee, then the guarantee is pretty hollow (like an AIG couterparty insurance contract!) and that would explain why CITI, BAC and AIG are different shades of worthless.

    Maybe if Bloomberg news is successful gaining access to these transactions that Paulson promised would be “transparent” (I think he meant “invisible”) then we might be able to understand

  6. danm says:

    What I like about this environment is that it’s taking time. People are starting to see that the Emperor has no clothes. They are starting to see that the successful industries of tomorrow are not the successful ones of the last 10-20 years.

    Lending is not happening because 1. the bad assets are still on the books and 2. they know they’d be throwing good money at the same crap… I’m not sure this propping up environment is generating many new investment ideas.

    If they nationallize, I can’t help but think that they will:

    1. Either write-off, support or hide all the crappy assets
    2. Quickly start using the banks to make money flow and increase debt
    3. Throw more money at the “old paradigm” wasting more resources and energy

    Inflation will be very quick with nationalization, unless they know what they are doing (LOL)!

  7. ottovbvs says:

    BR: Soros as usual makes a lot of sense. I think he’s right about nationalisation for all the reasons you’re as familiar with as I am. You don’t . Opinion on this is divided as it is on a lot of matters. One thing is undeniable however and that is the Geithner/Orzag/Volcker/Summers/Bair team, and these are the people who are going to make the decisions about this, are in the middle of minefield. One foot wrong and this whole thing could blow up so they are rightly moving in smallish steps and with great caution. I find a lot of the shoot the pianist commentary on this on TV shows and suchlike by folks who are either financial or politicals shills or don’t have all the info, to be largely buffoonish.

  8. wally says:

    I think there is a lot of misdiagnosis about hte ‘undercapitalized’ part. Whether banks have capital or not does not seem to be the issue to me… though it obviously seems so to those with bank backgrounds and a bank-centric world view. But you’d get a similar industry view from ANY industry and there is nothing special about banking. The problem that unites them all is: who are you going to lend to? What investments are you going to make? Where will a loan be repaid and a profit made? These are confidence issues.
    I’d favor getting rid of all the people and institutions that broke things because as long as they stay in control, trust won’t come back. That’s why Geithner should resign (should never have been nominated) and that’s why the banks should be nationalized. It is the precise opposite of Soros’s view: it IS the politically popular – and correct – thing to do.

  9. Stuart says:

    Nobody wants to take the loss so inflate the losses away with a cheaper dollar could be an option.

  10. dead hobo says:

    Wally, I agree with you about getting rid of the people and institutions that made this mess. I still don’t understand why the FDIC doesn’t come in and sell off a few money center banks that are on the public dole now. If there are assets left over that nobody wants, then we should look at a ‘bad bank’ option.

    The banks that helped create this mess will be the same banks that create the next mess.

    Why should Uncle Stupid keep throwing money at incompetents, thieves, and their cronies? Paulson was just looking out for his friends. He’s gone. Now we have people in place who should have the guts to do the right thing. Use the FDIC and sell off the pieces. Recover taxpayer money. Fire the executives and boards that screwed up – everyone. Then survey the landscape and offer help to people who don’t have a proven track record of being total fu*k ups.

  11. mark mchugh says:

    I gotta agree with Stuart. Here’s a clip from the Jon Stewart show (with Lawrence Lindsey):

    http://www.thedailyshow.com/video/index.jhtml?videoId=217029&title=Lawrence-Lindsey

    If we nationalize the banks, what is the point of even having a stock market?

  12. DeDude says:

    Yes first nationalize the insolvent banks. Then I would say we should give government home loans directly to those people who can afford it. It its idiotic to have all these costly private entity middlemen sucking money out of the deals for turning a few pieces of paper and trying to look busy. Direct loans at 30-year treasury rates + 0.5%, the only thing is that if you take the deal you owe the money to Uncle Sam. If you don’t pay that loan back you got the IRS with all their “tools” and jail-time coming after you.

  13. dead hobo says:

    Stuart Said:
    February 4th, 2009 at 8:25 am

    Nobody wants to take the loss so inflate the losses away with a cheaper dollar could be an option.

    reply:

    1) This is the nuclear option. It will be used when when the opportunity presents itself.

    The Republican Party has institutionalized the idea of “Live on Borrowed Money and Stick Someone Else with the Bill”. This was probably the payback mechanism they intended to eventually use. In other words 1) Take control of the Govt legally via elections 2) Lower taxes, presumably until there are no taxes left, 3) Borrow to cover the shortfall and expand the size of government spending as much as possible, Repeat annually 4) Introduce massive inflation to pay off the bill 5) Try it all over again because people are stupid and will fall for any explanation offered that makes it look like someone else’s fault.

    This option is still on the table. However, it probably won’t be used for a few more years. People are starting to get used to the word ‘trillion’.

    2) With respect to the Fox/Glen Beck video … He is talking textbook and not real life. Asset values were inflated due to credit, not cash in circulation. When credit is free and freely available then prices go up for the things you buy on credit. This includes real estate, commodities, stock prices, and more. Credit is the fuel of asset bubbles. Not cash. The same about of cash will support 10 to 1 leverage and 40 to 1 leverage. Guess which one includes inflation as a necessary side effect. To some extend, cash is inert.

    If people paid in cash then cash in circulation would matter. In fact, cash is almost a form of litter or a type of lubricant. It doesn’t matter a lot when compared to credit availability. If the banks are putting it in a mattress (which they appear to be doing) then it isn’t doing anything and it’s not inflationary in the slightest.

    3) For once, I want to see incompetent people fired in large quantities.

  14. mark mchugh says:

    Dead Hobo,

    Couldn’t agree more with number 3.

    The problem I see with nationalizing the banks is I think we would be letting the government decide who lives and who dies. Quite frankly, I don’t trust them to make good decisions.

    The thing I like about “trickle-up” economics is that it would stimulate spending, slow foreclosures and let’s face it, one way or another it will flow directly back into the banks. Individuals will decide the necessary course of action, in a capitalist setting. Sure some people will squander it on crack or GE stock, but most will pay down debt, buy stuff (like autos), or invest it in viable enterprises. The deflation scare evaporates immediately.

    If we’re going to give money away, let’s give it to the people who it means the most to.

  15. call me ahab says:

    @DeDude 9:10

    good point- should be cheaper if there isn’t a middle layer of folks skimming the cream.

  16. bernandoo says:

    Your nationalization is basically a bankruptcy on steroids.. where the government gets the good assets and screws the creditors. I think you’d hit a lot of legal landmines with that nationalization plan and combined with the politcal stigma of the gov’t owning the financial system, it’s not going to happen. I think following the AIG or FNMA model would be more palatable to both the public and creditors.

  17. dead hobo says:

    mark mchugh Said:
    February 4th, 2009 at 9:49 am

    The thing I like about “trickle-up” economics is that it would stimulate spending, slow foreclosures and let’s face it, one way or another it will flow directly back into the banks.

    reply:

    Re trickle up economics: Agree completely and have said so many times. Supply side trickle down economics is a scam and always has been. It’s class warfare being institutionalized. You build a house from the foundation up, not from the roof down. But Republicans like the ‘roof down’ idea. It allows them to profit at public expense but wrap it up in a respectable sounding theory. Trickle down economics is the stuff of thieves, scammers, crooks, organized crime, and their lapdog hangers-on.

    I haven’t watched CNBC for a few weeks or watched Kudlow for even longer. He was the archetype Republican lapdog. Is he still messed up in the head?

  18. Stuart says:

    Sweden nationalized their banks early last decade. There’s a model that could be followed, is it not? I think the problem here is the size of the loss to be nationalized. Even if the Govt goes the insurance route, isn’t that like the Govt selling a put option where it instantly is in a loss position.

  19. Wyatt_Earl says:

    WE’VE ALWAYS NATIONALIZED BANKS.

    I’m an old guy, and in my entire life, when banks fail, they get “nationalized.” The FDIC moves in, sells the deposits to somebody who knows what they’re doing, sells the loans to someone who knows what they’re doing, etc., etc. Stockholders lose everything & management goes away in disgrace. Everybody moves on; good banks survive. IT WORKS.

    The only thing new is that somebody has injected this concept of “Nationalization” as if the FDIC was being run by Lenin and Marx, and it was the first step on a slippery slope toward the end of capitalism.

    The effort to save Citi and B of A is political, not economic. Let’s bury the dead and move on.

  20. Mannwich says:

    @dead hobo: To answer your question: Kudlow hasn’t changed his views one iota. Once a shrill ideologue, always a shrill ideologue. He has no new answers on anything. Supply side rules all for every problem.

    Agree with your comments but now that the Dems have control so they should be able to do “trickle-up” if they really WANT to. All it takes is a little bit of will and some guts but I fear they’re beholden by the same monied interests the GOP was and still is. They’re on the clock to prove they’re somehow different than the GOP. I’m/We’re waiting.

  21. Ken says:

    I think Mr. Soros is wrong, and getting wronger each day, on the “culturally unpalatable” thing, based on the conversations I’ve been having. People are more and more thinking the big financials have screwed them over, and are getting really angry about the bailouts (and no one calls it TARP or BARF or whatever the acronym is that week; it’s always “bailouts”). I don’ t think we’re quite at the pitchforks-and-torches stage, though if John Stewart keeps using the phrase…

  22. dead hobo says:

    Mannwich said

    They’re on the clock to prove they’re somehow different than the GOP. I’m/We’re waiting.

    reply: Being the impatient soul that I am, I will assume they will be major disappointments. Pre-election, they were gutless, aimless, uninspired, unmotivated, and embarrassing. They have much to prove. I won’t hold my breath. Nancy Pelosi has an excuse for everything and Harry Reid still makes me want to puke.

  23. rktbrkr says:

    Wyatt, you’re 100% correct. Somehow we drifted into a scenario where secretive weekend deals were used instead of FDIC and bankruptcy courts to resolve the problems of big bankrupt banks & corporations. Now we’re digging deeper into the same pile of shiit.

  24. Mannwich says:

    @dead hobo: Congressional Dems are hopeless (at least the ones in significant posts seem to be), so it’s really up to O to bang some heads and lead the way. Being the impatient soul that I am, I’m beginning to get worried and prepared for disappointment as well.

  25. wally says:

    Wyatt,
    Makes sense. Functionally, isn’t an FDIC takeover the same as nationalizing and resolving the values and being on the hook – after equities and paper goes to zero?
    If it is roughly the same thing, then why not just do it as we have always done and dispense with all the whooping and hollering?

  26. super_trooper says:

    ” culturally unpalatable.” WTF is that??? Is this Hungarian culture?
    If anything, the wall street of the 90s and 00′s has been culturally unpalatable!
    Time to get serious, temporary nationalization a la Sweden. No bonuses and limit your salary to the government scale. Sell in 3-10 years.

  27. Todd says:

    not enough inmates watching the prisoners, the prisoners know it and so they just keep making demands.

  28. Todd says:

    Should have been guards.

  29. ECONOMISTA NON GRATA says:

    “SERENITY CAN ONLY BE ATTAINED THROUGH WHOLEHEARTED COOPERATION WITH THE INEVITABLE”

    The facts are in direct contradiction with the solutions. Let’s just skip the next three steps, anger, bargaining, and depression and go straight to acceptance. We’re all adults here, right? This bad/good bank nonsense is just that. We all know who the “bad banks” are, some uncertainty lies in how “bad”. The only mechanism the can be used to establish certainty is Bankruptcy Court. What we are suffering from is an overcapacity of banks and the longer that impaired banks are allowed to function the higher the risk of impairing sound banks.

    “NO SUSAN, YOU CAN’T HAVE YOUR CAKE AND EAT IT TOO.” Overcapacity in Residential and Commercial real estate and development, overcapacity in banking, overcapacity in federal, state and local government. “YOU ATE YOUR CAKE, NOW IT’S GONE.” Sorry sweetheart, daddy is putting you up for adoption, or better yet perhaps I can sell you to some Arab Sheik or Mandarin Lord.

    Best regards,

    Econolicious

  30. DL says:

    I see no reason why this country wouldn’t survive the liquidation of Citigroup and B of A.

    In fact, I think we would be far better off in the long run.

  31. leftback says:

    Banker bonuses are culturally unpalatable. Also, tax evasion by members of Congress.
    Common sense says liquidate and nationalize NOW.

  32. Paul Jones says:

    Why not bankruptcy? So as to apply the same procedure to all companies great and small, well connected and not?

    In olden times, banks capitalized by paying attarctive interest rates!

    We seem to have forgotten the fundamentals of economics.

  33. Winston Munn says:

    “Somehow we drifted into a scenario where secretive weekend deals were used instead of FDIC and bankruptcy courts to resolve the problems of big bankrupt banks & corporations.”

    The Bush Administration utilized secretive methods to bypass established legal remedies? Gee, that’s a real shock.

  34. Jeff L says:

    I still haven’t seen or read a good answer (and I’ve been looking keenly for one for months) Why can’t we just let them fail? Take the bitter medicine and move on. The epitome of smart is learning from the mistakes of others, learn from the Japanese mistakes, let the FDIC do it’s thing on the insured deposits, as to everything else “oh well:” In the cases where crimes were committed, prosecute and fine to the fullest extent of the law…and move on.

    The disconnect between Washington/Wall St vs Main street gets worse every day and the longer bailouts and news about some crazy money being paid or wasted somewhere goes on, the more likely I think that this mess could end in violence….and it ain’t the Wall St finance guys with the guns.

  35. Todd says:

    You would need to go in with a 100% guarantee of deposits, and keep to bank functioning on a day to day basis. A majority of the fortune 500 use BofA, Citi, Chase, and Wells Fargo for their day to day banking needs. Could you imagine the disaster of throwing all of these company into a line to collect their money that goes beyond what ever artificial limit there is on deposit guarantees. That’s what would happen in a Bankruptcy.

  36. Mannwich says:

    @Jeff L: The answer is simple: too many powerful players will lose their shirts. That’s it, really, so the people in charge are just doing whatever they can to ensure that won’t happen, at all costs.

  37. danm says:

    Why can’t we just let them fail?
    —————–
    Let’s make a long list of names of the losers who would end up on thisi list.

    Maybe the problem lies in those names!

  38. DL says:

    Todd @ 1:03

    “A majority of the fortune 500 use BofA, Citi, Chase, and Wells Fargo for their day to day banking needs… imagine the disaster of throwing all of these companies into a line to collect their money…”

    Point taken.

    There are no good options here.

    The option that the politicians seem to like the most is increasing the national debt by a few trillion dollars.

    I personally don’t favor that, but that’s what’s likely to happen.

  39. danm says:

    Oh… and don’t forget that to get in the get rich quick club you probably needed to have done some not so very holy things. Maybe some people out there are afraid the losers on the list will bring them down with them.

    I’m sure there are more Spitzer type out there than we think shaking in their shorts!

  40. cheese says:

    “Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.”

    (Keynes, Collected Writings, vol. XXVII, p.122 ).

  41. Wyatt_Earl says:

    Todd –

    Your Fortune 500 Company issue is a good point.

    However, the FDIC has a temporary insurance in place for *ALL* checking accounts, regardless of balance, as long as they aren’t interest bearing.

    So I still say shut’em down, and let the FDIC deal with it. It’s way more toxic assets than usual in one of these situations, granted, but the governments gonna eat the toxic waste – we’re just discussing which tax-payer funded entity get’s the biggest slice, and whether management gets to stay or go.

    Show of hands on who thinks management ought to stay. Yeah, that’s what I thought.

  42. inthewoods says:

    Here’s my question: who would be big enough to actually buy the assets of a nationalized BAC or C?

    And, I don’t know about the rest of you, but I’ve basically given up and now assume that the government will make the worst choice regardless of whether the Dems or the Repubs get their “vision” through – there is no way any actual radical solution that might work will ever get passed.

  43. danm says:

    Here’s my question: who would be big enough to actually buy the assets of a nationalized BAC or C?

    ———–

    Maybe there’s not much to buy!

  44. rktbrkr says:

    John Paulson bought Indymac from FDIC, CITI and BAC will find new owners.

    The availability of federal funding actually raised BAC Lewis’ appetite for risk when he bought Merrill (and WaMu). Didn’t take long for “moral haard” to appear did it?

  45. Bruce in Tn says:

    “We should keep housing prices from overshooting on the downside…”

    Er, why?

    Look, don’t give me the simple answer…but, why?

    If prices go too low, actually there might be more of a concerted buying effort, and hence true turnaround, than if we pick a price that is too low, and prevent housing prices from going below that level..

    Just sayin’…and if Jim Rogers actually did make most of your money, maybe you don’t have to be that bright…

  46. hawleyl says:

    I keep hearing some banks are to large to fail. In the aggregate, are they too large to save?

    I agree with dead hobo about credit driving up prices. Many ads emphasize a monthly payment, not a total price.