Nationalization Not A Viable Strategy?
By Justin Gardner | Related entries in Banks, Money
I’ve been wary of nationalization because, while I think there’s some logic to it, I question the idea of completely wiping out shareholders. Basically, it seems like an action like that could create a domino effect that would send the Dow spiraling out of control.
William M. Issac, somebody who has done this type of thing before with Continental Illinois Bank, explains why all of this talk about taking the banks over should stop immediately…
Let’s begin with the fact that today our 10 largest banking companies hold some two-thirds of the nation’s banking assets, and some are enormously complex. Continental had less than 2% of the nation’s banking assets, and by today’s standards it was a plain-vanilla bank. This is important for three reasons.First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern. Do we really think that dismantling our largest banks would be helpful? I don’t. [...]
Second, for nationalization to work there needs to be a reasonable exit strategy. In the case of Continental, we had scores of options for returning the bank to private hands, including a public offering or a sale to any number of domestic and foreign banks and investor groups.
Today, who has the wherewithal, legal authority, and desire to purchase our largest banks? No one comes to mind, particularly if we rule out foreign groups, which I suspect would not pass muster due to national security concerns about ceding that much power over our economy to foreign powers.
Third, who will run these companies when we dismiss the existing senior managers and board members? We had significant difficulties attracting quality people to Continental even without today’s limits on compensation.
Any way you slice it, this is an incredibly scary situation, but maybe this is why we aren’t hearing the word nationalization out of the Obama administration. They know that it could set off exactly the type of panic we don’t need right now.
Thoughts?
This entry was posted on Monday, March 2nd, 2009 and is filed under Banks, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
March 2nd, 2009 at 5:00 pm
We have already nationalized the big banks for all intensive purposes. I think the real question is given these nationalized banks, what is the best way to get the government out of the banking business. In the end I think breaking the banks up into smaller pieces and selling those off is the way to go. Although there is some pain for the economy in this, the pain won’t last as long as putting more and more money into banks who still won’t loan given the risk in their credit default swaps. What we are doing now is just prolonging the problem.
March 2nd, 2009 at 5:35 pm
Gotta love Issac, he tells us what we cannot do, but doesn’t have a viable alternative for what we can do.
Issac’s argument hinges on the faulty assumption that the banks must remain big banks, and Trescml hits the nail on the head. Take them over, break them up and then sell them back into private hands.
Issac says that if we nationalize a bank it will be forced, both by the regulators and the marketplace, to shrink dramatically. ANd that’s a bad thing, why? That is exactly what needs to be done. I am getting tired of saying it–if it is too big to fail, it is too big to exist. That applies to banks, the auto industry, insurance companies….
His second argument, that we don’t have a good exist strategy once again rests on the premise that when the government is done ridding the banks of the toxic assets that the bank needs to be returned to private hands as they nw stand…that’s absurd. We will be right back where we started from. Furthermore, our current path of shoveling money at the banks leaves the same people in charge and probes to them that they need not worry about taking risks because the government will them out. That’s insane.
And that leads us to his third, most idiotic point… he asks who will run these companies when we dismiss the existing senior managers and board members? So, he argues, we need to shovel money at the banks to keep the same crooks an incompetents in thier plush seats while enjoying bonuses for driving the economy into the ground.
Yeah, Issac, you know what you’re talking about.
March 2nd, 2009 at 9:45 pm
And if we don’t nationalize what do we do?
Plain old boring bail-outs would cost trillions. Even if we just loaned the bail-out money we’d still need to find several trillion in cash.
Which leaves bankruptcy. Bankruptcy always zeroes out the shareholders. So unless Isaac or some other smart person can come up with another option the shareholders will be zeroed out. Wallstreet may be spooked and panic. But if that’s going to happen it’s apparently inevitable. But bankruptcy isn’t even being discussed — these banks are apparently too big to fail.
I’m not convinced that there isn’t a huge talent pool of potential bank managers waiting in the wings. The thing you have to keep in mind is that if there are only three banks there can be only three bank CEOs. So it’s pretty much inevitable that lots of people as good, or better, than current management aren’t in current management. Besides the CEO who saves Citibank will still be CEO when the salary cap disappears.
The complication argument doesn’t make much sense to me either. If they weren’t a mess Obama wouldn’t even be considering nationalization. And if the government owns these banks it can sell bits of them off, which simplifies things considerably.
I agree that this sucks. Lots. It isn’t ideal. Unfortunately as far as I can tell nationalization is the least stupid option. Bailing them out would take literally trillions, which we don’t have, and we can’t borrow. The finance dudes are pretty convinced we can’t let these go into bankruptcy.
If somebody has a third option I’m open to it. Until somebody presents such an option we’re stuck. The choices are nationalize now or nationalize later. I’d prefer now. Get it over with.
March 2nd, 2009 at 11:25 pm
Of course there’s a third option. Even one capable of being used today. Certainly less expensive than the current futile approach of trying to re-inflate a burst bubble.
Basically, it seems like an action like that could create a domino effect that would send the Dow spiraling out of control.
Looked at the markets lately? What do you think is happening NOW? The markets are reeling because there is NO indication from the admin that they will do anything even remotely intelligent to liquidate the toxic book assets out there, a necessary prerequisite to stabilizing the credit markets.
Indeed, they seem to be doing their best to make things worse.
March 3rd, 2009 at 3:23 am
Isn’t it pretty much agreed that without the money the government has already pumped in, most of the big banks are basically insolvent?
If you accept that premise, what good reason is there that stockholders shouldn’t be completely wiped out?
it seems like we’re just prolonging the inevitable … at a cost of billions.
March 3rd, 2009 at 11:13 am
I think we should let the banks fail. Let those Biggie banks who pushed and took in the toxic stuff suffer in a way that stuff like this will NEVER happen again. If we do not do the pain thing now and feel it now and pay for it now and just sugar coat the bad decisions, we will truly end up Japan and kick the can down the road and have the economy in a clunker mode for a decade or so – just like Japan. Our choice! As the AAMCO transmission commercial said – “You can pay us now….or you can pay us later.” I say pay now, hunker down and bite the bullet, and let the job of recovery fall to the majority of the good Community banks who did not deal in this toxic stuff. And the lesson may THEN be learned that Actions DO have Consequences. Pavlov was right!!