Q: What do you think about nationalizing the banks?
A: I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.
Agreed, I posted a comment there.
Adding some related posts:
The problem of experts
Bill Gross: Nationalization of Banks Won’t Work
No answer is pretty.It’s just a case of who ends up with a chair and who doesn’t when the music stops. I vote for the taxpayer. The other guys already had their shot and blew their — and other’s — wad. Do it fast or do it slow but do it so the taxpayer is a rational player in every deal and not a chump subsidizing crooks.
Thx, I think we are finding out what creeping nationalization does and it’s not pretty.
this may be below the level of conversation here, but at least a public dialogue about what nationalization might look like is getting started.
rj:
I couldn’t agree more, I have been astonished by policy for at least a year, but this is out of your and my hand. Ideally new players would take over whatever assets are available at whatever prices suit both parties, but that cannot happen when you have interference and the kind of phoney markets promoted by the fed and other authorities.
jck,
I think there are a lot of us who too don’t want to live in cages and barter with scotch but still are astonished by policy. Did you happen to catch the exchange b/t Sen. Bob Corker and Bernanke yesterday? So now the plan is to just continuously issue convertible preferred to the top 20, which will be converted to common as losses come. That almost guarantees nothing will move or be re-priced.
I mean look, we’ve gone through a regime change, and it’s time to let the new players, who have balance sheet capacity to buy assets at prices that reflect that.
I’ve tried to buy assets from the top 20 at prices that while low (deservedly) would allow me to employ people and add debt to my businesses pristine balance sheet. But they are not forced to sale and thus these assets just sit in limbo, at ridiculous ask prices. Until they are forced to purge all this stuff nothing is going to get moving again.
That is Japan 101.
There are ways in between stone age Calvinism and what they are doing now, which is preserving a failed system.
RJ
Gaius,
The payment system has already been destroyed. We — the taxpayer — are currently paying the crooks who destroyed it to preserve the appearance that it is still functioning. We all know the ultimate outcome is a massive devaluation and a lower standard of living for everyone in the US.
When someone tries to steal from me I don’t pay him money to continue to do so. If someone tries to blackmail me with the collapse of the financial system as we know it, I don’t pay them off either.
If there are adverse consequences that have to be absorbed because “I/regulators” was asleep at the switch so be it. It’s a lesson to be learned. Obviously, we all try to minimize the pain of that lesson. However, that doesn’t involve paying off the crooks that put you there.
Remove the moral compass and you have nothing but a Hobbesian free for all. Punishment when it comes should be clear and unequivocal — as in China.
gaius marius:
Agreed, nobody likes what’s going on, but I, for one, don’t want to go back to the stone age in order to punish the bankers and other culprits although this is a temptation for many as shown in a speech by Lorenzo Bini Smaghi I posted a while back, here is a good piece:
If we’re going to take our lumps either way for the greed and bad judgment of a few, and we are, I’d like to see the people that created this mess take theirs first and foremost.
ss — i think we all reflexively favor a moral resolution. the question is whether or not one is feasible. if in order to make them suffer we destroy the payments system and revert to barter, what good has that really done?
fwiw — not to get too philosophical — there’s a reason time-tested belief systems broadly eschew revenge. if you think of religion as the accumulated trial-and-error of ten thousand years, one might even consider it the empirical residual of ancient debt crises to be turning the other cheek.
even putting government guarantees under some of these things in advance may not neutralize the risk. if a run really gets started on financial commercial paper (of the kind that sunk mony market funds after lehman) — that’s still a $700bn market. woudl gov’t really backstop it? and it could be just one of several massive liquidating markets. gov’t could quickly be faced with the choice of firewalling the gov’t off to save it or going all in.
talking nationalization is fine — i tend to think it’s the only way, for better or worse — but let’s be honest about the risk profile. it could be a catastrophe.
perhaps the bondholders already freaked out…
“a 30-year Citi bond that matures in 2034 is trading at a highly distressed 58 cents on the dollar, down from 98 cents on the dollar in late December, according to Bloomberg data”
source: http://www.crainsnewyork.com/article/20090223/FREE/902239993/1123
“Citi bondholders await their fate”
I would like to know who those bondholders are…
And why are they so sensitive?
““Do not ask the bondholders for money. They will freak out and we all might get hurt. Is that it?”
Yes, that’s it. Lehman bondholders lost about $150 bn and collateral damage (equities, bonds, etc) worldwide was far more than 100 times that, stock markets alone lost more than $28 trillion in 2008, 2/3 of that post-lehman and that’s counting only to end-2008.”
Guess what, the markets were over-leveraged and overvalued. The decline is a natural consequence of these two factors working themselves out. There was no other answer than a decline in value. It might have been slower or it could have been much faster. Either way there are no innocents here. I am not a fan of the privatize the profits and socialize the losses school of thought. Especially, when it is justified under a mantra of “save the system” when gaming of that very system is what created this mess.
If we’re going to take our lumps either way for the greed and bad judgment of a few, and we are, I’d like to see the people that created this mess take theirs first and foremost.
excuse me, mr gross took risk when he bought the debt instruments. sounds like more of the privileged class looking for a bailout to me. he and his customers need to take the hit like the rest of us. perhaps for pensions, the government steps in to protect the people, not the institutions. he is long junk. he made a mistake. he did not do his homework although he will swear that he did. tough luck, i say. preserve banking. toss out the banks and the bankers.
if we got this result with $12 million dollar ivy leaguers, we cannot do any worse with some regular folks at $500 thousand. natioanlize ‘em. let’s take the heat and move on. risk is risk. otherwise we continue to socialize the risk, and privatize the profit. why work at all. uncle sam will do it for me.
Specularbage :
“Do not ask the bondholders for money. They will freak out and we all might get hurt. Is that it?”
Yes, that’s it. Lehman bondholders lost about $150 bn and collateral damage (equities, bonds, etc) worldwide was far more than 100 times that, stock markets alone lost more than $28 trillion in 2008, 2/3 of that post-lehman and that’s counting only to end-2008.
jck,
ok, I did not know about “interbank deposits” that are not insured by the FDIC as you say. What if the govt would guarantee those? I guess there would still be plenty of bonds of the banks balance sheets that could bear some costs.
For the rest, what a wonderful rational explanation: dear american taxpayers, you do not want to play the russian roulette. So just pay. Do not ask the bondholders for money. They will freak out and we all might get hurt. Is that it?
“Haircutting the bondholders of Citi and BofA: and the consequences? this raises the cost of capital for all the others…”
Does your proposal not raise the “cost of capital” to anybody?
I think all options have consequences.
“The cost of the haircut is nothing compared to the collateral damage”
So now the cost of the haircut is “nothing” (relatively I understand), so taxpayers should take it, not bondholders. Is that because the taxpayers are so rich?
jck,
by bailing out only 19 ‘big banks’ (I guess this 19 are the big election donators), the pres. hussein obama team already is distorting the market
think about the little guy who has his savings on a small (but healthy) bank, and, suddenly, they are told about by this crook bernanke that only 19 are too big to fail
to me sounds like the obvious choice will be he put his savings on the 19 government backed, hurting the hundreds (thousands?) of the small ones
well, maybe its all about a new round of consolidation, anyway
Specularbage:
I would define “deposits” in a large sense not just retail, but including interbank deposits and they are not insured by the FDIC, plus damage affecting related markets like repos, a nationalized is obviously less risky than than a non-nationalized one.
Lehman redux: no it’s not sure, nothing is, we can play russian roulette again…
Haircutting the bondholders of Citi and BofA: and the consequences? this raises the cost of capital for all the others, if you get haircutted investing in a systemically important bank, are you buying bonds at 5% from some other non-systemically bank? The cost of the haircut is nothing compared to the collateral damage, which is what you are ignoring, just as for lehman it’s not the losses by lehman stocks or bondholders that’s the problem, it’s the collateral damage.
You say that “wells fargo and jpm did pretty well ” on protecting the solvency of their companies.
Well that’s your opinion, but many people disagree:
- Mish (Shedlock)
- Reggie Middleton
- Nouriel Roubini
- Bennet Sedacca
… and the stock market.
Perhaps you should say “I think that wells fargo and jpm did a good job” ?
hi jck,
I find your argumentation not convincing. I recall three arguments against nationalization:
1. nasty side effect #1: deposits will go to other banks.
Well the govt just has to guarantee all deposits (if not already done). The deposits of the banks that the FDIC took care of did not get any losses. So that does not hold for me.
2. nasty side effect #2: the “Lehman” shock again, and the credit market problems.
That is not for sure. You can argue that it will be a shock, or not. By now any market players knows we are in deep trouble and any bondholder knows there are risks to his assets. Bondholders can dream of staying under the umbrella of the taxpayers, but the taxpayers don’t have to agree.
3. Haircuts to bondholders will affect the “little people” (“so what you are saying is let’s wipe out pension funds/insurance companies and joe sixpacks 401ks”).
Well perhaps you can provide some facts here. I am no expert in the finance business, but it’s hard to believe the joe sixpacks of this world are the bondholders in majority.
Are 401ks not full of equities (which have already lost 40%+ of their values)?
What I can see is that:
- stockholders have paid for their mistakes,
- people who bought their houses at the peak are paying for their mistakes,
- taxpayers are paying for all kind of mistakes.
Why should bondholders not pay at least a little bit?
That’s called a haircut I understand.
Why not take all the bondholders of Citigroup and Bank of America (to name the two most abvious) to the haidresser?
Remember Freddie and Fannie? Implied govt guarantee with overseers pushing them to lend… We’ve seen that movie.
Could you detail for me how this nationalization of all banks would work? I live in the Pacific Northwest, where there are some shaky banks. But I cannot find any of our regional or local banks being terrified that if the big banks are seized, they will be as well. Is there any real evidence of this fear? For example, the FDIC has a list of banks that will take assets from seized banks. Is there any evidence that this process is being interrupted? There are investors like Wilbur Ross who are claiming that they will invest in banks if the government sets up an RTC type situation for banks being seized. I’m not saying such a scenario isn’t possible, but detail for me how it would work and why, if investors in certain specific banks are dealt losses such an event will occur. Bill Gross wasn’t at all specific. It was just wait and see. Wait and see what exactly?
acc:
“But each banker is first and foremost responsible for protecting the solvency of his or her bank even in a situation with systemic risk.”
Yep, agreed. wells fargo and jpm did pretty well on that score, and the reward is…check their market cap today and last year or two years ago.
“you can’t hedge against systemic risk”
That’s what tangible common equity is for.
“no matter how dumb the regulatory capital level, banks will driven towards it by cheer force of competition.”
One of the lessons taken from the experience of the 1930s was that competition in the financial sector is inherently destabilizing. That’s why we had such an anti-competitive financial structure for decades. If you want to argue that regulators allowed banks to face too much competition (both from each other and from innovative financial companies created after the 70s), then I can agree with you.
The idea that it is possible for regulators to define a safe level of regulatory capital in an environment with aggressive financial innovation and competition strikes me as totally unrealistic — the regulators are guaranteed to always be behind the curve. And the one group that was most aware of this fact was the bankers themselves.
“the bankers didn’t create that mess alone and they can’t get out of it alone.”
But each banker is first and foremost responsible for protecting the solvency of his or her bank even in a situation with systemic risk. The regulator didn’t tell me not to do it is simply not an acceptable excuse.
like you i suspect, i’ve already moved cash under the TBTF umbrella. i agree entirely that it would have to be catch-all-and-release — bank holiday and let them go only following FDIC vetting — but i also sadly agree that’s not what’s on offer in washington, at least not yet. i don’t think most understand the potential ramifications of international depositor flight, for example, or crossholdings of bank debt, or the havoc in commercial paper and money markets, etc. — it would add to the debate if someone with a real voice (not me, lol, maybe felix salmon) offered a laundry list of the likely knock-on effects. too many pro-nationalizationists (?) seem to believe the only possible motive for resisting or moving carefully is some kind of indentured servitude to the banks.
acc:
you can’t hedge against systemic risk, you can’t hedge against regulatory changes like mark to market or basel II, banks have constraints, that they messed up is beyond dispute but what about the regulators and the c.b. they are supposed to be in charge, 2 months before going bust northern rock was given the all-clear to use the most aggressive version of basel II that would have resulted in a 30% cut in their regulatory capital.
no matter how dumb the regulatory capital level, banks will driven towards it by cheer force of competition. the bankers didn’t create that mess alone and they can’t get out of it alone.
gaius marius:
yes, i would say that because at this point in time (this has been going on for over a year and half), the cost of the haircut is worse, complete collapse imho.
suppose that citi is nationalized, are you going to leave your cash in a non-systemically important bank? i won’t and only fools would, so piecemeal nationalization would start a chain reaction of bank crashes, if you want nationalization, i don’t mind as long as it’s done the right way: bank holiday and all banks go, that would be fine but that’s not what is proposed by the pro-nationalization crowd, they want a few bad apples nationalized without considering the effect on the others.
“gov’t has failed to reemove uncertainty and restore confidence”
This attitude leaves me at a complete loss. I’m Austrian enough to believe that the government is that last place anyone should look for the removal of uncertainty and/or the restoration of confidence. If the financial system doesn’t act to protect confidence in itself and to deal with uncertainty, then what can the government do?
If your view is representative of the financial community’s then I think we’re in a much worse hole than the Great Depression. At least back then, bankers knew that it was their job to deal with uncertainty and their job to maintain confidence. In such an environment, it’s much easier for the government to step in and say, I’ve looked over the bank balance sheets and these are the good ones (e.g. FDR in 1933). The underlying confidence in the basic honesty of bankers was still there.
i don’t doubt there would be fireworks — i’d suggest at least considering a bank holiday, suspending or nullifying CDS and maybe even capital controls as firebreaks — but it seems to me that we’re trying to thread a needle with no eye. making bondholders whole, once the true extent of the bank losses becomes apparent as the consumer continues to delever, runs a good risk of bankrupting the US (ie pushing through a rate spike in treasuries and/or engendering wholesale monetization with potentially dangerous currency consequences).
there is a massive tail risk here that japan, replete with domestic savings, never faced. going the zombie bank route has a distribution of outcomes, only one of which looks like japan. would you say, jck, that those are better risks to run than haircuts for holders of BHC debt?
Personally I’m in favor of nationalizing those that are insolvent, equity holders to $0, bond holders get to be new equity, all positions are declared transparently. Oh yes, and let’s try something new and prosecute the crooks of course.
This is all just a shell game to forestall the inevitable and give an easy exit to some…
barry:
you are probably right.
acc:
at this point there is not much choice left, nationalization has to be for all banks, if not the “good” ones will lose deposits to the nationalized ones as happened in the u.k. when northern rock was taken over. don’t get me wrong i don’t like it but that’s where we are, there are no good options left, and garanteing debt is necessary because gov’t has failed to reemove uncertainty and restore confidence. we are not in a normal situation where one or two banks would go bust but where all banks, systemic crisis, will crash. the trick is to compare the cost of avoiding the crash vs the cost of the crash itself. that’s a no brainer, imho.
They cynic in me says that Mr. Gross is long bank prefered shares.
But, jck, you need to think through the consequences of what you are proposing. If all debt issued by financial institutions of any sort carries a government guarantee, then the financial system has been completely nationalized — but left in the control of a few interested parties rather than the government.
The problem is: What kind of an end game do you propose after offering a de facto government guarantee of all debt? What Bill Gross is proposing just doesn’t make sense.
the banks are issuing gov’t backed debt because nobody in his right mind is going to fund them without a guarantee at anywhere near current rates.
now if you want to wipe out bondholders it would be a good thing to contemplate the consequences, for a start it’s hardly going to reduce risk premiums or restore confidence, and banks’debt are other people assets, so what you are saying is let’s wipe out pension funds/insurance companies and joe sixpacks 401ks… well bill gross is right, lehman was a walk in the park if that happens.
How can we on the one hand have plenty of private capital available as so often sighted in deposits and free form PE etc, and on the other can;t possibly “afford” privitization> The credit market risk is a red herring used to instill fear. The Banks by last tally have issued something like $150 billion in gov’t backed debt via the FDIC. Defending bondholder capital as sacrosanct is ideology nothing more.