naked capitalism

Anonymous says:

One form of government intervention, injecting zero interest money and guarantees, being held on a pedestal while another, accountability in exchange for cheap loans, being ostracized. The entitlement and corruption disgusts me.

If it wasn’t going to burn the responsible as well, I’d rather let these people learn the hard lesson of how much they really depend on their socialist government to stay afloat.

Early Withdrawal says:

obvious thread music is obvious

http://www.youtube.com/watch?v=ip1zsUIosoA

Anonymous says:

Only nationalization can save the bank shareholders and bondholders.

Swedish Lex says:

The Administration could easily back track from that statement. It is a weak endorsement of its own policy. I suspect that Geithner will have his Greenspan moment soon, and change the course towards nationalisation if/when necessary.

Is there a small group of individuals in the Treasury who secretly have been drafting the U.S. equivalent of the nationalisation à la suédoise all along and who will be ready to present it soon? Or, will it have to be another unorganised retreat towards a new, improvised, policy position, Paulson style?

Steve says:

eh: yes, it would be ludicrous to nationalize healthy institutions. But that’s not the situation.

2cents says:

Yes, they may prefer private banks, but Citi/BAC won’t be around after Monday if they choose to stick to their ,preferred plan!

bg says:

Newspeak definition of “in private hands”:

public holds the risk,
public sets pay,
public pays bills,
public equity is wiped out.

This isn’t denial. It is politics.

ex VRWC says:

This guy Gibbs is a renegade. Remember it was him giving doublespeak answers when he was being quizzed about enforcement of the executive compensation restrictions.

They are rushing around like a fire brigade with no idea what to do to fight the fire. Don’t expect anything coherent or competent, even if they try some kind of nationalization. It will just be some plan so they can rescue the shareholders and bondholders. Look for the Bill Grosses of the world to come out with what they want to see done, and look for the pols to follow it.

eh says:

It’s ludicrous to “nationalize” unhealthy ones at this time. Look at how incompetently the government has handled this whole mess so far — do you really want them ‘owning’ banks? I don’t. Which is not the same as defending the idiots and criminal who got us here (and some of them are working for the government as well). So IMO the right course of action is — where necessary, and part of the problem is right now we just don’t know for sure where it will be necessary and in what amount — is for Uncle Sam to inject capital after the model of preferred shares. This will entail some degree of ownership, including ownership of future earnings, albeit not necessarily in the same way Buffett would negotiate such a stake right now.

donna says:

It’s not nationalization, it’s pre-privatization. Haven’t you heard? ;^)

Anonymous says:

eh the preferred shares have to be bought on AIG-like terms (that is, the _first_ AIG bailout), otherwise it’s no good.

no more gifts to the banks or their stakeholders.

Anonymous says:

Bring on Seidman the Zombie Slayer:

http://newcombat.net/Conversation/2009/02/19/seidman-the-zombie-slayer/

gregg says:

Has the administration painted themselves into a corner? How do they nationalize any banks at this point and not lose all credibility?

Anonymous says:

The HEROIC yves was on Fast Money. Anyone see? They didn’t give you enough time Yves. You’ve basically laid out the case for wiping out the equity better than anyone else.

Typical CNBC facile coverage of the people who actually know what they’re talking about

JAM says:

Yves, nice to see you today.

Anonymous says:

Video of Yves on Fast money

http://www.cnbc.com/id/15840232?video=1041773905

ruetheday says:

Anon1 – None of the “nationalization plans” put forth out there are permanent nationalization plans. When Krugman, Stiglitz, Mankiw, Roubini, et al talk about nationalization, they are talking about a temporary nationalization to fix insolvent banks.

When Obama says something as completely assinine as:

“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,”

…it shows that the somehow the whacko right has managed to commandeer the lexicon and convince otherwise intelligent people that “nationalization” means a big permanent state-run bank with bureaucrats deciding to whom to loan money. God, this is frustrating.

Anonymous says:

Just how effective has the British government been with its nationalization of Northern Rock and effective nationalization of RBS and Lloyds/HBOS?

Sometimes there just are no good answers. Nationalizing C and BAC might simply do what it is doing over in the UK… putting a massive
load of bad debt on the governments books.

Wasn’t that the reason that the USG
only took a 79.9% share in Fannie and Freddie? If it went to 80% the government had to ‘nationalize’ agency bonds too.

commonsensical says:

Did these guys bother to read the post here couple of days back? Do they even know that the US banking system is practically insolvent!!! Right now as Roubini says there are only 2 options

1. Nationalization
2. Massive capital injection aka printing more money – this move is fraught with great risk like collapse in the bond market or even risk to the dollar. Not to mention that there is a good chance it won’t work (i lost track exactly how much but already hundreds of billions of dollars have been injected with little benefit)!!

So option 1 is the only “sensible” but unpleasant thing nonetheless to do. And even that might lead to US Treasury debt downgrade because we are talking trillions here.

For the long term, US (and the rest of the world) should seriously think about getting back to a value-based currency system instead of a fiat-based one.

Anonymous says:

The Credit Crisis Visualized by Jonathan Jarvis
http://vimeo.com/3261363

this is a great basic explanation, extremely high quality production

Anonymous says:

Great appearance on CNBC, Yves! You presented the issues quite clearly. It’s a shame that they didn’t give you a longer segment, but of course in-depth discussion isn’t exactly what CNBC is about.

(PS: On Gibbs – Ditto Anonymous@7:16.)

anon1 says:

ruetheday,

So, he didn’t use the word nationalization, and he didn’t rule out nationalization, according to your definition.

So exactly what’s the citicism of what the White House said, again?

Printfaster says:

I still see receivership/trusteeship as necessary.

You might not call that nationalization. Of course FDIC will play a major role in making up capital loss to depositors.

I still would like to see Paul Volcker and Greenspan assigned as receivers for the monster loser banks. Just what would be needed to restore confidence in the face of total collapse.

john bougearel says:

Yves,

I am glad you got on CNBC to state your case, I have not seen the vid yet, but look forward to it.

I love the support you are getting from your blogging community too on your latest effort.

But to your rhetorical question “Lordie, is this crowd in denial? My take, partly informed by Whalen, is that they will play their hand out until the 11th hour. They believe they can have their cake and eat it too by keeping them private. So far the delusion holds, but if Whalen is right, they will learn what market discipline is all about, flaunting risks like this, when the banks report Q1 earnings. Hope Whalen is right.

My client wrote me this tidbit eod on the sibling fight on the hill today:

Yikes-what’s the call? Heads or Tails….how about BAC action today. “you’re nationalized, no wait we need you public, no wait you’re insolvent, wait wait we need you to make loans” Dodd- “We will nationalize you”
Obama- “no we won’t!”
Whose in charge here…..by the way, don’t pay your mortgage and the forgotten man will bail you out!

Advant Guard says:

Donkeys are going to have to bray louder if they want banks to be nationalized. The people who count in making that decision understand that quick, stupid solutions while making pundits happier will leave Americans poorer. If people think they can roll over “No Drama” Obama by chattering long enough, well it’s a free country. I’m trying to figure out the best entry point for the bank stock I’ve been eyeing.

Keep talking about nationalization, I want to get a little bit better price on my purchase.

Anonymous says:

Yves, lots of talking heads out there, but yours was the voice of rationality. Great Job!

Anonymous says:

missing the point-what else could the White House have said? Consider the alternative had Gibbs said that the White House was in favor of nationalization that would be de facto nationalization. Gibbs will be denying nationalization till the day it actually happens.

I think it is also worth clarifying that those of us who support “nationalization” are not supporting the idea of government running the banks but rather the idea that common and preferred equity holders along with subordinated debt holders are wiped out first before the tax payer puts in a single penny.

eh says:

The speed of the decline is wrecking havoc with the Obama team,…

Share prices in some banks have declined quickly, yes. Mostly on rumors of nationalization — if you choose to believe the tabloid/popular financial press.

And the government can and should put a stop to those rumors.

Doc CEO Holiday says:

Yves My Dear,

YOU HAVE IT ALL WRONG –WTF?

I figured this out this afternoon, so relax, this took a handful of M&M's and a glass of OJ, so check it out:

One has to parse the lingo and decode the intent: Re: This administration continues to strongly believe that a privately held banking system is the correct way to go,

>> That friggn means that the banking system will remain private, but select banks like Citi, BAC and various other garbage dumps, could be nationalized or bailed out with Super Collusion Glue which helps attach corrupt Fed money to CEO's….

Huh, what think, was it worth the wait? LOL!

I'm currently looking at that quote in the mirror under Moonlight without my glasses, so standby!!!!!!

Keenan says:

Anon 8:47 : Mike Shedlock offers a few thoughts on the topic of nationalisation & what it could mean:

Obama Admin Tries to End Nationalization Talk

Anonymous says:

@9:15 Yes, instead of calling it “nationalization”, they should call it what it is: bank failure.

Instead of all this bailout crap, Obama needs to hold a press conference:

Good afternoon. Today, after evaluating many alternatives, the FDIC has taken several large US banks under FDIC administration to ensure the stability of our financial system. We had hoped to avoid this step by first injecting capital into the banking system, but unfortunately, this has not been as successful as we would have liked. The large banks in our banking system continue to be a drain on the American economy. Rather than continuing to put good money into large, insolvent bank corporations, we have decided that it is in the American people’s best interest to honor the government’s pledge to back the insured deposits of these banks up to the FDIC limits and going forward, allow new entrepreneurs to bid for the assets of the failed banking corporations.

During this transition, I want to assure you that the FDIC and US government stands behind the insured deposits in these institutions. Within your community, it will be business as usual at bank branches, though over time, individual bank branch offices may be bought by stronger banks or credit unions, there may be name changes, and some unnecessary branches may be closed to promote greater efficiency in our banking system.

We will do everything possible to make this a smooth transition for retail banking customers, and our hope is that the remaining 7,990 banks in our banking system will work with us to strengthen the US banking system and regulations to ensure that our children never have to face this kind of situation.

Furthermore, we are developing new regulations that will go into effect within 30 days that will force all commercial and retail banks offering FDIC protection of deposits, to move all of their investment-type operations to separate brokerage companies. This will ensure that the more stable banking functions of deposits, CD’s, lines of credit, and commercial and consumer loans will not be affected by swings in the markets.

There is no ideal solution to the problems that have been brought on over the last 10 years by greed, incompetence, and an ineffective bank regulatory system. We know that even though depositors’ funds remain safe, many stockholders and bondholders of these large banks will be negatively affected by our decision today. These investors have had many good years with these large banks, and as with any investment that carries risk, there is always the possibility of bad years too.

The banks we have taken under FDIC protection are:

Bank of America
Bank of New York Mellon
Capital One
Citibank
Chase
PNC Bank
Regions Bank
Sun Trust Bank
Wells Fargo

(This is a fake press release that we’ll never likely see, but I personally would welcome it.)

Anonymous says:

So if the market cap of Citi is 5 billion, don’t we already own it???

I want a private jet, my own Manhattan office and a Swedish secretary.

-Right now the stocks will go up on tax-payer money and we won’t see a dime.

doc holiday bedtime stuff says:

What are bond investors so worried about? Maybe they see the same fiscal future, trillion dollar deficits as far as the eye can see, as do report authors Alan Auerbach and William Gale:

In 2009, the federal deficit will be larger as a share of the economy than at any time since World War II. The current deficit is due in part to economic weakness and the stimulus, and in part to policy choices made in the past. What is more troubling is that, under what we view as optimistic assumptions, the deficit is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years. The longer-run picture is even bleaker. We estimate a fiscal gap – the immediate and permanent increase in taxes or reduction in spending that would keep the long-term debt/GDP ratio at its current level –about 7-9 percent of GDP, or between $1 trillion and $1.3 trillion per year in current dollars.

Yves Smith says:

whitetower,

I have commented on this before to you and you do not seem to listen, or do not want to get it.

Banks in the US do not “fail” as you seem to think of it. They do not go into Chapter 11 or Chapter 7 (liquidation). They are seized by the FDIC, which is a form of…..nationalization!

They have no right to contest. Banks are subject to regulation (this is the deal if you are a bank, if you don’t like it, do something else) and the regulators have sweeping powers. For instance, they can look at a regulated entity’s books, decide that its positions are really risky, deem it needs to be holding a lot more capital, and if it doesn’t have enough, voila, it’s cashiered.

Yves Smith says:

There is no legal recourse, so how can a bank fight? Seriously.

John Hempton is of the view, and claims that his view is widely shared, that Wachovia was solvent when it was taken over. He also contends (and agrees it is a more controversial view) that WaMu was also solvent. Did you hear a peep out of either one? Now admittedly WaMu was starting to see a run, so I’m not sure I buy his argument. But you can e-mail him for details (read his posts first). This is a huge hobbyhorse of his.

Similarly, when Freddie and Fannie were put into conservatorship, it was Freddie that was a goner (and also non-compliant, had refused to raise equity as ordered) Fannie could arguably have made it (absent pressures to make more loans) but Treasury had decided that the public didn’t differentiate between the two very much, that taking out Freddie would just make everybody scared re Fannie and make it non-viable in the not-too-distant future. Go back and read the coverage at the time. They were asked to concede to the government, but told it could and would be done forcibly if they did not play nicely. Admittedly, this was a different set of regulators, but I believe the same premises apply.

If push comes to shove, the regulator can yank your license, which puts you out of business. That is why you have no recourse. They have the nuclear option.

whitetower says:

They have no right to contest.

Yves,

You are simply factually wrong about this — if by “they” you mean the shareholders, meaning the owners of the bank.

The FDIC can be sued by the shareholders if the FDIC improperly seizes a bank, which is exactly what occurred in 1993 when the FDIC improperly seized First City Bancorporation of Texas — the shareholders won a $145 million judgment against the FDIC.

Further, banks do declare bankruptcy — WAMU did so in September of last year after it, unfortunately, was seized by the FDIC (here is another case where there will likely be civil action against the FDIC, this time by WAMU shareholders).

Let’s be clear here — those calling for nationalization (i.e., bank seizures) are doing so from the self-interest of the bondholders. Bondholders want the banks seized because they, unlike shareholders, retain some (perhaps all) of the value of their bonds.

In contrast, bankruptcy the shareholders conceivably will emerge with some value — bankruptcy would likely leave the bondholders will emerge with little to nothing.

Put another way: what other conceivable reason could there be to seize a bank’s assets rather than just compel it to go into bankruptcy?

Steve says:

whitetower:

You need to distinguish between bank holding companies (subject to ordinary bankruptcy laws) and insured depositories (subject to special statutes).

The FRC example is way to unusual and complicated to use a guide (the holding company had pledged its banks as collateral for FDIC open bank assistance, and FDIC foreclosed; later, complicated cross-guarantees caused multiple subsidiaries to fail after one sub was declared insolvent by its regulator). But yes, stockholders have the right to sue both the chartering authority and FDIC. They just can’t sue to prevent the declaration of insolvency and appointment of FDIC as Receiver.

The bondholders stand to lose everything if nationalization is done under existing law. Under current law, no creditor gets paid until FDIC is made whole for covering the deposits. So, no, I don’t think the bondholders are pushing for STATUTORY nationalization. They want nationalization with no haircut — a sweetheart deal that gives them government-guaranteed debt at an excess rate of interest.

Anonymous says:

This website is so educational. I learn about things about long dead banks that, if inconsequential at the time, are full of import now.

So, the FDIC wants to avoid bank runs. Makes sense. OTOH if you are Ken Lewis and faced with a choice between death or zombiedom, well… what do you choose. Run for the bankruptcy judge before Sheila can kill you? Does Sheila ( or the Administration) really want to deal with BofA declaring bankruptcy? BTW, your word verification just asked me to type a racial slur.

Anonymous says:

Citigroup Inc convertible preferred shares issued in January 2008, for example, were quoted at around 18 cents on the dollar on Thursday, compared with around 25 cents on the dollar last Friday.

Wells Fargo & Co convertible preferreds — originally issued by Wachovia in April 2008 — fell to 40 cents on the dollar on Thursday from 55 cents at the end of last week. Wells Fargo acquired Wachovia at the end of December.

Preferred shares pay regular dividends, similar to a bond's interest-rate payments, but if a company files for bankruptcy, bondholders get paid back before preferred investors.

'There's a lot of talk of bank nationalization, which would cut off preferred dividends,' one portfolio manager said. When Fannie Mae and Freddie Mac were nationalized last year, their preferred shares lost almost all their value.

Anonymous says:

Oh yes, and “public-private partnership” is a short-hand for saying transfer public wealth to my friends who will repay me when I leave office.

Anonymous says:

I left the comment at 10:17. My beef with using the word “nationalization” is that ordinary people don’t know what it means. The headlines for a bank failure always use those words: bank failure. They don’t say, or at least I’ve never seen, “Today the FDIC nationalized Wachovia Bank”

I realize that the FDIC taking over a bank and dumping capital into a bank in exchange for shares can be considered “nationalization” to some degree. But if you ask a person on the street what it means when a bank fails vs. what it means when the bank is nationalized, they’ll probably understand a bank failure, but have opinions all over about what nationalization means.

Of course, this could all be by design: I doubt the government wants ordinary citizens to fully understand that the goal here is to ensure that the large financial institutions with their huge campaign contributes are the winners, no matter what the cost to the country.

Anonymous says:

Thanks for the clarification. Then assuming they really are in trouble, the banks should be seized, not nationalized, and they should be forced to give back all of the TARP funds they’ve received, first. The bank stockholders and bondholders can fight with each other over the remains. I think the bondholders should sue the credit rating agencies for fraud.

As long as companies believe there is a chance of a government bailout, they will continue to take inappropriate risks, or sit around and do nothing (car companies), and spend their resources gaming the system to their best advantage instead of running a viable business.

The prospect of complete and utter failure is what forces most businesses to make the best decisions they can, run a tight ship, and take appropriate risks. If you know you will be rescued no matter what stupid thing you do, there’s no incentive to do your best.

The easiest way for the government to make sure banks “do the right thing” is to take back the bailout money and tell them to cleanup their own pig pen. Same for the car companies.

Here’s my grand plan to help the economy:

1. Force the banks to give back the TARP money – all of it. Any that can’t give back the money go straight to the FDIC for takeover. Stockholders and bondholders are wiped out, deposits are insured. That’s how these large commercial banks were supposed to be operating anyway. Last I heard, stocks and bonds were not government insured investments. We have 12 banks and several credit unions here in my small southern Indiana town of 30,000. I’m sure we won’t miss Chase closing down.

2. Force banks to renegotiate ALL adjustable rate mortgages to fixed rate, and make them illegal in the future. Ordinary citizens are not smart enough to make a good decision about an ARM; there is too much future uncertainty. If people still cannot afford their mortgage, they declare bankruptcy and leave the house. If that foreclosure lowers property values, so be it: this reflects the reality of an overbuilt area like California.

3. Force banks to renegotiate ALL credit card balances, and cap CC interest rates to 5% above the national average bank savings rate. Balances for the last 5-10 years should be recalculated based on the principle amount actually borrowed, plus a reasonable interest rate, ignore all of the banks’ phony interest charges. It isn’t fair for banks to pay people .74% interest on deposits and then charge outrageous interest rates for credit cards. My CC interest rate is 12%, even though the payment is taken directly out of my bank account each month and I have sterling credit. The poor slobs with 30% or higher CC rates have no chance. When banks complain that there is too much risk with credit cards, GOOD! – they shouldn’t have been passing them out like candy in the first place.

4. Bond investors will complain about these changes because they’ll lose money. That’s too bad: banks bonds are not a government insured investment, and the bondholders were lied to by the credit rating agencies. Bondholders should sue the 3 big credit rating agencies for fraud and try to recover their losses that way.

5. To ensure this kind of thing doesn’t happen again, commercial banking (FDIC insured, low risk) should be totally separated from investment banking. All commercial banks should be forced to either keep the loans they make, or sell them only to other commercial banks. There should be no securitization of commercial bank loans, because this only encourages fraud. If you are making loans, you should be stuck with any losses. This will encourage prudent lending. If a company or individual needs to raise more risky capital, they should do it through a more risky investment bank, not through a commercial bank. Investment banks should be allowed to charge whatever interest rate they want, and nothing they do is government insured. Commercial banks should have loan and credit card interest rate caps based on national or regional deposit rate averages. Obviously credit cards carry higher risk and interest rates, but commercial banks should not have the ability to gouge ordinary consumers and businesses at will.

6. The government should take back all of the auto bailout money, and make it clear to everyone they are no longer in the bailout business. If Chrysler hadn’t been bailed out in the 80’s, it might have scared the hell out of GM and Ford, and today, we might have 2 viable car companies instead of 3 sick ones. The plain fact is, these businesses have grown much too large and unweildy, and will never be successful again. They should be allowed to die whatever death comes their way, with entrepreneurs picking up the pieces and trying to do whatever they can in the car industry. Our government can’t even run itself well; there’s no evidence it can help a failing company (or industry).

7. I am all for government helping to establish new businesses or industries, for example, in developing alternative energy. However, if the public is paying to develop these businesses, the public should get shares in the companies, according to how much tax they pay. Our government funds development, then turns it over to private businesses to run, profit, and gouge consumers. If we are providing the seed money to start these businesses, then we should be highly rewarded in shares, just like venture capitalists when they invest in new companies.

8. If the banks still are a problem, the government should look to non-profit federal credit unions. This is a much better model for commercial banking that the multinational megacorps we have now.