Bank Nationalization

[Subdude]

The question of the week obviously. Should Citi, Bank of America and the like be nationalized? If not, how should they be supported?

[RedScare]

If you would have phrased the poll question as "Should taxpayers get bank stock for their bailout money?" you would get a FAR different poll result.

http://www.cnbc.com/id/29352730

Edited February 24, 2009 by RedScare

[Subdude]

If you would have phrased the poll question as "Should taxpayers get bank stock for their bailout money?" you would get a FAR different poll result.

Fair point. But a lot of the discussion is also about what kind of bank stock (preferred or equity), and how much (controlling stakes or not).

[RedScare]

Fair point. But a lot of the discussion is also about what kind of bank stock (preferred or equity), and how much (controlling stakes or not).

True, but the term "nationalization" triggers knee jerk reactions in some people who fear a socialist government, yet many of those same people would demand that the government get something for their loan money, not realizing that this is the definition of nationalization (at least the definition that we are using here).

Of course, by pointing it out, we may have diluted the effect.

[Subdude]

True, but the term "nationalization" triggers knee jerk reactions in some people who fear a socialist government, yet many of those same people would demand that the government get something for their loan money, not realizing that this is the definition of nationalization (at least the definition that we are using here).

Of course, by pointing it out, we may have diluted the effect.

Again, you're absolutely right that "nationalization" can be a loaded term, but that is the word that is used in press reports about it, so we may as well lay it out that way. Myself, I would much rather go with loaded but honest words like "nationalization" than vaguely comforting euphemisms such as "conservatorship" (cf Fannie, Freddie and AIG). But your question is just as valid:

"Should taxpayers get (common/preferred) bank stock for their bailout money?

[TheNiche]

The question of the week obviously. Should Citi, Bank of America and the like be nationalized? If not, how should they be supported?

I want to see an overarching fiscal policy package, and I want to have seen it in January. Struggling firms can't plan on an uncertain future.

Edited February 24, 2009 by TheNiche

[RedScare]

I want to see an overarching fiscal policy package, and I want to have seen it in January. Struggling firms can't plan on an uncertain future.

That's not one of the choices. It's either nationalize or the gov't. receives stock for its investment in the banks. Pick one. Don't be wishy washy.

[TheNiche]

That's not one of the choices. It's either nationalize or the gov't. receives stock for its investment in the banks. Pick one. Don't be wishy washy.

No deal. I want a comprehensive plan within the context of which I can meaningfully evaluate potential future outcomes before we continue on a path of piecemeal intervention.

And if there's anything worse for business than general pessimism, it is uncertainty. We need to get people investing again, and right now they're just sitting on the fence because they know better than to think they know what's happening with the economy or the government. As someone evaluating policy, I'm in the same boat. You wouldn't want a physician prescribing you medication without asking what other medications you'll be taking, and you shouldn't want an economist telling to the end-all-be-all solution if that person doesn't know what else is going to be undertaken concurrently.

[crunchtastic]

Too late. Citi has already effectively asked to be nationalized with the stock conversion bid that came out in the papers yesterday. It will happen, at this point it's a matter of to what degree, and semantics. It's time for the government to show some balls, seize what assets are left, and refuse to keep losing ROI from the TARP. all indications now are that BOA and Citi are only going to continue to lose value. Private business would refuse to keep throwing money away in this situation, why shouldn't the Fed?

This is why I opposed all of the 'bailouts.' None of them have worked, and it was the equivalent of setting billions of dollars of taxpayer money on fire. The banks, the auto manufacturers, all are worse off now than they were in Q4.

[Fringe]

True, but the term "nationalization" triggers knee jerk reactions in some people who fear a socialist government, yet many of those same people would demand that the government get something for their loan money, not realizing that this is the definition of nationalization (at least the definition that we are using here).

Of course, by pointing it out, we may have diluted the effect.

Call it what you want but how will nationalizing our banks make us any different from the socialist European governments?

[memebag]

Call it what you want but how will nationalizing our banks make us any different from the socialist European governments? Like it or not, letting poorly managed banks and companies fail on their own is part of capitalism.

That sounds good, but where will capitalists get capital without banks?

[TJones]

Red, how would we consider who gets stock, and in what amounts ? Would it be a percentage based on your tax bracket. Would those who don't even pay taxes get a share, just like they get a share of the tax breaks now ?

I am agreeing with you that we should get something in return, but how to go about doing it is my question.

Edited February 25, 2009 by TJones

[Subdude]

Too late. Citi has already effectively asked to be nationalized with the stock conversion bid that came out in the papers yesterday. It will happen, at this point it's a matter of to what degree, and semantics. It's time for the government to show some balls, seize what assets are left, and refuse to keep losing ROI from the TARP. all indications now are that BOA and Citi are only going to continue to lose value.

What's getting tossed around is that the government would take 40% of Citi common, meaning it would still not have full control.

Call it what you want but how will nationalizing our banks make us any different from the socialist European governments? Like it or not, letting poorly managed banks and companies fail on their own is part of capitalism.

I'm afraid that train left the station after the bank panic last autumn. Nobody wants a repeat of that, and there is general recognition that banks aren't like other businesses that can be let fail without damaging the economy. The question at this point isn't whether the banks will be bailed out, just the form the bailout should take. For whatever reason we've let ourselves be saddled with a set of too-big-to-fail banks.

[TheNiche]

Too late. Citi has already effectively asked to be nationalized with the stock conversion bid that came out in the papers yesterday. It will happen, at this point it's a matter of to what degree, and semantics. It's time for the government to show some balls, seize what assets are left, and refuse to keep losing ROI from the TARP. all indications now are that BOA and Citi are only going to continue to lose value. Private business would refuse to keep throwing money away in this situation, why shouldn't the Fed?

This is why I opposed all of the 'bailouts.' None of them have worked, and it was the equivalent of setting billions of dollars of taxpayer money on fire. The banks, the auto manufacturers, all are worse off now than they were in Q4.

Neither the Fed or the federal government are private businesses, nor should they be run as such. The economic damage is already done, and regardless of who controls what, society is going to pay for it. You can't get around that. The worst possible outcome is to allow banks to fail, but it is not clear to me at this time whether an unconditional bailout, a conditional bailout, or nationalization is preferable, or how that might affect or be affected by a fiscal strategy which is still completely unknown.

I'm afraid that train left the station after the bank panic last autumn. Nobody wants a repeat of that, and there is general recognition that banks aren't like other businesses that can be let fail without damaging the economy.

I'm not so sure that's true. There are political forces at work that might use this as a justification to nationalize auto manufacturers. It could be a slippery slope.

[Subdude]

I'm not so sure that's true. There are political forces at work that might use this as a justification to nationalize auto manufacturers. It could be a slippery slope.

That doesn't follow, does it? Yes, there may be knock on effects w.r.t. the auto manufacturers, but that doesn't mean that there isn't a broad level of agreement that the banking system needs to be saved.

[KatieDidIt]

Every day this mess just gets uglier and uglier.

It's sad a day for those that have done the right thing, made the payments, saved and scrimped and never asked for anything.. Pure and simple.

Edited February 24, 2009 by KatieDidIt

[TheNiche]

That doesn't follow, does it? Yes, there may be knock on effects w.r.t. the auto manufacturers, but that doesn't mean that there isn't a broad level of agreement that the banking system needs to be saved.

There is broad agreement that the banking system needs to be saved. What is not clear to me is that such agreement is exclusive to the banking system.

[BryanS]

Nationalization is happening now, whether we like it or not.

AIG. 80% govt owned. And needs more money.

Citi. 45 billion. And now wants the govt to buy up to 40% of common stock... before this "stress test"... hmmm... sure do find that strange.

At the end of the day, the US govt will own 100% of both... and they will still both implode.

The CDS market will ultimately doom AIG.

So long AIG and Citi! Nice knowing you!

[RedScare]

Call it what you want but how will nationalizing our banks make us any different from the socialist European governments?

[crunchtastic]

Neither the Fed or the federal government are private businesses, nor should they be run as such.

That's a matter of debate. But facts are the government and the Fed are currently the only entities with the ability and willingness to raise capital and buy assets, and are therefore the only viable near-term solution for bank stabilization.

Edited February 24, 2009 by crunchtastic

[TheNiche]

That's a matter of debate. But facts are the government and the Fed are currently the only entities with the ability and willingness to raise capital and buy assets, and are therefore the only viable near-term solution for bank stabilization.

No, I don't believe it is debatable. Government should behave differently from private businesses and with different aims. Not only would government duplication of private sector endeavors just act to crowd out the market, but because government is not set up to have a decent system of accountability where minutia is concerned and is rife with labor unions, government tends to be less efficient.

[crunchtastic]

No, I don't believe it is debatable. Government should behave differently from private businesses and with different aims. Not only would government duplication of private sector endeavors just act to crowd out the market, but because government is not set up to have a decent system of accountability where minutia is concerned and is rife with labor unions, government tends to be less efficient.

OK, let's say it's not debatable. But do you disagree that the federal government is the only entity currently willing and able to raise capital or buy assets in the amounts necessary to stabilize the credit market? In other words, do what banks do?

The government is uniquely qualified for the task, since it controls the money supply (in the strict fiat currency sense) --and if I'm not mistaken you've been a proponent of inflationary policy as a tool to get out of this mess. Govt prints more money, takes over a bunch more assets at fire sale prices, and pushes out the writedown until the 'free market' pulls its head out of its ass and can start buying things back.

In any event, I'm more interested in you new signature? Old man??

Edited February 25, 2009 by crunchtastic

[TheNiche]

OK, let's say it's not debatable. But do you disagree that the federal government is the only entity currently willing and able to raise capital or buy assets in the amounts necessary to stabilize the credit market? In other words, do what banks do?

The government is uniquely qualified for the task, since it controls the money supply (in the strict fiat currency sense) --and if I'm not mistaken you've been a proponent of inflationary policy as a tool to get out of this mess. Govt prints more money, takes over a bunch more assets at fire sale prices, and pushes out the writedown until the 'free market' pulls its head out of its ass and can start buying things back.

That much is accurate. But the very fact that the government can control the money supply is an indication of why it needs to be run differently than a private firm. A private firm would just print money continuously because it can.

In any event, I'm more interested in you new signature? Old man??

My signatures always get comments. Either I'm doing them very well or I'm doing them very poorly. ...probably the latter.

It came to me on Saturday night when I was watching George Carlin's last HBO set. He was drawing differentiation between old men, old farts, and old ____s like himself. I was the old man.

[crunchtastic]

I'm fascinated with how the idea of bank nationalizaiton has to be ignored, deflected, and outright lied about (Ben Bernanke lied, just flat out lied, and the stock market went up a couple hundred points) all because Americans get the heebie-jeebies at the mention of the word.

The nationalization genie is already out of the bottle. This guy on Bloomberg explains it a lot better than I could:

http://www.bloomberg.com/apps/news?pid=206...id=axsmjkDYWDsg

[Fringe]

Every day this mess just gets uglier and uglier.

It's sad a day for those that have done the right thing, made the payments, saved and scrimped and never asked for anything.. Pure and simple.

And that's the whole problem with these bailouts. Those of us that have worked hard to get where we are and stay out of trouble will be the ones paying for all this in the long run. There is no accountability left in this nation.

Government running banks? What has the government ever done right when they got their hands on something?

[sevfiv]

Government running banks? What has the government ever done right when they got their hands on something?

It's unfortunate, but you could say that about any entity. All's left is reform.

[memebag]

Government running banks? What has the government ever done right when they got their hands on something?

Is that a serious question? Our government has done a lot of things right. The best instances involve public safety, like the regulation of food & drugs, building codes, environment, etc. Things that private interests could have profited from at public expense. Government control of the banking system is yet another example of that sort of safety. We're in this mess because greed found local maxima for a few individuals at the expense of millions of other citizens. We invented government to guard against that. Why not use it?

[BryanS]

Government running banks? What has the government ever done right when they got their hands on something?

What has the current non-government bank management done for banks? They're running the banks... right into the ground. And in the process, destroying America's retirement savings. Please!

[liammclaren]

That sounds good, but where will capitalists get capital without banks?

The money that banks loan isn't "capital", it's debt. Not the same thing.

[memebag]

The money that banks loan isn't "capital", it's debt. Not the same thing.

OK, then where do capitalists get capital?

[Fringe]

OK, then where do capitalists get capital?

The Feds just print out more money.

link

[memebag]

The Feds just print out more money.

link

If debt isn't capital, fiat currency doesn't get to be capital either.

[TheNiche]

It's unfortunate, but you could say that about any entity. All's left is reform.

I have multiple 'entities' of my own. Are you calling me a failure!? Do I need to be reformed?

And what entity will perform the reform? Won't it just fail, too?

[crunchtastic]

I have multiple 'entities' of my own.

is "entities" just your code word for "personalities"? I knew it, you are crazy. Much like AIG, I'm afraid reformation of The Niche is futile.

[sevfiv]

I have multiple 'entities' of my own. Are you calling me a failure!? Do I need to be reformed?

And what entity will perform the reform? Won't it just fail, too?

No comment!

But you could say that about anything or anyone, it doesn't make it necessarily so. There are always wretched ones in any bunch, but I'd take the government any day for regulatory power over a large private entity.

[TheNiche]

No comment!

But you could say that about anything or anyone, it doesn't make it necessarily so. There are always wretched ones in any bunch, but I'd take the government any day for regulatory power over a large private entity.

This is an example of where words that signal absolutes, such as "always," need to be clarified and explained. A one-liner is utterly incapable of summing up the relationship between millions of businesses and a single federal government.

[Fringe]

No comment!

But you could say that about anything or anyone, it doesn't make it necessarily so. There are always wretched ones in any bunch, but I'd take the government any day for regulatory power over a large private entity.

Obviously you haven't heard the term "good enough for government work".

[RedScare]

Nice plain English description of the nationalization debate.

http://www.msnbc.msn.com/id/29412829/

As the article makes clear, there are no easy answers or solutions. Every solution has risks...big risks...associated with it.

[TheNiche]

Nice plain English description of the nationalization debate.

http://www.msnbc.msn.com/id/29412829/

As the article makes clear, there are no easy answers or solutions. Every solution has risks...big risks...associated with it.

The article discussed what happens to stakeholders, but I'd suggest that the bigger part of the debate is how the government would fix these institutions and restore them to solvent entities that can be sold back to the private market and stand on their own merit. What I want to know is: who calls the shots, how are they accountable, what are they going to do to repair the entity, what is the government's exit strategy, and how can we ensure that the government will execute that exit strategy on schedule rather than drawing it out for as long as possible?

It is tempting to say that accountability ultimately rests with voters, but even very important single issues have a tendency to get drowned out in an election...and I'd suspect that to be especially true when we're talking about high finance, which relatively few voters understand.

[citykid09]

What are the pros and cons of bank nationalization from the perspective of the banks as a business entity?

Also from the perspective of fixing current financial problems?

[TheNiche]

What are the pros and cons of bank nationalization from the perspective of the banks as a business entity?

Also from the perspective of fixing current financial problems?

The devil is in the details. The short answer, for now, is that I don't have enough information to draw many conclusions or argue one way or the other.

The Scandinavian precedent makes for good reading, and is an example where it worked out well. But there's no evidence from which to conclude that our experience will match theirs.

[Rammer]

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

- Thomas Jefferson

[TheNiche]

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

- Thomas Jefferson

The power of private banks to print money was steadily worn away until about 1910, by which time the Department of Treasury had taken on all matters related to the printing of money.

Your quote is irrelevant to the situation.

[Subdude]

Long but good post on pros and cons of nationalization.

The case for and against bank nationalisation

He concludes it is the best way to deal with the zombie banks and avoid repeating Japan's experience.

One point in favor not made in it is that nationalization would provide a convenient way to deal with the "too big to fail" problem that both the UK and US walked into. In addition to being split into "good" and "bad" bits, nationalized banks should, at a minimum, have their risk-taking investment banking activities spun off (ie return to Glass Steagall). If necessary, the surviving "good banks" should be further disaggregated so as to not pose systemic threats. A side benefit to ending up with a lot of smaller banks instead of a few behemoths would be to improve competition. Yet another benefit is that nationalization provides the perfect opportunity to throw upper management off of the (gravy) train.

As an alternative to being broken up into tiny pieces, the too-big-to-fail institutions should be clearly identified as such and put under a very much more comprehensive regulatory regime than smaller banks. After what has happened it seems only fair to expect that banks (and insurance companies, and GSAs, and car companies..) that only live by virtue of public funds should have a high degree of government oversight.

The argument that has been consistently made to support the bailout programs is that banks are different because of their central role in the economy. Fair play, but if large banks are effectively public utilities then that is the model by which they should be regulated. This implies not only strict oversight, but a drastic change in the banking culture which in many ways was at the heart of the problem.

What has happened to the financial system is awful, but we're going to have to deal with it, and as they say it would be a shame to waste a good crisis.

[TheNiche]

The argument that has been consistently made to support the bailout programs is that banks are different because of their central role in the economy. Fair play, but if large banks are effectively public utilities then that is the model by which they should be regulated. This implies not only strict oversight, but a drastic change in the banking culture which in many ways was at the heart of the problem.

Given that there is a consumer surplus associated with nearly any kind of economic activity within any kind of industry, you could make the case that all industries are effectively public utilities which should be subject to the same kind of intense government scrutiny you're discussing here. And if government could be trusted to efficiently and competently enforce such scrutiny, then I could come up with no unreasonable objection. That would be communism, however, and history shows that communism doesn't work. It isn't that government can't physically achieve the same things that firms can, just that corruption, incompetence, power struggles, conflicts of interest, perverse incentives, asymmetrical information, and so on and so forth act against it in every step of the way.

It's hard to object to nationalization, whether temporary or permanent, if you buy into the core assumption that economists make in an academic environment, which is that all individuals are rational. This is not the case. And that's why I'm very impatiently waiting for details. I want a competent plan, a committed exit strategy, and accountability.

[BryanS]

The argument that has been consistently made to support the bailout programs is that banks are different because of their central role in the economy. Fair play, but if large banks are effectively public utilities then that is the model by which they should be regulated. This implies not only strict oversight, but a drastic change in the banking culture which in many ways was at the heart of the problem.

You absolutely hit the nail on the head. And for the regulatory/oversight function, may I recommend Sharky, the regulatory shark:

"Banking culture:" You skirt or cheat the system again... this will be your fate.

You losers. You just destroyed America's retirement savings.

[Subdude]

From Big Picture

[TheNiche]

I was just watching an interview of Warren Buffet on CNBC. When asked what would be the best approach to deal with ailing banks, he refused to answer. He wanted clarity from the federal government before he was willing to take a hard line. When drilled on it, he actually went on and on for a couple of minutes about the importance of clarity.

Someone must've been reading my posts!

[BryanS]

I was just watching an interview of Warren Buffet on CNBC. When asked what would be the best approach to deal with ailing banks, he refused to answer. He wanted clarity from the federal government before he was willing to take a hard line. When drilled on it, he actually went on and on for a couple of minutes about the importance of clarity.

Someone must've been reading my posts!

Warren Buffet is an idiot. Just ask him about his Goldman Sachs "investment"... How do you feel about that stock trade, Warren?

[TheNiche]

Warren Buffet is an idiot. Just ask him about his Goldman Sachs "investment"... How do you feel about that stock trade, Warren?

That's right BryanS, everybody except for you is an idiot, prone to errors. You are a financial god, the one and only arbiter of truth within that realm. And you're only not a billionaire because you choose not to be.

Nobody bats a thousand. I don't pretend that Warren Buffet is infallible. Neither does he.