Posts filed under “Finance”

Nationalize Like Real Capitalists

Steve Randy Waldman writes the blog interfluidity. His take is usually away from the mainstream, and always interesting.

His most recent discussion on Bank Nationalization is quite interesting

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It will come to no surprise of readers of this blog that I favor nationalization of failed, systemically important banks. But James Surowiecki and Floyd Norris have a point. We absolutely should not nationalize as a means of persuading banks to issue credit more freely. If the government (idiotically) wants looser lending than banks are willing to provide, it oughtn’t take their money and lend it. The government can lend its own damned money (well, our own damned money) if it thinks that profitable loans are not being made, or that for the good of the economy unprofitable loans must be made.

The reason to nationalize a bank is because the bank has failed and its former owners have no legitimate claim to its assets. The government has been forced to offer support with public money, thereby purchasing the corpse fair and square. We take the bank into public ownership because taxpayers who have been conscripted to accept extraordinary losses are entitled to whatever gains follow the reorganization they finance.

When a bank is nationalized, shareholder equity should be written to zero, and existing management should be handled as roughly as the law allows. If we have a bit of courage, we should impose haircuts or debt-to-equity conversions on unsecured creditors, but I don’t think we have that kind of courage. “Toxic” assets should be revalued at pennies-on-the-dollar market bids or else written to zero and hived into “bad banks”. Once we have a conservative valuation of the assets and know exactly what is owed, we’ll know how much public money would be required to cobble a robustly funded bank from the wreckage. However, if we recapitalize “too big to fail” banks without restructuring them, we will quite deserve our next mugging. We had better cut these monsters into little, itty, bitty pieces. We should embed strict size and leverage limits into their itty, bitty charters, restrict their ability to recombine, and then hire management to run the little things on strictly commercial terms. Hopefully we will change what it means for a bank to run on commercial terms — We should create a tax and regulatory structure that penalizes scale and leverage across the board. Better yet we should decouple the payment system from risk investment by reorganizing banking functions into “narrow banks” and credibly not-guaranteed investment vehicles. But whatever the banking industry comes to look like, nationalized banks should be recapitalized once, then managed to compete in it, and for no other purpose. Taxpayers should seek to extract maximum value from their eventual privatization. But should any of the reorganized banks seek a second helping of at the public trough, they should be ostentatiously permitted to fail. Rather than an implicit government guarantee, successors of nationalized banks should face a particularly itchy trigger finger.

Having nationalized “banks” make loans that prudent managers of a well-capitalized bank would not make is just a way of obscuring a subsidy and guaranteeing permanent quasipublic status by requiring on-going guarantees, bail-outs, and capital injections. Further, putting easy-lending public banks in competition with ordinary thrifts would resuscitate the destructive dynamic we have just put behind us, wherein bank managers must match the idiocy of their most foolish counterparts or watch their businesses wither.

If we want to stimulate the economy, put idle resources to work, stoke animal spirits, whatever, we should do that with some combination of transfers, investment subsidies, inflation, and public works. But if we are dumb enough to force-feed credit into the economy, let’s not hide that behind a bunch of puppet banks. And let’s keep it very clear that we are not confiscating private firms in order to make them tools of the state. We nationalize reluctantly, when we have had no choice but to inject public money (or guarantee assets, which amounts to the same thing) in banks that otherwise would have failed. We nationalize because, in a capitalist economy, investors get to keep the profits they endow, even when the investors happen to be taxpayers.


Some nationalization links

Steve Randy Waldman — Tuesday January 20, 2009 at 12:16pm

Category: Bailouts, BP Cafe, Credit, Finance

Selling Banks’ Crown Jewels

Analysis and Discussion with Ben Phillips of Casey Quirk & Associates

Category: Finance, M&A, Video

Niall Ferguson on Colbert Report

Niall Ferguson explains money as a relationship between a creditor and a debtor

Category: Economy, Finance, Video

Madoff’s Investors Had $43 Billion

via Bloomberg:

Client                   Total          Source

Access International     $1.4 billion   Company statement,
Advisors                                Bloomberg Data

Alicia Koplowitz,        $14 million    Bloomberg News
One of Spain’s richest
women

Aozora Bank Ltd.         12.4 billion   Company statement
                         yen ($137
                         million)

Bard College             $3 million     Bloomberg News
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Category: Digital Media, Finance, Legal

Was There Really a Financial Crisis ?

Hale “Bonddad” Stewart is a former bond broker with several regional firms. He currently writes for Bonddad Blog, the Huffington Post and practices domestic and international tax law

Website: http://www.bonddad.blogspot.com/

Law office: http://halestewartlaw.com/

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A recent paper by the Minneapolis Federal Reserve has gotten a lot of attention. The paper is titled Facts and Myths About the Financial Crisis of 2008 and it argues there was in fact no credit crisis. Several people have used this paper to argue that Wall Street overstated the severity of the credit crisis in order to get a bail-out they didn’t need. What these commentators have failed to heed is this paper was widely criticized within the financial community, even drawing a rare rebuke from a sister Federal Reserve Bank. In short, to argue there was no credit crisis — to say we were “punked by Wall Street” — flies in the face of every available fact on the crisis.

First, let’s provide some background for this debate. As of this writing 311 lenders have “imploded.” The XLFs — the ETF that tracks the financial sector – is down almost 70% from a high in the summer of 2007. Total credit losses at the world’s financial institutions have totaled 1 trillion dollars:

The gauge is down 46 percent in 2008 as credit losses and writedowns at the world’s largest banks surpassed $1 trillion and the U.S., Europe and Japan entered the first simultaneous recessions since World War II.

In other words, the financial sector’s economic position is terrible at best.

But the evidence runs deeper. About every six weeks the Federal Reserve issues a paper titled “The Beige Book.” This is a book complied from anecdotal evidence from the Federal Reserve Districts on the general economic environment. Every Beige book issued in 2008 has indicated credit conditions were tightening and loan demand was decreasing.

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Category: BP Cafe, Credit, Derivatives, Finance, Really, really bad calls, UnScience

The Walking Zombies of Wall Street

WSJ’s Dennis Berman tells colleague Evan Newmark that although tens of thousands of people have managed to hold on to their jobs, there isn’t much work to go around. Instead, he says, Wall Streeters are working to appear busy.

12/9/2008

Category: Finance, Markets, Video, Wages & Income

What Did the Repeal of Glass-Steagall Do ?

Here is a question that I have been wrestling with: What exactly did the repeal of the Glass-Steagall Act accomplish? Were there positives as well as negatives? Should the Gramm-Leach-Bliley Act be repealed, and Glass-Steagall reinstated? > ~~~ What say ye? >

Category: Bailouts, Credit, Finance, Legal, Regulation

Goldman: $2 Billion Loss for Q3

The WSJ is reporting that Goldman Sachs, the guys who have so far managed to avoid getting banged up by the credit crunch, has run out of luck. “Industry insiders,” whoever they may be, are suggesting losses for the Q of as much as $5 per share. Excerpt: Though analysts and investors already were bracing…Read More

Category: Bailouts, Corporate Management, Derivatives, Earnings, Finance

Bush WH Ignored Mortgage Meltdown Warnings

“In hindsight, it was spot on.” -Jeffrey Brown, former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending. > A brutally damning article about the warnings the Bush administration received and ignored was published this morning by the Associated Press. The AP summed…Read More

Category: Bailouts, Credit, Finance, Legal, Real Estate, Regulation

Reshaping US Banking

click for interactive graphic > Sources: Citi Faces Pressure to Slim Down U.S. Seeks Change as Part of Rescue Deal; Talks Began on Fears of Client Exodus DAVID ENRICH and DEBORAH SOLOMON WSJ, NOVEMBER 25, 2008 http://online.wsj.com/article/SB122753629931853007.html Citigroup Should Be Held Accountable, Obama Aide Podesta Says Edwin Chen Bloomberg, Nov. 28 2008 http://www.bloomberg.com/apps/news?pid=20601087&sid=akf_DTv.v8ic&

Category: Bailouts, Credit, Digital Media, Finance