US Banks: Nationalization? Pre-privatization?

[punked]

And what exactly are your assertions?

It seems to me, msj, that you are like SNL's version of Geithner (playable in Canada).

IOW msj, you repeat the Roubini line, or the line of the Credible Risk comments.

Roubini says we can wait. Other say we can't.

FT

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Can we wait, or can't we? Should we place good money after bad? Every bureaucrat is terrified of another Lehmans.

Nationalizing Citibank or Bank of America (or AIG) amounts to putting them into bankruptcy.

I don't think we can wait.

http://www.mcclatchydc.com/227/story/63606.html

" WASHINGTON — America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days."

It is over we either need to nationalize or take another Trillion and create a "Bad Bank" to take on these loses. The seem to be Same side of a different coin to me. They are going to take a lot of government over sight. They are going to cost a lot, and something has to be done.

[msj]

Ah August, still acting like a lost child.

I don't see why I need to hold you by the hand since I have linked enough times so that anyone who has a memory will know what my assertions are:

1) Proper regulation so that lenders and borrowers know what risk they are taking on.

2) Proper monetary policy which does not try to prop up every little "crisis" that comes along.

3) Proper statistic gathering so that policy makers have the best available data to act upon before it hits the fan (and to reduce the amount of cheer leading from the ignoramuses - you know, like the recession deniers of 2008).

You know, you can always go re-read some of my posts and the articles I have linked to so you can refresh your memory.

[msj]

It is over we either need to nationalize or take another Trillion and create a "Bad Bank" to take on these loses. The seem to be Same side of a different coin to me. They are going to take a lot of government over sight. They are going to cost a lot, and something has to be done.

No, nationalization means that taxpayers take the losses but also will share in some of the gains once things improve.

Creating bad banks means that taxpayers buy bad assets at inflated prices, thereby socializing the losses, while ensuring that existing shareholders/debtholders get all of the upside with no taxpayer participation.

Not the same thing at all.

[punked]

No, nationalization means that taxpayers take the losses but also will share in some of the gains once things improve.

Creating bad banks means that taxpayers buy bad assets at inflated prices, thereby socializing the losses, while ensuring that existing shareholders/debtholders get all of the upside with no taxpayer participation.

Not the same thing at all.

If we were to do the Bad Bank thing it would half to be done by buying the bad assets at what is valued on the books. Otherwise it would not work it just wouldn't. Becuase the government can hold onto the bad assets for a really long time most of it would be paid back at much higher then the book value giving close to the same out come I think. I however do think it is a too much of a risk and am for nationalization instead.

[August1991]

No, nationalization means that taxpayers take the losses but also will share in some of the gains once things improve.

How naive.

It ain't so simple.

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msj, have you ever been a banker? Are you married?

Edited March 10, 2009 by August1991

[punked]

How naive.

It ain't so simple.

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msj, have you ever been a banker?

It ain't never that simple. Although that is the jist of it.

[August1991]

It ain't never that simple. Although that is the jist of it.

It is simple. Have you ever been married?

It's a question of trust and confidence.

[bush_cheney2004]

It ain't never that simple. Although that is the jist of it.

I doubt that.....they simply don't know, especially when it comes to valuations. Be particularly aware of anybody claiming to be smarter than "ignoramuses"!

[msj]

If we were to do the Bad Bank thing it would half to be done by buying the bad assets at what is valued on the books. Otherwise it would not work it just wouldn't. Becuase the government can hold onto the bad assets for a really long time most of it would be paid back at much higher then the book value giving close to the same out come I think. I however do think it is a too much of a risk and am for nationalization instead.

That would not work!

If you bought the bad assets at their supposed fair market value (whatever that may be - see where I'm going here?) then the banks would be wiped out.

There is not enough equity on the banks books that would cushion against such write downs. Any write down reduces this equity from surplus to deficit with the resulting impact on capital ratios.

The bad assets would have to be purchased at higher than fair market value, if not their original carrying value, so that banks can maintain their equity and capital ratios. That's just simple accounting and that's just how the system works. No capital, no bank.

Basically, if you want to go down the bad bank road then taxpayers have to be prepared to take all of the losses and not participate in any of the gains.

Most people see this as unreasonable - if the government is to act like a white knight then it should participate in the gains when they come.

[punked]

That would not work!

If you bought the bad assets at their supposed fair market value (whatever that may be - see where I'm going here?) then the banks would be wiped out.

There is not enough equity on the banks books that would cushion against such write downs. Any write down reduces this equity from surplus to deficit with the resulting impact on capital ratios.

The bad assets would have to be purchased at higher than fair market value, if not their original carrying value, so that banks can maintain their equity and capital ratios. That's just simple accounting and that's just how the system works. No capital, no bank.

Basically, if you want to go down the bad bank road then taxpayers have to be prepared to take all of the losses and not participate in any of the gains.

Most people see this as unreasonable - if the government is to act like a white knight then it should participate in the gains when they come.

I agree the problem with the bad bank idea is that we don't know how to price the assets. Although I think you half to agree it will be much easier legislatively to go the bad bank route becuase we worlds like nationalization aren't used making people like August here happier. I just don't think Nationalization which we can agree is the best answer will happen, so lets deal with the reality we are going to set up a Bad Bank and figure out how to work it.

[August1991]

If you bought the bad assets at their supposed fair market value (whatever that may be - see where I'm going here?) then the banks would be wiped out.

There is not enough equity on the banks books that would cushion against such write downs. Any write down reduces this equity from surplus to deficit with the resulting impact on capital ratios.

The bad assets would have to be purchased at higher than fair market value, if not their original carrying value, so that banks can maintain their equity and capital ratios. That's just simple accounting and that's just how the system works. No capital, no bank.

Basically, if you want to go down the bad bank road then taxpayers have to be prepared to take all of the losses and not participate in any of the gains.

Most people see this as unreasonable - if the government is to act like a white knight then it should participate in the gains when they come.

If the taxpayer is not the White Knight, what do you propose?

Sorry to be so direct but you present yourself as someone with all the answers...

[msj]

How naive.

It ain't so simple.

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msj, have you ever been a banker? Are you married?

Yes I'm married. I also see quite a bit of the financial side but I have enough personality to never have become a banker.

I'm reminded of that joke: The economy is worse than divorce... I lost half my money and I'm still married.

What is truly naive, however, is thinking that its a good idea for taxpayers to take all the loses and not share in any gains - how is the banking system going to learn their lessons if they don't take the blood bath that they deserve?

As for trust and confidence - that ran out a long time ago.

John Mauldin's recent email letter has this quote:

So long as risk is effectively concealed from borrowers and lenders or actually shifted to others, risk-taking will be excessive. The initial phase of excessive risk-taking will manifest itself as an economic boom, but eventually, when actual losses begin to change the perceptions of borrowers and lenders and begin to impinge upon unsuspecting others, the boom will give way to a bust....[A] market system whose credit markets involve risks that are partially concealed from the lender and partially shifted to others will be biased in the direction of excessive risk-taking. And excessive risks are converted in time into excessive losses.

- Roger Garrison

Confidence is gone because "financial innovation left transparency in the dust."

Furthermore:

Wall Street devoted much of its intellectual and political capital to concealing the risks it was creating. This concealment was deliberate; products needed to be priced inefficiently to produce profits. Second, these companies are integral parts of a networked global economy; as such, their value is completely dependent on the overall health of that network. Unless the network can be restored to health, these assets will remain severely devalued. Right now, the network is very sick. When a system is allowed to hide risk for so long, it is ill-equipped to manage that risk when it finally emerges from the shadows.

Etc, etc....

[msj]

If the taxpayer is not the White Knight, what do you propose?

Sorry to be so direct but you present yourself as someone with all the answers...

So, you have no idea what a white knight is when it comes to finance and takeovers?

This is getting absolutely stupid.... what, you want me to hold your hand and recite the alphabet and count to ten with you too?

Let me put it to you this way:

If Warren Buffett rode to the rescue of, say, Bank of America, do you honestly think that he would come in and fork over all this capital in Berkshire and say, oh no, I don't need to make any money on this transaction, this one's on me.

Of course not.

He would do what he's done to GE - 10% yield, please, plus the option for capital gains upon conversion.

Edited March 10, 2009 by msj

[msj]

I agree the problem with the bad bank idea is that we don't know how to price the assets. Although I think you half to agree it will be much easier legislatively to go the bad bank route becuase we worlds like nationalization aren't used making people like August here happier. I just don't think Nationalization which we can agree is the best answer will happen, so lets deal with the reality we are going to set up a Bad Bank and figure out how to work it.

Not entirely sure what your getting at.

We are only looking at nationalizing a handful of banks.

The FDIC does this all the time. In fact, they have already taken over something like 19 failed banks this year.

You don't think that the FDIC can hire people competent enough to deal with the bad assets?

You honestly think that we're better off with these banks to remain in the hands of the inept who have run them into the ground and taxpayers should simply hand over money at whatever price these incompetents tell us their loan portfolio is worth?

Talk about trust and confidence!

[punked]

Not entirely sure what your getting at.

We are only looking at nationalizing a handful of banks.

The FDIC does this all the time. In fact, they have already taken over something like 19 failed banks this year.

You don't think that the FDIC can hire people competent enough to deal with the bad assets?

You honestly think that we're better off with these banks to remain in the hands of the inept who have run them into the ground and taxpayers should simply hand over money at whatever price these incompetents tell us their loan portfolio is worth?

Talk about trust and confidence!

The handful of banks you speak of make up one third of the banking sector. Citibank use to be the biggest bank in the world not too long ago.

[msj]

The handful of banks you speak of make up one third of the banking sector. Citibank use to be the biggest bank in the world not too long ago.

Yes, they were big.

They are small now for a reason, you know - because they were incompetently run.

Granted, they got big thanks to an unsustainable bubble in the first place as I have already mentioned in a few posts back...

[punked]

Yes, they were big.

They are small now for a reason, you know - because they were incompetently run.

Granted, they got big thanks to an unsustainable bubble in the first place as I have already mentioned in a few posts back...

They are still huge. Bank of America has branches everywhere. We aren't just talking about some small banks they are still huge.

[August1991]

We are only looking at nationalizing a handful of banks.

The FDIC does this all the time. In fact, they have already taken over something like 19 failed banks this year.

Handful of banks?

AIG?

As soon as there is a hint of AIG in receivership, its counterparties (and the depositors/creditors in its counterparties) will withdraw cash. There will be a run on banks around the world.

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msj, Canada managed the bankruptcy of Confederation Life without a run. How?

Edited March 10, 2009 by August1991

[msj]

Handful of banks?

AIG?

As soon as there is a hint of AIG in receivership, its counterparties (and the depositors/creditors in its counterparties) will withdraw cash. There will be a run on banks around the world.

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msj, Canada managed the bankruptcy of Confederation Life without a run. How?

You do realize what the government has already done to AIG, haven't you?

I mean, with a wink and a nod, sure we can pretend AIG isn't effectively nationalized already. Ya know what I mean, ya know what I mean ....

Some of us prefer to look at things with our head out of the sand.

As for a handful of banks - yes, we are talking anywhere between 4 and 19 big banks. It can be done and will eventually be done - the longer it takes the longer the pain.

Once again - head out of sand.

Rinse, lather, repeat....

[msj]

They are still huge. Bank of America has branches everywhere. We aren't just talking about some small banks they are still huge.

I have simply assumed that people realize this, but maybe they don't:

Citibank's market capitalization was around $240 billion back in November, 2006 (as was Bank of America's).

Their market capitalization today is ~$8 billion.

The government has put in something like $45 billion and have guaranteed another ~$300 billion.

So, we have management eroding shareholder value by $232 billion and people [not you, punked] complain about nationalization because, heaven forbid, some people want the government to get a piece of the action since the government has already sunk $45 billion+ into this black hole.

Oh, but it's all ok for the government to provide billions, just don't wipe out that precious $8 billion in remaining market cap.

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On a side note - Citi's shares went up nicely today after their announcement.

"I am announcing that I have $10 billion in my bank account except for the portion of the $10 billion that I don't have!"

Link.

Also some nice Elliot Wave stuff (mostly links to previous posts) in there for those who care.

[msj]

While I'm linking to some interesting articles tonight here is a good one with some interesting thoughts about Sweden:

Lessons from Swedish bank resolution policy

Please, let us discuss the issues raised (punked, any ideas?) rather than focus on whether or not the author is this or that.

[msj]

Looks like someone else has come up with another name for "nationalization" or "pre-privatization."

This time I'm not going to because the point is perfectly clear:

“Capitalization,” now that’s something I think we can all get behind. C and BAC need to be “capitalized.” If the people who put in the capital get 100% ownership, well that’s just how the game is played.

Now, before August or others go off in a huff because I dare to point to someone making a comment to a Barry Ritholtz post (it's comment #1) I ask that they consider what is actually being said rather than who is saying it.

I don't really know who John Haskell is but, even if he is a novelist and performer in New York, I don't think that should distract us from the substance of his point.

[msj]

I will also add the following link to the others I have already included. It adds a nuance that really is important to this debate:

Paul Krugman’s false logical step

And, once again, I don't know who the guy is but his ideas are interesting nonetheless.

Edited March 13, 2009 by msj