More on That Dirty Word "Nationalization" and Possible Approaches

In a post yesterday, some readers bandied about the idea of developing some reasonably thought out proposals for “nationalization” or “receivership” or “pre-privatization”, possibly on an open source model of some sort. (Aside: those who know how Linux was developed know that it wasn’t free form; Linus Torvalds exercised control, one might think of it as final edit, and he also delegated areas of supervision to key lieutenants. That was obviously a much bigger task than this would be, but I just wanted to give readers a head’s up that there needs to be someone, maybe several someones, in charge if we collectively take this to the next step).

That’s a long-winded way of saying this is an idea I’d like to pursue, and per my earlier post, I don’t see Team Obama moving in this direction soon (as I said, it would be much better were I proven wrong). But to make the most of it, some preliminary discussion would be useful.

One of the things about group problem solving is that people tend to want to drive for solutions before they have all the relevant data at hand. And studies have shown that putting proposals on the table, even at a supposedly early stage in the process (i.e., while fact gathering is being done) winds up cutting down on idea generation (the problem here, of course, is there are already options on the table, but I’d like to focus upstream as much as possible).

The better way to go about it is to segregate problem definition/examination of possibly relevant facts from option generation/assessment. So I’d like to push further on flushing out possible complicating issues.

I also want to address the knee jerk reaction I get from some readers when the word “nationalization” comes up, particularly from those readers who say they’d prefer a form of receivership.

Folks, this is a nomenclature issue. Let me turn the mike over to reader Steve, who worked for the FDIC:

Americans are funny. `Nationalization’ immediately evokes Soviet commissars and bearded guys yelling in Spanish — the unjust taking of successful businesses by brutes and bullies. If someone does think of the companies that failed into government ownership in Europe, well, those pinko wussies ran them into the ground in the first place and wouldn’t let Real Men come in and run them, and I hope they’ve learned their lesson. But if you say that when Dopey Bank & Trust failed its assets were nationalized, the response is, oh please, that doesn’t happen in America. Everybody knows that deposit insurance comes from the tooth fairy.

Ultimately, the taxpayer is on the hook for deposit insurance, so while FDIC is technically a government corporation rather than a government agency, it’s still nationalization. The failed bank’s assets are removed from the private sector and returned to it over time. Even in an immediate sale, FDIC often retains a loss position; and while the asset sale is technically a receiver’s sale, the deposit insurance is paid by FDIC in its corporate capacity, with a due-from receiver to cover the insurance outlay. Under FDICIA, the nationalization aspect is even more pronounced than in the past: FDIC used to share pari passu with all general creditors of the failed bank, now it has absolutely priority as a creditor until it is made whole for the deposit insurance paid and the costs of paying it. Bair has bent this priority quite a bit by paying advanced dividends to excess depositors even when it clear that FDIC will incur a substantial loss on coverage of deposits under the legal limit.

So if you are OK with the FDIC (actually, technically, he chartering authority, namely the OCC, OTS, or state closes the bank, the FDIC is the receiver) taking over dud banks), you are OK with nationalization. What we then need to figure out is what form it would be best to take for big banks, since the normal FDIC process (as discussed in our earlier post) doesn’t fit the mega banks too well.

And to clarify: I am not a fan of nationalization or otherwise taking financial firms out and shooting them per se, but the alternative of having them have in effect an open funding source from taxpayers is worse. As Steve Waldman put it:

Zombie banks beg for money. They are very clever. They come up with ways you can give them money while pretending not to give them money, such as guaranteeing their assets, guaranteeing new debt issues, or buying up assets at “hold to maturity” values. Just say no! A healthy financial system cannot be run by zombies. “Rescuing” insolvent banks makes about as much sense as tying string to the arms of a loved one’s corpse so it can come to the dinner table as a marionette. For a while that may be comforting (or not), but pretty soon it’s sure to smell really bad, and it’s gonna ooze. If you think you have engineered a miraculous turnaround, you have only made matters worse. An undead bank is an abomination. It will pretend good health but hide a rot. It will afflict you, over and over and over again, with harrowing near insolvencies (cf Citibank). Dead banks must be allowed to die.

The big problem is the bad incentives. The taxpayer has been putting money in at well below rates the private sector would require, and worse, management and stockholders get the upside. That means they still have reason to take risk since Joe Public will eat any mistakes. And if you think this won’t happen, some believe that the reason Merrill’s results deteriorated badly in the fourth quarter was due to trader bets gone bad.

Any private investor who had put as much as the government has put into faltering banks would have far more supervision (board seats, probably regular operational reports) and would also have replaced the CEO, with an understanding that he could clean house if he saw fit. Getting a new CEO in is usually standard operating procedure with distressed organizations, but the Treasury and Fed are writing checks and failing to make inquiries. Look at the contrast with the treatment of GM and Chrysler, which are being asked plenty of tough questions and are required to submit turnaround plans that could be rejected or be revised under duress.

Now to some of the problems with nationalization :. I’d like readers to help start an “problems to be addressed” list. One set came up in the prior post: the really big banks, Citi and BofA in particular, have large capital markets operations. There isn’t an obvious way to put the trading operations into receivership. The notion of a normal Chapter 11 is creditors are kept at bay, for biggies there is DIP financing to pay for routine expenses (beyond what revenues might cover) while the bankruptcy is on. But trading firms live on credit. The DIP model won’t work here.

What remedies or alternatives might there be? Could the trading ops be segregated with a government backstop to be kept going, and the other non-trading capital markets businesses (prime brokerage, asset management, prop trading, etc) be put into receivership? What are the issues here, regulatory and practical? (This is one reason why Willem Buiter’s “good bank” model does not seem applicable to these firms, unless you want to see the investment banking rump of Citi and the former Merrilll go into a Lehman style collapse).

Bonds are risk capital, and it would seem better to take out bondholders before having taxpayers pony up. But that is treated a as third rail issue. What are the potential complications that need to be thought through here?

There are also many regulators involved here. The SEC regulates broker dealers and asset managers; the CFTC, any commodity trading; BofA and Citi are subject to foreign regulation of both their banking and securities operations. I don’t know to what extent these are mere complications (one could assume they’d largely accede to a reasonable plan from the Treasury/Fed, particularly if the alternatives looked worse, but there could be some sticky issues, like worries that foreign depositors would be shafted, as Icelandic banks did in their meltdown). However, the really bad stuff is OTC debt and derivatives, which are largely unsupervised. Anyone who has any insight here is encouraged to speak up.

Please feel free to address these issues and flag others in comments. If nothing else, this should be instructive for all. Thanks!

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  1. Sukh Hayre


    My belief has been that the US government does have a plan and it really is designed to screw the bondholders, who I am guessing are foreigners for the most part (I could be wrong).

    The fact of the matter is, instead of the bondholders taking a haircut and in return getting ownership of the banks, what the US government is going to do is, take a small preferred shareholder position in these banks, and than, instead of the government preferreds getting wiped out, they are going to force a haircut (more like a crewcut) on the bondholders, but not give them the ability to take ownership in return. Only the US government could make it possible for preferred shareholders (the US government) to come out further ahead than bondholders in a bankruptcy situation.

    This way, foreign bondholders get shafted, the government buys the banks on the cheap (at bondholder expense)and then, after they have been cleaned up, they are sold to Americans (the ultra wealthy currently sitting on the sidelines in Treasuries).

    This is a chess game and the US government seems to be Big Blue with 21st century capabilities – unbeatable).

    The sad part is, the Chinese, Russians, and the OPEC leaders know they been screwed (checkmate) but their isn’t anything they can do about it.

    This is the main reason I think globalization comes to an end, because in retaliation, what these investors are going to do is, not recognize US and European intellectual property rights. So, they will catch up with the US technologically wise.

    But I believe that the US was already pretty sure that their technology would eventually be reverse-engineered as other countries are only going to pay rent on these advancements for so long. So, as a pre-emptive strike, the US has maxed out its credit and has no intention of ever paying its creditors back. And this is all perfectly legal as the bankruptcy laws permit this, and these laws were in place, when the savers of the world trustingly handed over (lent) their savings to the Americans.

    I still believe that the world going forward will be better for the majority, as long as we can keep ourselves out of resource wars. And I think this may be possible for all resources except for oil, which is just too valuable and too consentrated for a hundred million people to protect against the 3 billion people who want to secure their energy supplies.

    PS. As a side note, the only way the US will ever be able to pay off the debts that they currently owe is to not just have higher tax rates for the rich, but they will actually have to tax wealth. That is the only way to get the economy going again. And if the economy falters, social unrest will ensue.

    PPS. I’d love to hear your thoughts. Am I just off my rocker?


  2. Anonymous

    One issue that comes to mind with the larger banks has to do with the branches and deposits in those branches. Various states have limits on how much deposits any one institution can have.

    Ohio is one such state and this is something that complicates taking down an institution like Fifth-Third which is about 4X the size of IndyMac in terms of assets and deposits.

    In the case of Fifth-Third you find that JP Morgan can’t do it because of its (former) Bank One presence. Bank of America and Citi are out because they are dead sticks. Wells Fargo can’t do it because they are digesting Wachovia and if the stock market is right about them they are about to start blowing chunks. Sun Trust is a disaster. Regions Financial may be being sized for its own casket. KeyCorp is out because of its Ohio presence and the fact that it too is starting to see its breath in the cold air of the morgue.

    That leaves US Bank. While it is possible that they could go for the deposits the assets would be another matter. But what complicates a US Bank scenario is the remarks by the CEO at an event last week claiming that they didn’t need TARP money and didn’t want it and want to give it back. The market isn’t buying that – one speculation being that they have been swapping any good Downey Financial (and the other failure they picked up in CA) mortgages for defaulted ones in their portfolio and scape-goating the Downey deal.

    So this could be a slice and dice situation ala IndyMac for both the assets and the deposits.

    Both Citi and Bank of America have large branch networks and this will complicate the handling of depositor accounts. If the deposits were to be sliced and diced to more than a handful of institutions I don’t know how they could keep the pending action quiet with the risk being a run on the deposits before the bank is “nationalized”.

    A further difficulty I suppose in pricing will be the certificates of deposits – especially the 100K+ variety. These are the largest source of deposit growth among the top 20 banks if you examine their 10-Qs. If the buyer clips the interest rate the depositor will probably liquidate the CD at first opportunity in search of a higher rate thus eroding the deposits that were purchased by the acquirer.

    Just a couple of thoughts for what it is worth.

  3. Frank Ruscica

    Re: analogizing this proposed effort to the development of open source software, it is important to recognize that the most successful oss development has typically been an exercise in “chasing the tail-lights” (i.e., mimicking features of proprietary software) — at least in the initial stages of a project.

    So developing a functional specification for a next-generation bank might be a logical first step.

    Further support for this approach, via Nobel laureate Herbert Simon (from his book The Sciences of the Artificial): “There is now a growing body of evidence that the activity called human problem solving is basically a form of means-ends analysis that aims at discovering a process description of a path that leads to a desired goal. The general paradigm is: Given a blueprint, to find the corresponding recipe.”



  4. Anonymous

    Sukh writes: “My belief has been that the US government does have a plan and it really is designed to screw the bondholders, who I am guessing are foreigners for the most part (I could be wrong).”

    I think you are wrong. What’s your data? BTW, Bloomberg gas data on bond ownership. Not close to a machine but if you are, have at it.

  5. Frank Ruscica

    To preclude an exchange wherein someone calls someone a Nazi (see's_Law), let me expand a bit on my assertion that “the most successful oss development has typically been an exercise in ‘chasing the tail-lights’.”

    I am thinking of Linux, MySQL and Mozilla 1.0, primarily. Also scripting languages that incorporate many features of other languages.

    Of course, counter-examples abound (e.g., Apache).

    Summing up: I am not a Nazi. :-)

  6. bena gyerek

    there is a big difference between the otc derivatives trading operation at a citibank and at an aig, in that at aig the insurer is taking an outright proprietary position on the underlying risk, whereas at citi (one would hope) the bank’s net exposure is significantly constrained by trading limits.

    i don’t know what the legal implications would be, but from a “practical” risk management perspective i think it would make sense for the govt on a pre-privatisation to (a) separate out trading books into a separate legal entity that will not be bankrupted, (b) impose severe risk limits on traders so that in effect they can act as market makers only, not prop desks, (c) explicitly guarantee counterparties on all otc derivatives (that is, guarantee that the derivative can be closed out at any time at its current mark-to-market value).

    point (c) is important, because any downgrade of citi as a derivative counterpart could result in a huge cash drain on the bank as it would be forced to overcollateralise many swaps (e.g. this is a rating agency requirement for swaps with spvs issuing rated notes). the “subsidy” inherent in such a guarantee should be limited to “gap” risk (a counterparty of citi blows up and the market moves before citi can reestablish its hedge) and “basis” risk (e.g. a cds does not perfectly cover specific underlying asset held by citi), assuming that all of citi’s trading positions are fully hedged per (b).

    another important consideration is that a technical default by citi (or rather the counterparty under its otc derivatives)(e.g. if it was taken into “conservatorship” per the agencies) would trigger an automatic termination of all existing isda master agreements with otc derivative counterparties. this scenario would be a humungous operational problem for citi and all its counterparties (e.g. many derivatives are highly highly specific transactions, hard to value and hard to replicate in the market). also citi may have a lot of big outright positions in its derivative book (e.g. where it has bought credit protection on an underlying bond position held in a cash (non-derivative) trading book), meaning that an attempt by citi’s derivative counterparties to reestablish hedges could crystalise large gap risk on their part as they end up pushing the market against them. also, the resulting increased market volatility will cause a further big cash drain in the market. basically it would be the same mess we saw after lehman’s collapse.

  7. Richard Kline

    Major failing banks _must_ be taken into administration, now. Why? Because they are dead, but as they rot in the middle of the credit pool they continue to suck the oxygen—capital—out of the water, stagnating the entire flow of credit in the national, and indeed global economy. There can be no improvement in the US or global financial system until the losses of these banks are removed from the pool. There are other reasons, but that is one necessary, sufficient, and inescapable. Big zombie banks are not coming back; their losses are simply too huge, far exceeding any rational future capital investment.

    Yves: “Now to some of the problems with nationalization :. I’d like readers to help start an “problems to be addressed” list.” My thinking on ‘what about it?’ follows yours exactly in this, Yves. Since we must act, the place to start is why _not_ to do act, and what can be done to mitigate the costs and consequences of the attendant negatives. Those actions shape the space within which the desirable parts of the outcome can be developed. One point to start: This process of a ‘bank workout’ can be started in months, but its resolution should be expected to take several years. Trying to solve everything too quickly has been the hallmark of the failed initiatives to date. Historical experience, too, is clear in this regard. Taking busted banks into administration quickly will allow credit in the rest of the financial system to begin to clear; what to _do_ with these festering behemoth carcasses can proceed at a slower pace. I regret that I’m a tad too thick and dull tonight to really tear into this, but here are a few thoughts.

    Price discovery of rotting securities and derivatives is a major problem in closing down dead financials. Public authorities have gone to ludicrous dimensions to avoid price discovery, but the problems which come with it are very real. We may know aleady that Megabank X is dead already because their losses on their securities exceed any real capital due to their excessive leverage; it doesn’t matter in their case if the security is down to 75 on the dollar or 5, they are dead. But it matters greatly to many other holders of portions of these securities whether their final clearing price in, say, five years is 75 or 5. Surely if the crumbling securities were all dumped on the market now, they plunge south of 50 or much worse, and if that were to be allowed to happen many smaller banks, and money funds divers would be taken out as collateral damage (so to speak *heh*). It would be a good thing to avoid killing bystanders who may yet survive. Accordingly, whatever resolution process is applied it would be desirable NOT to push these securities on the market just at this time, or even make crude efforts to price them immediately. The goal more nearly would be to strip them both as liabilities and assets from the functional portions of banks—specifically their deposit, branch, and useful back office components—into some ‘Resurrection Corp.’ Seizure for administration also avoids the stupidity of pricing-and-buying the stuff from banks because the banks involved have already been taken over outright.

    Such seize-and-strip actions imply that whatever government process is applied in the first instance is applied ONLY to banks which are seized. Whether the government chooses to buy similar rotting securities from other parties should be considered an entirely separate question, and indeed a separate function. The first instance is to seize outright manifestly dead banks whose continued existence threatens all. Other institutions should be told to address themselves to the emergency swap windows until their name is called. Period.

    The next question is, “Who does the nasty?” That is, who actually seizes these chop shops. I do not think the Treasury is fit to do this; it is too close to any administration. The Paulson-Bush concept of having one GS employee with a briefcase czar trillions in asset throughput is, well, ‘odious’ is one word that comes to mind, and after many other words ‘stupid’ is another. We really need an actor, chartered by Congress, and under oversight, but at arms length from the Guvmint. That takes time; moreover, it takes legislation, which takes brains on top of spines of which there are damned few inside the Congress. So that is a problem. Such a Windup Shop should in principal coordinate the activities of existing agencies, and server as a liason with overseas regulators, rather than seek to duplicate their staff and functions. The coordination problems with such an approach are enormous, and their resolution does not naturally suggest itself as a swift one. If we go the alternate route though, of the Treasury acting ad lib in each case and hiring outside experts to feast themselves feeing us to poke through the entrails we can expect graft, malfeasance, and exceeding little public _control_ over the outcomes. What we need is control, here. So we need a Controller. The US has a long history of setting up complex logistical organizing bodies from scratch on an emergency basis. There is the talent to do this, if there is the will. Bear in mind, though, that Windup Shop could be entirely separate from Resurrection Corp. chartered to adminster bum assets; indeed, they should be separate outfits: a two key system, so to speak. So let’s think big, here, sez I.

    The next major question is, what of existing stakeholders? Particularly for an outfit such as, say, JPM, which was not even really in a position to become a ward of the state until a few months ago, there is no clear cut process. It is a given that equity is wiped out: the losses at these shops exceed their stake, period, end of story, shareholders are gone. We saw, however, the knock on problems from the failure of preferred equity at (memory short) Lehman’s in the fall. This needs a careful think-it-through, and moreover a consistent policy, so that stakeholders in banks which get taken out know what to expect, and none are treated favorably relative to those in similar positions at comparable zombies. Then there are the bondholders. I have very little sympathy for these ‘leverage enablers,’ whose willingness to lend lucratively to drunken monsters is so much at the root of our crisis. Nonetheless, financial firm bonds are widely held across the financial landscape, and killing the bonds outright will cause significant knock on losses. It would seem a reasonable position to take that bondholders have claim against the rotting securities and problematic derivatives stripped from firms taken into administration; that would be broadly in keeping with bankruptcy as an institutional practice in our tradition. There is a further issue here of whether or not the government commits to pay out the derivative swaps of firms which are taken over. I strongly think that this should NOT be done, that the swap counterparties just become other unsecured creditors. This needs some close consideration by those who are intimately acquainted with the structure of such exposures, though.

    This last, what of stakeholders?, raises a secondary question, however: What expectation of recovery will the public via the government have for the costs of refloating some portion of the seized banks? From one perspective, it would be desirable for the public squeeze whatever recovery it could from the rotting securities, no one else gets a farthing. I question the immediate value of this approach, however. In re-capitalizing the portions of seized banks, one goal would naturally be to _shrink_ the size of those banks. We do not need these behemoths to be vast for the credit system to function, we need their corpses to be gone. So ‘new capital’ for seizing ‘some banks’ is not necessarily in total anything like the entire capital of the banking system at the peak of the crisis. Then too, the government would be seizing these firms without paying a nickel, so that the costs of acquisition are, metaphorically, equivalent to the price of a phone call (though of course there are administrative costs, etc.). And at the end of this process, the goal is for the government to actually resell smaller, functioning banks back to investors. While smaller then, they will be the squeakiest, cleanest, banks in the country (or should be), and the government may be in a position to charge a premium to private capital wanting to get into banking in a big way. Accordingly, it may be quite possible to give existing bondholders, and certain other stakeholders, a recovery slice of the rotting security pile. The point, though, is for said pile to be handed to the Resurrection Corp. to administer and sort through, with only partial claims against the result left to stakeholders. Again, such an outcome needs to be as uniform and transparent as possible to ease litigation, and in the simple interest of fairness.

    A further major problem is, as you say Yves, that many of the worst offenders are so much more than ‘banks,’ including brokerages, proprietary trading outfits, derivatives writers, market makers, and a plenitude of other money pirates, err, _subsidiaries_. There is a secondary problem here in that some of the worst problems, such as Citi, one strongly suspects JPM, but on the other side of the pond a monster such as RBS, are well, LARGE. Too large. A major contributor to our crisis was the fact that these firms were allowed to become so large. A major part of the resolution is for them to be rendered into much smaller pieces. Beltway types will find this very, very hard to accept and imagine, for reasons political, national, and of personal financial health, but this is what is needed. In seizing large shops, it should be an explicit goal not to recapitalize them ‘as is’ and resell them to new wannabe Masters, but to break them up and resell the pieces. This will be the equivalent of defusing a string of unexploded nuclear bombs, yes. I see this as the hardest single part of the impending Bank Administration Act. Partly for that reason, it would be better to take the Big Boys one at a time rather than all at once. There will have to be a minimum of interim government funding or guarantees for portions of these firms during the wind down, both to keep trading desks dependent upon credit from blowing up in the interim and to preserve asset value for public recovery when the functional portions are split off and resold separately. Commenting on this really needs to come from knowledgable individuals with insight into the operational necessities of such speciallty divisions, which I am not. One thing which may be emphasized here, though, is that from the second that the government guarantees interim funding the employees of those shops are liable and accountable for everything that they do; this needs to be clearly identified in law, new law as necessary. That may cause them to lose their enthusiasm, but that is not necessarily undesirable. We may need some of these desks to live on on life support, but we manifestly do not need them playing the lottery for bonuses: there will be no bonuses, instead there will be continued employment and audits. Those that can’t deal with that get severance and escorted off the property.

    That’s all I’m up for tonight. This is just the sketch of a starting point but there it is.

  8. Advant Guard

    The top issue with nationalization for Citibank is what to do with the international banking operations. Are these units orphaned, meaning that U.S. depositors are protected, but other depositors lose out?

    We’re all Icelandic now.

  9. Anonymous

    This is a novel approach, particularly for your usual readers.

    It’s a high bar to ask suddenly for constructive dialogue instead of toxic negative monologue, when the premise as usual is biased right out of the gate.

    I think for starters you should ask your readers to go back and read the Hempton post, several times.

    Then everybody can take a deep breath, and all together ask:

    “Do we really know what we’re talking about here?”

  10. dearieme

    There’s an obvious way to raise money for the banks – sell tickets for watching the execution of the previous bank bosses. Two birds with one stone.

  11. Frank Ruscica

    Toward functional specifications for next-gen banks:

    From Buiter’s op-ed in the WSJ, at

    Given the limited scope U.S. authorities have for increasing the public debt burden without adverse asset market responses, it is best to forget about tax cuts or public spending increases. Instead, the available fiscal resources should be focused on restoring the flow of credit to nonfinancial enterprises and, to a lesser extent, to households (most of which are already over-indebted and should not be encouraged to spend more).

    — end of excerpt —

    So maybe there should be two types of next-gen bank: one specializing in lending to businesses, the other to households…

  12. Anonymous

    First let me thank you for your wonderful blog and the of a kind of an open source think tank especially Yves.

    As a first time commentor without much of a economics background please bear with me if what I say might completely off topic or otherwise inapropriate.

    That said I really like your idea, but why stop at comments from only one blog?

    Why not take it to other economic bloggers and their communities too?

    Especially bloogers that you mention and refer to quite often, like Buiter, Roubini, Krugman among many others.

    This approach might lessen each single contributors impact of the outcome, but each single additional blogger would widen the amount of people participating not only amongst their respective community but also bring in fellow workers or even their students (in case of economic professors at teching facilities) included into this open source project.

    Best regards

    Olaf from germany

  13. Michael Pollak

    It seems like there are two different issues here, bankruptcy and complexity.

    On the problem of not having a model for taking an investment bank into receivership, and nobody trading with a bankrupt entity, I’m not sure why nationalization = bankruptcy. If nationalization comes with a large infusion of capital, the bank wouldn’t be bankrupt. Arguably, it would be solvent for the first time in months. Arguably, the only reason traders are trading with them now is precisely because they feel these banks have government credit behind them. So why would they be spooked when that government credit becomes overt?

    This might be a stupid question, but how else do you learn.

    The second issue, of complexity, and the government not having staff that understands half of what these bank do, that does seem to be a problem, and an answer to the question, “What makes these nationalizations different than all other previous nationalizations?” I’ve been wondering why no one’s raised this issue before. I’m eager to see how this line of argument develops on your blog.

    KUTGW! (Keep up the good work)

  14. Autor

    Similar thoughts here – most of the bloggers tend to think that nationalization is same as bankruptcy. I see it as a wipeout for current shareholders (or mega dillution) but with current prices of both biggest banks stocks taking an 80-90% share by issuing new capital is not that much compared to what they have already received under different help programs.

    Of course banks keep their current activity (just like AIG does ) and at some point in the future government will slowly get rid of their shares through privatization (with probably a nice profit for taxpayers).

    Everybody want US Treasuries – why would people not want to place money or do trades with US Government owned bank ?

  15. Anonymous

    @anon:7:58said…It’s a high bar to ask suddenly for constructive dialogue instead of toxic negative monologue, when the premise as usual is biased right out of the gate…

    Biased[?], if anger over what has transpired in exponential acceleration via immoral and non reality based investment vehicles is biased, count me in. Better here than in the streets, I think.


    Then you say… “Do we really know what we’re talking about here?”

    I say yes, the wiggling of the worm as the hook is run through it, as we are the bait, used in war as soldiers to enforce policy or home owners/family’s to sink roots in community’s only to see corporation’s/jobs move before state tax exemptions expire and move inter state.

    How about the rule of law, where did it go, is it just there to fill jails and prisons with the refuge of society of which it was born and never be applied to the policy makers both politician and the financially powerful that control the leavers of society.

    None of this bodes well for us, it is far to complex to unravel with even the best minds now at work on it. This simply is the biggest event in human history and it is exacerbated by more than the markets, try changing climate, population forces, WATER RESOURCES, no new lands which to exploit for easy profit and population relief etc. We may fix one or two but until we address them all in concert we will diminish the world and our selves.

    The powerful and the wealthy, think they can ride out the storm relatively unharmed but I think not, unless they have transport to Mars or some other destination off world. When they start to fear their mortality more than their wealth/power and become honest at the negotiation table, then we can be unbiased. For those which disagree with my point, your rocket is departing, go befoul some barren rock world that mirrors your soul.

    Skippy…Welcome to the great unwinding of human race. Peace and love to all that deserve it.

  16. Dan Duncan

    An “Open Source Plan?”

    OMG…this post is just begging for an OMG to be peppered with lots of LOLs. ANd a :) for good measure ;)

    TARP 2.0: A Viral Cure.

    Now that is funny…

    My first contribution to the open source…because surely you are not going to exclude me….is to address the fundamental problem of the valuation of these assets. I propose that we establish a WIKI-Level III as a collaberative place where people can come and issue a “vote” on the best formula to use in valuing these assets…and in this way we’ll establish an agreed upon value these pesky Level IIIs and we can move on.

    In anticipation of the response of : “..that’s what markets are for…”

    Yes, this is true…but what I’m proposing is a Wiki Market! Don’t you get it? It’s a web 2.0 collaberation!

    If there’s one thing that can be stated about Naked Cap is that there is not a whole lot of respect for the American Public. And now you want to enlist a public collaborative development model to find our way out of this mess?

    [BTW: How does this jibe with the incessant references to various publications having to “dumb it down” for the “ignorant” American public?]

    OK, fine…so you’re definitely not going to allow “wide-open” involvment and there’d be a “certification process”. And just how on earth will this certification process be established? Another Open Source Project, perhaps?

    Better make it quick, though…in case you hadn’t noticed things seem to be deteriorating rather quickly.

    Please….don’t let this go any further. If you stop now, it’ll just go away quietly and it can be attributed to a simple brain storming idea that just didn’t stick.

    Seriously…Don’t allow Naked Cap to “Jump the Shark”. This entire conversation needs to be kept deep in the Comments Section…never to escape the friendly confines of Naked Cap Group Think.

  17. Anonymous

    ———— Problems To Be Addressed ————–

    1. Recognize and accept your reality. Its not a banking problem it is a political ‘divide the pie’ problem. With out political power you are engaging in just another energy dissipating fantasy exercise that will create, “Just another plan for the disingenuous man!” It will go no where!

    2. Examine and recognize why you have no political power and you will find that; aggregate generational corruption in the “Rule of Law’ is responsible for the present division of pie model and underpins the conditions that support that model. Government is purchased in America and does not reflect the will of the people but rather reflects the will of those who have purchased it. Examine and list milestone events to convince yourself of how money trumps ‘democracy’, e.g. how US banking was created, how the Fed was created, how ‘corporate person-hood’ was created, how banking regulations are created (and withheld), how derivatives were created, etc.

    3. What are the key problems impeding regaining control?

    We are brainwashed and our language and culture has been poisoned. The fact that socialism is a dirty word in America says it all. There are two key reasons why …

    • Control of media. We have NO VOLUME in our voices. Yes we have limited Free Speech in America, but the volume of those who have purchased the media and its delivery systems speak comparatively through a deafening megaphone that constantly validates their lopsided elite control and drowns out our small voices. Just as creating credit leads to creating money supply, creating content leads and creates culture.

    • Control of the electoral system. Our electoral system is corrupt and non responsive to the will of the people. It is a scam that prevents alternative viewpoints from being seated in our government. America, a nation that prides and presents itself as being the home of the free market of ideas, has in reality an illusionary ‘two party’ decoy system of governance that is owned and controlled by the same wealthy ruling gangster elite. It is an energy dissipating scam.

    4. The key problem then is how do you break this generational wash, rinse, and repeat, cycle of corruption …

    • Recognize the reality and address the real goal, regaining political power by nationalizing the Rule of Law to make it truly responsive to the will of the people and not just a deceptive and greedy elite few.

    • Use the power of the internet (rapidly being diminished and more controlled by the man as each day passes) to organize not only nationally but globally. To make our small voices one big voice.

    • Organize proactive election boycotts. Create a parallel open source electoral system on line that will recognize all ideologies.

    • Ignore all corporate media and consolidate and organize all alternative media on line. That media should focus on re-instilling values that seek a balance of honoring the needs and desires of the individual spirit with the collective group spirit in a fair and democratic fashion rather than being instilled by a small group of wealthy elite (be wary of the wealth behind various media/web sites in the consolidation process). Again, for emphasis, it is about making and molding all of our small voices into one powerful voice.

    • A central discussion will be how much wealth is enough? We have speed limits, we need greed limits. What are fair limits on yearly salary and net worth? Should the decision of how the world’s resources will be used really be left in the hands of a few billionaires, corporate captains or self anointed ruling elite? Should the control of credit and debt be in the hands of just a few fat ass bankers or can it be made a resource that benefits all of human kind?

    I don’t mean to be a wet blanket here but it really is; “No balls! No brains! No Freedom!” time. This IS a political problem, it is NOT a banking problem.

    Deception is the strongest political force on the planet.

    i on the ball patriot

  18. Kafka

    Lies lies and more lies. Many seem to decry Nationalization. Does any one even know what it means? Most of the majors are insolvent even with all their government gifts, bailouts, subsidized interest rates and TALF incarnations. Why aren’t all the purported capitalists crying about the bailouts (as they should be). Had the government not intervened in grand commie fashion most of the major banks would be gone and no discussion of nationalization would even be necessary. Most of the majors have received bailouts greater than their current market caps. How much more money is the government gonna give to their special interest friends. If JPM wasn’t insolvent and didn’t need the bailout, why doesn’t Jamie just give the dough back which was allegedly forced upon him? The banks are now effectively government controlled, if the country is gonna be socialist, which it is, why not at least do it cost effectively. Split off the deposits and good assets creating a good bank to be sold to the private sector and leave the bad assets with the shareholders and creditors, simple, cost effective and has highest probability of success. What all the creditors and preferreds will be unhappy and they make huge Politico “contributions”, okay keep wasting money, a nation of thieves, liars and fools. Of course, if one were ever to look at the banks’ financials, check out who owns the preferreds and bonds, the effects of the implosion would be devastating to many others in the financial industry, that is the problem with ponzi schemes, at some point the music stops.

  19. Anonymous

    anon 9:46

    the premise is insolvency, sport

    the bias is the requirement for nationalization

    the problem is disagreement on the definition of insolvency

  20. Anonymous

    Fixing the banks is simple. Seize the banks that look insolvent if assets are marked to vulture bids, wipe out shareholders, and haircut bondholders and give them the bank. Done in a weekend. No muss, no fuss, no taxpayer money. Fancy words and acronyms like "nationalization", TALF, FSP, TARP, etc are just a way for the politicians and their wealthy campaign contributors to steal money from the taxpayer.

    People also need to pay attention to UBS fighting discovery of the 52000 rich americans evading taxes by hiding income in Swiss bank accounts and not reporting it in income. UBS hired NY lawyer John Savarese at Wachtell Lipton to represent them. UBS says it shouldn't have to cough up the names of the US tax evaders because that would violate Swiss law. So what? The data is in UBS offices within the US, so US Marshalls can just seize it. The people holding it aren't citizens or residents of Switzerland.

    More at Bloomie:

  21. Dave Schuler

    I’d like to underscore a point made above: the scale of the problem makes an RTC-style approach not only complex but possibly unworkable. In order to sell assets you’ve got to have qualified bidders. Putting so much on the market all at one time will drive the price of the assets down so far that it could threaten the rest.

    That implies that whatever process is arrived at should be a gradual one and it may already be too late for a gradual dissolution of insolvent banks to be effective.

    There’s one more item I’d like to throw into the pot to stew on. So far it hasn’t been mentioned that a hefty proportion of the qualified candidates for buying off the assets of zombie banks will be foreign banks. What role is envisioned for foreign banks in this grand scheme? How can a degree of transparency sufficient to level the playing field be arrived at?

  22. MrM


    It seems that most discussions about bank nationalization assume that nationalization of a bank would imply a sudden restructuring of the bank’s operations, wholesale replacement of its management and a quick wind-down of its balance sheet. This is why this kind of discussion ends up in “analysis paralysis”.

    However, nationalization of bank does not have to proceed this way. All it does is to change the majority owner of the bank. Imagine that Warren Buffett were to acquire Citi. Would he try the approach described in the paragraph above? Of course not. Similarly, the government should simply acknowledge that the taxpayers now own all of the equity of the bank (and they have been on the hook for liabilities all along). Then the government needs to add a handful of its representatives to the bank’s Board of Directors with a veto power (again, you do no need to fire the whole board). Then the government can focus on two key issues:
    1) Immediate credit/lending decisions (such as mortgage mods, credit card lines, small business loans, etc)
    2) Long term restructuring of the bank’s operations (such as capital markets operations, oversees operations, etc)

    One does not have to wait for all the t’s in the restructuring plan to get crosses before the government can proceed with its first phases. We just do not need to overcomplicate the solution.

  23. Anonymous

    “Similarly, the government should simply acknowledge that the taxpayers now own all of the equity of the bank (and they have been on the hook for liabilities all along).”

    That is tottally unacceptable. The creditors and counterparties need to eat the losses on assets. Assets need to be written down the vulture bids, and all equity needs to be given to the bank creditors. If they want to dissolve Citi or split it up into small banks or turn it into a chain of wax musuems, that is their business. They own the bank. They don’t deserve handouts from taxpayers. If they wanted to invest in debt guaranteed by the federal government, they should have bought US treasuries. They wanted higher yield, so they bought bank debt. It’s time for them to accept they were stupid enough to buy bonds worth $70 for $100. Accept the loss and move on. There is no reason for bank bondholders to force those losses on the public.

  24. Anonymous

    I don’t think legal considerations are necessarily a top priority. The previous US administration did anything it wanted, regardless of whether it was legal. I submit that in this case, getting the banking mess straightened out is a “national security” issue, and as they have done before, the US can suspend whatever laws it wants. They will do this anyway.

    The key issue to me, is whether the US government truly wants to do what is best for the country, or whether they are still pandering to the interest of megacorporations. Since they knowingly hired a tax cheat for Treasury Secretary, I have my doubts.

    I’m not a financial person, but here’s a dumb idea: the government could take back the TARP money (or not, but I would prefer they did), and tell all banks “you are on your own, if you don’t have the capital required for FDIC insurance, you’re losing your FDIC guarantee, figure out your own mess”, and announced to the public that these banks had withdrawal limits (for cash), but checks and other electronic transfers would still be honored. The public would transfer their funds from the bad banks to good (smaller) banks. It would be like a controlled run on the bad banks.

    Another idea along these lines would be to announce gradually LOWERING the FDIC limits for the failing banks. If the public is notified in advance for example that the top 10 failing banks are having their FDIC insurance lowered to $100K in 30 days, other than CD’s already issued, I think people will move their money to other banks, but will not totally freak out.

    It seems to me this would force the zombie banks out of the commercial banking space, if their FDIC insurance limit went to zero, and then they can do whatever they want as far as I’m concerned. Let their stockholders, bondholders, counterparties, etc. fight over the remains.

    This would be a powerful incentive for the banks to clean up their own act, limit their bonuses, reign in expenses, etc. And the government would specifically disallow the purchase of any banks by the failing banks. We want them to get smaller, not spread infection.

    As a taxpayer, I don’t want any of my money “invested” in these failing businesses. If I want to invest in a failing business, I’ll do it through the stock market.

  25. MrM

    Anonymous @10:40AM – I did not say that the bank bondholders must be kept whole. All I am saying that one does not have to decide all issues at once, in a big bang approach. After the government takes over the bank, it can decide how to restructure its debt – what haircut to apply to long-term bond holders, what haircut to apply to short-term investors, etc. Since the government will be providing the necessary credit line for the nationalized bank, it does not have to fear a liquidity crunch, hence no need for “overnight solutions”. Maybe one step at a time, but get moving already! :-)

  26. JP

    those who know how Linux was developed know that it wasn’t free form;

    For the record: Those that were around know that Linux derived from GNU, which was begun during the 80s. I was working in the MIT AI Lab around the time the LispMachine wars finished and Stallman found another big fish to take down.

    It most definitely did not have a top-down hierarchy with dictatorship-like leaders. Stallman was (is) quite opinionated as is Linus, but both with argue you to death with logic.

    The difference to the bank situation: Idealogy is outside the realm of logic, and probably belongs in the realm of tribal behavior; You act in accordance with the tribe you grew up with. Governments are rife with non-logical thinkers that are playing to their tribe in order to get reelected.

    In summary: I seriously doubt that open-source-like solutions have any realistic role.

  27. David Pearson


    I understand that the capital markets operations of Citi depend on counterparty trust, and that this trust may be in jeopardy during a nationalization.

    However, by nature trading assets are very short term. What’s at stake is not the on-going business but the orderly wind-up of those short term positions. This would presumably take less than a month — perhaps much less.

    Why should closing out trades rock the markets? There is obviously no doubt that the government can finance the settlement of trades. That’s not an issue. Maybe Citi has outsized trading positions (bets) which it has been constantly rolling? Closing such bets could disrupt the markets. I don’t think this is an issue for two reasons: 1) its unlikely Citi has expanded its trading book in this environment; and 2) any trades included in 4q results were already marked to market. Sure, Merrill did swing for the fences with trades in 4q, but what are the chances Citi did in 1q?

    As for disruption to the short-term credit markets, the Fed has put in place back-stops for commercial paper and money market funds. Its unlikely that the short term markets would be disrupted by a Citi nationalization.

    Finally, there’s a hue and cry about taking out bondholders, presumably because this makes it harder for other banks to obtain credit. Obtain credit? Banks can tap term credit markets with the FDIC’s help, short term CP markets with the Fed’s help, and ultimately there’s the various discount windows. I don’t see how a Citi nationalization could be a shock to the bank credit markets at this point in the game.

  28. Anonymous

    The problem is excess loanable funds lent to uneconomic enties. The quantity of excess funds has to be extinguished! So, take over the bank, liquidate the weak to bad assets. Sell the viable components to new and compentent owners. Shareholders are wiped out. Bond holders take a big haircut, maybe even wiped out. Rationale, they should have lent their money to a competent enterprise.

  29. Anonymous

    I think the first thing that is needed is to list the objectives and prioritize them.
    After that we can begin to have separate discussions on the several objectives.
    Of course and finally there must be a synthesis.

    My first attempt at objectives is broad.
    1. FDIC -type objective. Preserve and guarantee deposits.
    2.Prevent further Lehman meltdowns or ~LEH.

    Now my priorities are in the order presented.
    So far, it seems that all answers to FDIC involve putting funds into ~LEH. With the predictable result of the funds being gambled and lost
    Would it make more sense to think of ways to advance FDIC in a way other then ~LEH?

  30. Mencius Moldbug


    What a great idea! I love clean-slate design. Here are my two requirements for a clean-slate bank:

    (1) All accounts are in fully-allocated gold.

    (2) No maturity transformation (“borrowing short and lending long”). The bank matches every liability to expected returns before the liability’s due date.

    (3) No free government insurance for creditors. Separation of bank and state.

    (4) Balance sheets posted in real time on the Internet.

    Obviously, for a person with these kinds of unattainable, pie-in-the-sky objectives, it should be clear that any attempt to resurrect the 20th-century financial system, at least in anything like its present form, is indeed a case of “chasing the headlights.”

    If you want to build Unix, you don’t start with System/370. It’s always much easier to build a new OS than to get rid of the old one. A basic, no-frills financial system meeting the above criterion is something a few smart people could design in a week.

    That’s not the problem. The transition is the problem.

  31. Anonymous

    There’s something that baffles me. Seizure of Washington Mutual notwithstanding (to cite a recent example), how come nobody points out the fact that under the Reagan administration in 1984 Continental Illinois, then the seventh biggest commercial bank in the US, was nationalized by the FDIC after a bank run, and held by the agency for ten years until it was bought by Bank of America?


  32. DocG

    from “The Valley of Dry Bonds”

    The hand of the LORD was upon me, and carried me out in the Spirit of the LORD, and set me down in the midst of the valley which was full of bonds,
    and caused me to pass by them round about: and, behold, there were very many in the open valley; and, lo, they were very dry.
    And he said unto me, Son of man, can these bonds live? And I answered, O Lord GOD, thou knowest. . .

    For the exciting conclusion, see:

  33. homedad43

    interesting exercise, Yves. Thank you for trying this.

    My concern with just letting the counterparties just work through it is that they know the government will take it if they don’t and they’ll game accordingly.

    There is an odd way that thoughts progress amongst everyone as they delve into it. My immediate concern is what happens to J6P who’s got a Citi credit card. Is it invalid for the duration of the takeover? There might be a significant consumption effect if folks – surviving on plastic – have that option blocked.

  34. Emma Zahn

    Why not work on developing an alternative to the Fed’s primary dealer system? It has already lost four primaries* to insolvency in the past year and looks to lose two* more very soon if this discussion is correct.

    There have been recent news reports that the Fed is shopping for replacement primaries but why not scrap the whole system for something more suited to 21st century communication abilities.

    I can’t help but believe that it is these banks’ privileged relationship as exclusive counterparties with the Fed that caused the mess we are in now.

    See this 2003IMF work paper on the primary dealer system. Pay special attention to Feds answer to survey question on its disadvantages.

  35. Kevin de Bruxelles

    Forget nationalization, the solution is privatize these banks, particularly their losses. The government should announce that the FDIC will cease to exist in three months. And at the same time the government should announce the formation of new community banks which will be run very conservatively. Then let’s let the people choose whether they want to keep their money in the private sector. Those who believe in unfettered free markets will be happy to keep their money in BofA or Citi, while others will trust the new government banks.

    And after the inevitable collapse of many of the dodgy banks, both the executives and investors in these failed institutions will surely bravely accept the verdict of the free market.

    You don’t demolish a dangerously undermined house brick by brick, nor can you reform an inherently corrupt banking system bit by bit.

  36. Minh

    The problem is too much claim on the future (assets/reliabilities), too much lawyers and the doctors’ bill are too high. I was in Orange County in Sept ’06, at the peak of the bubble. Home prices were in another world, while at ‘all-you-can-eat’ I paid $10.

    It was too weird to continue.

    Apropos Linux, as a programmer, I may add, the programming of linux kernel was 10^4 lines of code from 1991 as of now 18 years later it’s 10^7. People who did it for fun, as a hobby, and the common value was “truth,good and/or beauty”. As of C and banking as a whole, the motivation was mostly greed,hate and/or delusion.

    It’s difficult to import Linux spirit into banking, IMHO.

  37. cap vandal

    Wow…Where to start.

    1. Everything seems to get hung up on the capital markets aspects of the combined investment banks and the stand alone investment banks that are nominally investment banks. Conceptually split the problem per pre Glass Stegall. Does that help. Note that there has been great effort to undo this distinction in the last 6 month — that part that still existed.

    If this were done, where does it put us?

    2. Originate to hold vs originate to distribute. Can the problem be split into these buckets. The reason I suggest this is that the the part of the credit system that has evaporated is the latter. Once again leading back to investment banks/capital markets.

    3. What are the underlying assumptions that are true and essential compared to those that are beliefs or preferences. Critical here is the assumption that the current financial markets are reasonably efficient, deep, and liquid and that market prices are true. No one can deny they have “some” informational value, but how much? This is difficult, but we have had a market failure. People want to deny that for a number of reasons, some very good, some less good, and some just from what amounts to ideology.

    4. What doesn’t need to be fixed. Is the FDIC doing ok with banks smaller then the top 200? Are there some logical groupings that simplify things?

    5. What did we learn from the depression? Or maybe history for that matter. The fact that economists are still trying to explain the past should be humbling, but I don’t see much humility from economists that have been right about some things. I also don’t see much contrition from financial theorists that supported the development of capital markets practices. I’m getting the sense that they tend to be similar to communists that believe that if only Trotsky had led the revolution, etc. In other words, their idea work, have to work, and would have worked if they hadn’t been subverted by A, B, C…. A whole laundry list of failures that blew up a theoretically self correcting system.

    Slightly more specific suggestions:

    1. Identify all institutions that have over $5 billion in so called toxic securitized assets. Separate those into institutions for whom that is a significant current problem, (less then 5), not a significant problem (less then 5), and the rest. Out of the rest, identify the small number that have a large portion of their capital at risk from securitized assets.

    2. Are there banks whose solvency under some standards is called into question, but are still functioning effectively? That is, not liquidity constrained, not capital constrained, not making clearly bad loans, and not raising cutting off credit to worthy borrowers. I think there are huge numbers of banks that fall into this category. Given the concentration in banking, this may not account for more then 30% or 40% or 50% of insured deposits, assets, and loans. If this is correct, any solution needs to *not* blow up parts of the system that are working.

    3. Identify reform efforts that can be enacted without needing a solution. For example, requiring XBRL reporting on an accelerated basis. Continue to push for transparency in the area of credit derivatives. There have already been significant changes but we need more/faster in these areas. Especially since there seems to be a consensus on transparency as a general principal starting with Obama and asserted by just about every one except people that don’t want to disclose their book. Per the latter, there may be exceptions, but they need to be carved out, justified, etc. A more specific example, start requiring XBRL disclosure of all prior CDO’s that won’t amortize or terminate before 2010.

    4. Don’t repeat SarBox.

    Even more specific suggestions:

    1. Pour all efforts into the development of originate to distribute 2.0. Spit it into housing and non housing. This is very tricky. The government has already fully taken over the housing piece, via GSA nationalization. Move on the non housing pieces.

    2. Find the financial equivalent of Richard Feinman to demonstrate how the O ring failed.

    3. Look at prior “open source” projects. For example, the efforts by Ackman to discredit MBIA have had mixed success. There are lessons here. Note that MBIA is still around and paying. Part of the reason they are is legacy new deal capital and accounting requirements that were totally arbitrary but kept them from blowing themselves up rapidly.

    4. Invert the question and ask if we want to base our REAL economy on derivative based accounting. Think about the fact that legacy, inefficient remnants of New Deal reforms were the only thing standing between ourselves and total disaster.

    5. Rethink the Us/Them, Private/Public, etc. Remember that the taxpayer has a 35% claim on all future corporate profits. Note that the federal government gets 18% off the top of the GDP. Remember that the taxpayer has a huge stake in price stability, since he owes, via government 80% of GDP and privately a decent chunk of his salary. Any trade off between trying to seek justice regarding past abuses and the future of the economy need to fully account for the importance of getting the economy functioning closer to capacity.

  38. Frank Gifford

    We are all shooting in the dark here. This is mine.

    “Humpty Dumpty sat on a wall
    Humpty Dumpty took a great fall
    All the king’s horses and all the king’s men
    Couldn’t put humpty together again.”

    We were supposed to have learned this in nursery school. We apparently have all forgotten.

    After WWII, Japan had to start over. This is what is required this time of virtually the entire world. If we do not begin soon enough, then perhaps we are back to the dark ages within a century.

    Visit EntropyPawsed
    our nature linked low energy living demonstration site in West Virginia:)

  39. Gentlemutt

    Mr. Duncan’s cynicism regarding the aggregate capabilities of his peers is sad, but so be it. That is precisely the kind of “i know better than you, all effort at collective action is futile” stance exhibited by the absolutists among the free-marketeers. (And that stance by folks like Rubin, Greenspan, Summers, Cox, Gramm, and others helped get us here.)

    As to what can be done in a public forum, how about starting just by demanding that a light be shone on all Level II and Level III assets held by any company that has TARP money?

    Treasury and the FRB are already paying a lot of money to financial advisors to assess the damage — satisfy free-marketers and would-be dirigistes alike by publishing the data and evaluation methods at hand.

    There will always be disagreement regarding how to value complex paper. But full disclosure will help bring out the best bids available at any given time, and hence lots of useful information about the real extent of the damage.

    So perhaps the first goal of the proposed Forum would simply be to articulate a sufficiently strong voice, such that our government servants feel compelled to gather and really share data about the damaged assets that are clogging the market for credit.

  40. Anonymous

    I don’t understand why this has to be complicated. Just separate, say Citi, into a good bank and a bad bank. Bad bank holds all the toxic assets. Shareholders get a piece of each bank. Bondholders are also given shares of each bank. Bad bank shares are worth zero, but good bank shares zoom from 2 bucks to 20 or more. Problem solved. Don’t liquidate the bad bank because it is insolvent, just let it live until the toxic assets mature. Suspend mark to market for the bad bank, nobody will do business with it anyway, its only purpose will be to hold the toxic assets till maturity.

  41. Anonymous

    If you believe that you will be listened to, and those that run and control the current operating systems of government will pay attention to your brilliant plans and suggestions, then you should make the link (below – cut and paste if it does not work) and listen to Paul Keating, former Austrailian Prime Minister, talking about a new political reality that dumps the G7 and old IMF — a new “Bretton Woods agreement” — and become a part of that effort. They will love and welcome you with open arms and a big new waste basket for your ideas.

    Personally I think it is a part of the global coup in progress and amounts to no more than a grand energy dissipating sink hole — a ‘good cop bad cop’ ploy of the existing powers who intentionally created this crisis in the first place — meant to corral and channel the dissent of those who see the big picture and do want to start a new and viable truly democratic political reality. They recognize and have planned for the anger and dissatisfaction that they have created. Said another way; its the same old s–t in a new suit.

    Here’s the link;

    Deception is the strongest political force on the planet.

    i on the ball patriot

  42. doc holiday

    Re: Linux

    This systemic crash is the result of non-standardized accounting, or in reality, what we ended up today is standardized accounting fraud, which has ended up as being industry wide chaos. Imagine trying to use this blog to rant and rave if there were 2000 different operating systems which were all different and unable to connect to a functioning network. What we have today with accounting is chaotic system that is disconnected with the core elements being Fuc-ed up by FASB and a handful of crooked accounting and rule making lobby groups that pretend to do something, although what FASB does, besides create chaos is beyond me and that foul and did-honest group run by SIFMA and lobby groups should be shut down along with all the derivative bullshit Monday morning!!!!!

    I like this idea Yves and of course, the blog-World is far ahead of the curve, but Obama would be wise to take note of this approach to re-boot a system and to bring about standard rules; this should be a global goal and this sort of approach should be viewed as a new-age Bretton Woods, which would burn all FASB piracy and loophole engineering and align global accounting — and, and, and enforce these new rules with nazi-like zeal, i.e, if we allow the current crooks on wall street and washington to engineer rules, they will cheat, so how do we bring about standardized accounting with standardized accountability and enforcement? The only reason I bring up the word nazi, is because there obviously will not be cooperation by wall street crooks, so how does one deal with financial terrorism that is hatched from global operations that are intertwined with public and private funding? How do we separate the crooks and bad guys from the reality of greed and corruption and the collusion that is now so far out of control?

    See also as a weak example: Reforms of the world financial system: Can the G20 deliver?

    It is by now generally accepted that there is a deep contradiction between the inherent global nature of the financial system and the national fragmentation of financial regulation.
    To put it more bluntly, each gamekeeper is confined within the boundaries of his estate, while poachers can freely move across different estates according to convenience (often being enticed by a tolerant gamekeeper wishing to increase the number of visitors to his own estate).
    True, there is a complex web of international bodies and committees engaged in regulatory matters. However “the ‘system’, if it can be described as such, is certainly more a product of evolution than of intelligent design” and is based on voluntary agreements implemented on a ‘best endeavours’ basis. Its fault lines have been made painfully evident by the current crisis; differences in regulatory regimes across jurisdictions played a role in the generation of the crisis, while lack of coordination and differences in resolution mechanisms have increased its costs….blah, blah…

    > Did I mis-spell anything? I don't frggn care!

  43. Anonymous

    How much debt are we talking about here? A exercise in futility without numbers.
    (FDIC is insolvent, go fish)

  44. Anonymous

    My perspective is that now that we have folks understanding that we should not be bailing out these banks and insurance companies we need to explain to folks why “investment banking” needs to be killed and extracted from the world financial system.

    Until you do that you will be playing whack a mole as one persons unsubstantiated loss becomes the burden on the rest of us. You can’t fix companies that still retain the ability to create public derivative debt or even potential public derivative debt.

    The raging fire needs to be put out before you can care for the sick and wounded, IMO

  45. doc holiday driven 2 madness

    Damn it, I thought I was done ranting and raving, but no, always more and more friggn things:

    I posted this yesterday as part of a post @ CR around 2pm:

    "How do people get into car wrecks? They use cars, and then, after the wreck, how do they get help, they get in another car to go to a hospital — you almost never see or hear about a person in a wreck, walking to the nearest hospital."

    >> Okeedokie, then, here we go for knife-cutting and slicing:

    * The thing that really, really, really strikes me to my core, is that TARP is a vehicle for derivatives and Level lll unobservable Toxic shit that essentially amounts to accounting fraud, which may or may nor be blessed by FASB.

    Hence, you have the financially structured vehicles of derivatives that were at the core of Enron fraud, the SPVs and multiple names of the various untested models that would run drug-like money in offshore piracy, where non-existent financial structures were designed to avoid taxes and detection by GAAP accounting rules and laws, which were for the most part, offshore partnerships, structures and vehicles not unlike Enron's JEDI, Chewco, etc:

    Recall: "An Enron case is certain to be infinitely more complicated than the Andersen trial — a factor that legal experts say may favor the defense, since complexities can muddy the waters and throw jurors off the trail.
    Prosecutors, for instance, have indicated they may pursue charges related to Chewco Investments, a limited partnership formed in 1997 and named for the hairy Star Wars character Chewbacca. Chewco was a "special purpose entity," used to keep debt off Enron's balance sheet. A diagram of the bewildering Chewco setup makes IRS instructions seem like, say, directions for making toast.
    Still, said Houston attorney David Berg, "A good prosecutor will find a way to make Chewco … and all of those transactions as simple and as sinister as possible."'

    >> Thus, what do we all Fu-king have now, but TARP as CHEWCO and a corrupt DOJ, SEC, FBI and Whitehaus, et al, who are all in collusion to take fraud accounting from one used vehicle and put the drivers it into a new and clean ambulance and then patch the crooks up and put them out on the street again — like the drunk drivers they are! There is no redemption or remorse, these people are addicts and they will not change until they are taken off the streets and put into prison, where they belong!

    This is like letting the judges get drunk with the drivers that run down children while drunk; the corruption in this system is nothing short of system wide piracy where everyone has a hand in helping this cancer spread.

    Where will it stop, is what the majority of taxpayers are wondering, as they lose faith in America; how the F, does Obama plan to bring about confidence, if his people are drinking buddies with people that are guilty of manslaughter? Somethings gottah give baby!

    I feel a little better, but not really…

  46. Yves Smith


    Do I really expect anyone in power to take notice of ideas we generate here? Not necessarily, but the flip side is I also believe it is better to light a candle and curse the darkness. People are very upset, legitimately so, and I'd like to channel the energy into productive thinking and analysis.

    In addition, there are readers do have relevant expertise (regulatory, trading desk, etc). I've been struck by the quality and specificity of comments when I have stuck out my neck on topics like CDS and CDOs, including legal issues related to them.

    What this exercise MIGHT do is sharpen the discussion in the MSM if we go a couple of iterations. If nothing else, I have knowledge gaps, I'm sure readers do too, and I'd like to see if we can fill at least some of them.

    I can easily imagine someone like uber bank regulatory lawyer Rodgin Cohen (several pointed to some comments of his in the Financial Times over the weekend with great ire) who says to reporterrs, "trust me, this is all too complicated and a really bad idea." If a group of people who are reasonably finance savvy can point to some of the supposed big problems and say, "Wait a sec, there are ways, admittedly not pretty, to solve these problems" that would enable reporters to ask tougher questions.

    I have also been frustrated that people like Buiter and Stiglitz have come up with ideas that sound appealing but do not appear viable for reasons discussed on the previous post. They have basically stopped thinking because they believe they have an answer. That is unfortunate because they are influential.

    As for the "FDIC is broke" that is not an issue. The FDIC was given more money by Congress in the S&L crisis when its funds ran out. The US is NOT going to see depositors entitled to FDIC support stiffed. Never never gonna happen.

    Similarly, in the S&L crisis, the RTC took several years to dispose of the assets. Congress allocated funds for the working capital. Economists who later looked at the RTC performance say it did well within the constraints, but one of them was that in the later years, Congress got impatient with continuing to fund the working capital and put pressure on the RTC to wind up faster. That in turn meant they didn't realize as good prices as they might have on some of the later dispositions.

  47. Nicholas Mycroft

    This format constrains. Suggest Wiki with division into two workplaces: technical issues (how to handle ISDA/counterparty risk, for example), and desired future state of banking/financial system. Wiki also has a built-in mechanism for troll mitigation.

  48. Swedish Lex

    Paul Volcker says tells us that the experts do not how to solve this one.

    Hank Paulson taught the U.S. taxpayer how to waste their money and not fix the problem.

    Against that backdrop, my initial suggestion to Yves was to rally public support on these, and similar, pages around an evolving platform of ideas.

    I like what I see thus far

  49. eh

    First I’d like to know exactly what the situation is — i.e. the financial condition of the rumored nationalization candidates. A story out this weekend says Lewis claims BAC does not need any more bailout money and that talk of nationalization is unwarranted. All I personally know is that there’s been what looks like panic selling of financials (right before options expiration, wink wink) — mostly C and BAC — amid rumors of nationalization.

  50. MrM

    All this talk about insurmountable complexities and difficulties of nationalization of large banks is only smoke and mirrors. AIG was not much smaller or less complex than Citi is, yet it was nationalized in the matter of days. The only difference between AIG and Citi is the political clout – the powers that be wanted AIG to stand behind its derivative contracts (read GS) and now they want Citi’s top management to remain in power (read Summers’ and Geithner’s connections)

    As I argued above, nationalization and the wind-down are two separate problems and have to be tackled sequentially.

  51. Anonymous

    If FDIC can’t be broken then neither can the banks due to re-inflation ad nauseam.

    Federal Reserve declines to release numbers, Congress engaging in verbal hand slapping for wrong doings, consumers not consuming, RE still looking to bottom, foreign banks weighing heavily on the system, etc……A (currency) defaulting is somewhere in our future.

    They won’t even reinstall the uptick rule. Tells me the government wants to be on the path that they are on.

  52. Tim Smyth

    Best way to fix this
    Wells Fargo and US Bancorp are essentially declared winners by the government even if they need more capital and are currently insolvent(I don’t think anyone thinks they are as bad as Citi or BofA). JPMorgan is given this status conditionally on netting down there substantial OTC derivatives business and instituting some type of clearing solution. Goldman Sachs and Morgan Stanley which are closest of any to paying back the TARP are encouraged to due so which I also think will calm some of the political tensions regarding TARP and Wall St bonuses. BofA is allowed to continue to exist in present form and given more capital but is locked out of any future acquisitions and must divest of several non-core Merrill assets such as Merrill Broadcourt Clearing, First Republic, ML Prime Brokerage and some of its minority stakes in foreign banks as a condition of receiving more capital. I suspect you would see Morgan Stanley and Goldman pick up some of these assets on the cheap. Citi, the biggest problem child has to broken up as a condition of receiving more capital(Additionally capital will only be for keeping it alive during its breakup). In some ways the breakup of Citi will look like banking equivelant of Pan Am’s demise where its largely international route franchise was split up between its more domestic oriented competitors such as American, Delta, and United. Off the top Citi’s rump domestic retail franchise would be the only part of Citi that would be useful to US Bancorp so I would give it to them(This would give US Bancorp a better presence in NY and California) Next Morgan Stanley would get the rest of Smith Barney, private banking and the remains of Citi’s domestic investment banking franchise. The real challenge though is who gets Citi’s large international operations. One scenario I could see is Wells getting Asia and Mexico and JPMorgan getting Europe, Latin America and the Middle East. However, several questions remain as to how much JP Morgan and Wells want to have international operations and at what price. Most of Wells Fargo’s international presence is through the legacy Wachovia. Unlike Citi’s rump domestic assets these cannot just be given away. Also Citi historically has planted the American flag in many places where the US has foreign policy interests such as in Pakistan thus I suspect many in the State Department would like to see either a JPMorgan or Wells take over Citi’s Pakistan operations even if taxpayers had to subsidize it. Once this is all completed I suspect you could develop a better picture of what recovery the preferred shareholders and bond holders would have of the Citigroup holding company and you would have removed much of market panic that would occur with a Citigroup chapter 11 filing.

  53. Anonymous


    AIG had not been nationalized, the shares are still traded publicly, it has merely taken massive loans. Management paid huge retention bonuses to lots of supposedly key staff. They were made to cancel some fancy parties and client entertainment, all cosmetic stuff.

    It’s trading like an option, but that’d because the debt is so large and this is a terrible environment for selling businesses, which is what AIG needs to do to repay the debt.

  54. Eyal Bar


    Like many people above, I too do not understand what your entire post is about. The "nationaliztion" or "preprivatization" are one thing, and the eventual resolutiion of every citi/BOA subsidiary is another thing. Roubini, Dodd, Gramm, and various people who are arguing to nationalize, do not seem to have any problem with doing the first part without thinking of the second part, and I don't either. Of course, I do want taxpayers to get as much as possible, to get a huge upside, a deal like AIG except with much better terms than AIG. But the point I want to make, like others, is that this is easy to do and we already did it with AIG. You hand out a huge line of credit to Citi at huge interest rates, you take 80% of the equity (or all of it) and then you sell of pieces or liquidate them (as appropriate) and the taxpayers & bondholders will get the proceeds (according to terms negotiated between those two parties in what would be a pre-pack-like arrangement.

    And by the way, trading operations can be bought out by GS, with government providing support to GS if needed. And any AIG-style derivatives can ACTUALLY be 'sold' to AIG at government-mandated terms. This way the government consolidates assets/subs by type.

  55. doc retching holiday

    … and another thing, before I go off looking for more financial porn, which will probably just branch off into a search for other porn…

    What about this TARP related crap, which was an abuse of power:

    The Fed allowed investment banks Goldman Sachs and Morgan Stanley to become commercial banks. Goldman is being force fed an injection to cover the fact that Morgan is ready to be put on life support.

    >> How did we get to a point where a corrupt investment bank can go out and become a commercial bank and then use the Special Purpose Vehicle of TARP to take reality off the books? This is insane!

    Goldman Sachs and Morgan Stanley, the last big independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night, a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age.

    By becoming bank holding companies, the firms are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission.

    In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities. It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.

    >> How many vehicles does this make, i.e, The investment banks were piles of floating crap and essentially Chewco offshore Somalian piracy vehicles which then morphed all that shit into a relationship with The Fed and Treasury to hide all the hidden assets and now, thank God, but these crooks have the full backing of Paulson's twin clone Timmy The Revenue Burner.

    How will Treasury value the smoke and mirrors of these newly morphed diseased commercial pirate entities that suggest they have Level lll assets that can be valued?? Huh? Maybe, once they get some cash flow from Ma & Pa's main street businesses, they'll use a little leverage and make some bets on gold and then use Treasury to act as their collateral ….

    Spew, puke, vomit! Is this off topic, do I care, was I invited here?

  56. Jack Ketch

    I really don’t know all that much about banking, aside from building one (lotsa rebar in the vault). However, I have lived across the street from a Bank of America branch for eleven years. For the last three weeks, late model vehicles arrive late (12am), and leave early (7am), including weekends. No, they’re not the cleaning guy, he’s 8-9:30 pm, and they’re not construction people (no tools). Only a single person so far each visit. This has never happened before, so perhaps I’ll ask tomorrow morning.

  57. Steve

    The government is now providing the bulk of credit — mortgages, commercial paper, and other flows hidden inside securitized paper sitting at the Fed. The government is the only provider of new equity to the financial sector. The
    government is the guarantor of most new debt issued by financials. The government now guarantees a portion of money market funds. The scale of market failures is breathtaking.

    The only reason for preserving institutions that are part of these failed markets is a belief that markets will somehow un-fail. If you believe that, you will prop up existing firms and find a comfortable chair to sit in while waiting. If you believe that these market failures are irreversible, then you will look at what should replace them, and you will believe that propping up firms is a pointless gift of money to entrenched interests. What you think `nationalization’ should mean depends on what purpose you believe these institutions still serve in the real economy.

  58. MrM

    Anonymous @4:00 PM: AIG has been nationalized in the sense that the government took the 80% stake in it (the stake is not 100% which is why shares are still trading). Now, it was poorly managed after that, as your examples illustrate, but that’s a separate story. Of course the government should have a stronger say in what AIG does or does not do. However, the key point is that whatever upside sales or unwind of AIG businesses will generate, will go primarily to the taxpayers. Similarly, the government can still restructure the AIG debt when it chooses so.

  59. Anonymous

    Sy Krass said…


  60. Anonymous

    Open source is sort of useless when you assume insolvency, failure of yet undefined stress tests, and nationalization to begin with. There are arguments against all of these assumptions, and they are widely distributed across the blogosphere. This is closed, not open source.

  61. Frank Ruscica

    Mencius Moldbug @ 11:45 am, 2/22:

    You wrote:

    A basic, no-frills financial system meeting the above criterion is something a few smart people could design in a week.

    The transition is the problem.

    — end of excerpt —

    Of course, agreeing on criteria is important if one proposal is the goal.

    But why would anyone care how many proposals are developed?

    People can just work on the proposal that is based on their favored criteria.

    Of course, for the purpose of expediting a transition, all of us belong in the same coalition for the near future (i.e., until the defenders of the status quo are undone).

    Viva the rebels! :-)

    Also, this effort needs to be moved to a wiki. if it helps, I can host…

  62. Anonymous

    Everything the government is doing is attempting to nationalize the banks losses. Even the latest mortgage plan has banks as the beneficiary. Why is that? Because Uncle Sam is paying banks to lower the principal amount on those loans. In effect, this is a way to put more money on bank balance sheets.

    If Obama wanted to help homeowners he would simplify the bankruptcy process so people could walk away from their over-priced homes. Of course, that would only cause banks to realize all their losses that as yet are on paper.

    The government needs to guarantee all deposits with these banks. It needs to take over their loan portfolios. And then it needs to re-organize the banks, without the bad loans, and get a private equity injection. The government would have warrants or at least share in the profits of the new banks. And the government can sit on all the bad loans those idiot bankers made at prices two or three times what the properties are currently worth.

    The upside of this is that private equity would want to get involved in banking once the balance sheets are cleared up and there is no longer risk of dilution. Also, taxpayers will not be eating losses to the benefit of idiot bankers and the people that invested their money with them.

    Look at Paulson’s initial investment–it has already been devastated. That’s because all these banks are insolvent. When you use 20:1 leverage, and then lend out money worth 2 times the collateral, you are insolvent. And probably a criminal. But you definitely aren’t going to survive.

    It’s time to pull this band aid off. Create banks with clean balance sheets and you will have a working banking system that will make loans if they are sensible to make. Guarantee deposits and people’s FDIC insured accounts will be safe. Government should only take losses above that (and I’m guessing the losses the FDIC will take will be more than a trillion) if it is necessary to keep the financial system solvent.

    The bad loans these idiot banks made will be held by the government in a resolution trust. If it turns out the assets are worth enough to cover the government’s guarantee of the deposits, then the bondholders will ultimately be paid off, and then the preferreds, etc. Of course, the government gets a cut for managing the assets.

    The big problem here is that real estate is too high and these idiot bankers let too much money go out the door to unworthy borrowers. Forcing them to make more loans is stupid. As is having the government give these incompetents more money in capital (that is the craziest thing about this whole mess).

    Anyway, I really hope we do something like this. If Geithner backstops future banks losses, I think he should be arrested for deceit. Anyone with a brain knows he’s just nationalizing all these losses.

    Honestly, all the bums, Geithner and Summers included, should be thrown out so someone new that had nothing to do with this mess can try and fix it.

    *sigh* That is all.

  63. INTP10011

    Q: What remedies or alternatives might there be?

    Willem Buiter’s proposal is on the right track EXCEPT that it would be far simpler, cleaner and easier-to-understand if the ENTIRE (“good” performing & “bad” non-performing toxic) loan portfolio of an insolvent bank were left in its Chapter 7 bankruptcy estate for secured & unsecured creditors and preferred & common shareholders to liquidate (analogous to run-off mode of an insurance company). For more see: [see especially Figure 4 (p. 8)] [seek 10:20 to 12:15 for elevator pitch].

    The reason why the ENTIRE loan portfolio should be left in the Chapter 7 bankruptcy estate is that the much-larger-than-subprime *option-ARM default wave* is just beginning and will last until fall of 2011
    (which means that the horizon of Geithner’s stress test needs to be extended from two years to three years) and hence many now “good” performing loans will become “bad” non-performing loan as the recession deepens. (Note that the insolvent old bank’s bankruptcy estate would pay the new bank a fee for its old employees to continue to service its loan assets.) In another words other shoes have yet to drop, and hence to be conservative, safe and prudent even current “good” performing loans should be left in the Chapter 7 bankruptcy estate (after all that was the bet that the old creditors and shareholders took!).

    Under this ULTRA-CLEAN NEW BANK proposal, nationalized would be the CORE BANK OPERATING ASSETS (including, e.g., Citibank’s essential capital market operations) that the government deems to be in the PUBLIC INTEREST (such as to avert a systemic crisis). Of course in return the government will pay consideration to the insolvent bank’s Chapter 7 bankruptcy estate. Note that one of the benefits of the insolvent bank’s loan portfolio in RUN-OFF MODE is that there is no pressure to quickly sell any loan assets at fire sale prices because it is in the bankruptcy estate’s best interest for its trustee to hold them until for example, well after the option-ARM default wave subsides and the economy recovers (e.g., Enron Creditors Recovery Corp. is still around 7 years later after Enron declared bankruptcy in December 2001). Thus with government cash from the nationalization of its core bank operating assets together with its good performing loan assets as part of the insolvent bank’s Chapter 7 bankruptcy estate, senior creditors should not be at risk.

    In summary, the objective of bank nationalization (err, “detoxification”) should be FRESH START, which is best be accomplished by creating *ultra-clean new banks* with pristine balance sheets and tabula rasa loan portfolios. Initially with no legacy loans in its portfolio the ultra-clean new banks can focus exclusively on making new loans without being distracted by the delinquencies, workouts and charge-offs of legacy loans. [For example, ultra-clean new banks should be indifferent to say, Chapter 13 personal bankruptcy cramdowns that reduce the principals of mortgages because they would be negotiated by the Chapter 7 bankruptcy trustee of the insolvent bank.] With a clean-slate loan portfolio the new bank would have *no excuses* for not lending. For example under the 10% reserve ratio requirement, if freshly capitalized by the government with $700 billion, these new banks would have the capacity to make $7 trillion in new loans overnight! — which among other things could make available super-senior-secured debtor-in-possession financing to the Chapter 7 bankruptcy estate for say, old CitiGroup’s non-essential capital market operations like prime brokerage, asset management, prop trading (although note that the “good” performing loans of its portfolio should be throwing off tons of cash every day so liquidity might not be an issue). Thus for Obama, Geithner & Co., this bold, big bang, FRESH START approach of detoxifying the U.S. banking system by creating ultra-clean new banks would *incontrovertibly* show that America's banking system is ready, willing and able to start lending again.

  64. Anonymous

    Ant nationalization involving any type of debt would lead to a vortex of seliing in all financial companies.You might save the taxpayer money by such nationaliztion,but the cost would be a Dow at 4000.

  65. Anonymous

    “Ant nationalization involving any type of debt would lead to a vortex of seliing in all financial companies.You might save the taxpayer money by such nationaliztion,but the cost would be a Dow at 4000.”

    No. If the press and pols keep floating trial balloons about haircutting bondholders, the markets will adjust. Things won’t seize up because of the Fed guarantees of deposits and money market funds/accounts.

  66. Yves Smith

    Anon of 8:45,

    Didn't you get the memo? The Dow is going to 3600, according to one of the trader blogs I read occasionally (and he is short term SUPER bullish). I was saying the S&P would go to 500 as of last March, but my hedgie buddies are deeming that to be optimistic, their targets are now 300-400.

    Long winded way of saying all this does is accelerate the inevitable.

  67. cent21

    I’d like to sort out the capacity of the economy ex finance, real estate, and resulting recession undertow.

    From this, we could get a clue about where we should try to steer, for example, with stimulus, with size of the post-restructuring financial sector, with local and state govt services.

  68. 2cents


    I think that the ‘nationalization’ should take a multi-part form of a spinoff/divestiture and a merger. The bad assets would be spun off to the current creditors and all current stakeholders (i.e. the get 100% of whatever). The assets deemed to be salvageable get backed up with whatever gov’t capital infusion is required. Those same stakeholders get their commensurate proportion based on the current value of those assets as compared to the total put in by the gov’t.

    This has obviously been clouded by the fact that the gov’t has already contributed a sizeable chunk to many of these entities already, but I’m sure a reasonable compromise can be worked out on those previously received funds. The gov’t looks to re-privatize as soon as practicable with the notion that capital + x% per annum (time while in gov’t hands) needs to be returned to the gov’t.

    This gives the current stakeholders everything that they signed up for plus a little extra goose by partnering with the gov’t. The taxpayer provides stability funds via the gov’t and guarantees a minimum return to the taxpayer should the institution be reprivatized.

    Yes, that’s a bit of hand waving, but I think it forms a basis from which everyone can maximize their situation without bailing one side out at the other (taxpayer’s) ultimate expense. More important, I think it is a plan that the public would buy into and it leaves very little ground for the current stakeholders to complain ‘rationally’ against!

    What do you think?

  69. Anonymous

    Sukh writes: “My belief has been that the US government does have a plan and it really is designed to screw the bondholders, who I am guessing are foreigners for the most part (I could be wrong).”

    I am a bit late to this piece, and have not yet had a chance to read all the comments, but I was just thinking exactly the opposite to what Sukh writes…ie, that the reason these banks have been on life support for so long (it was obvious to anyone who cared to sit down and think about it for mre than a few minutes, that all these things were insolvent a year or so ago) is/was to provide time for the foreign bondholders to exit….on the basis that these guys are vitally important (as the major buyers of treasuries) to the overall US financial system, and any move which ends up wiping out, or substantially haircutting, these guys through a bank nationalization may have eventual repercussions for the treasuries market.

  70. Sukh Hayre

    Ahh! Anonymous (11:51 pm)grasshopper .

    Late, but I’m glad you’ve taken the other side of the debate.

    What you must remember is this:

    Nations do do not have friends: They have interests.

    And now that the US has maxed out its ability to buy oil and manufactured goods for IOU’s of little additional marginal utility, the game is over.

    Don’t think for a minute that the US is going to do anything to help its foreign friends at the expense of the American public.

    As much as we may want to believe that (and it has been a great cover for the powers that be to be percieved to be of this mentality), do not doubt for a minute that the those in charge are doing what is best for the counntry (the USA) as a whole.

    If they were not, why would their be such a push to get away from a single world reserve currency? That was the thrust of Putin’s speech at Davos. Most people don’t want to admit it, but this man is quite intelligent when it comes to protecting the interests of the Russian people. He is working his ass off to get back what Yelstin ignorantly gave up. If you don’t believe me, do you think the US will follow any of the austarity measure theat it (thorugh the IMF) forces upon the rest of the world’s over-debted nations?

    The Chinese (and all the other merchantile policy nations)and the oil producers now know that they have been duped. But there is little you can do after the fact.

    What the US is now afraid of is being isolated by the rest of the world in retaliation. That is why they have all of a sudden become so reconciliatory. Again, nations do not have friends, they have interests.

    When you think of the housing bubble, remember this: Who takes the hit as these loans are written off? The US has the benefit of now having these houses available for its people. So, when housing bottoms, Americans will buy these houses as investments. They will be bought at prices that make sense on a cashflow basis (and this will be dirt cheap because the rental income these properties can generate will be limited because these houses will be rented out to people working at minimum wage). But, who cares. In the end, American real estate investors get to buy the homes dirt cheap. Renters get to live in these homes based on their ability to pay (rent will probably be 40% at most of a very limited income), and who takes the hit? The world’s savers? And who were they? The people who sent goods and oil to the US in exchange for US IOU’s.

    (On a side note, and this is just a gut feeling, so I could be completely wrong on this one, don’t be surprised if there is an elephant oilfield find in the US in the next year or so. I truly believe that the US has been hording its own oil resources and buying/depleting the oil resources of other nations on the cheap while the US was still preceived to be a AAA credit nation (again, self-interest). If I’m wrong in this regards, then watch for the US to really use its millitary might to secure its energy supplies (and if this is the case, if you thought Iraq was a bloodbath, you ain’t seen nothing yet). But, before this can happen, there are a few chess moves that must first take place. What you will see is rising oil prices (above the US’s ability to afford), the preception that the OPEC nations are under-producing and therefore manipulating oil prices, finally, with an economy in depression, a hatred for the oil producers will arise and the nation will authorize its government to do whatever it takes to get the people the cheap oil they need to survive.

    But then again, the fear of a bloodbath may be enough for Middle Eastern rulers to provide the US with oil at a price they can afford. Otherwise, does it not make sense that the oil producers of the world would just export enough oil each year to allow them to purchase what they need to import. I know most people say that OPEC countries just cannot trust each other to do what is best for the whole, but I think this is too simplistic.

    I truly believe that this is a high-level chess game that most people do not even consider some of what I call, “what else could this mean” options.

    I can’t remember where I read it, but, when it comes to chess, the higher the level of play, the fewer moves that are available to the players. Whereas, the less you know about the game, the more options you perceive yourself to have. And I think that is why so many people come to the wrong conclusions when they see this global financial chess game being played out.

    I know I’ve thrown a lot out here, I’d love to hear your thoughts and anyone else’s for that matter.



  71. Sukh Hayre

    Here’s another interesting point I gleaned (sp?) from a MarketWatch article yesterday:

    China’s motive may be “exchange-rate mercantilism” — maximizing its manufacturing capacity rather than living standards.

  72. vlade

    Slightly modified approach from Mr. Buiter.
    His proposal:
    Current company has value X + U (where X is known value – i.e. the MTM of all MTMable assets, U is the hard-to-value, can’t-figure-it-out value). Good bank assumes that you sell X for X to the new entity and move everything there. Good idea, but operational mess. Now think what’s the goal – it’s to separate the company into two, one with known value (for simplicity say 0) and all the valuable (as in can be easily valued) assets and another company with value of X+U, but X being replaced by cash, and full of hard-if-not-impossible-to-value assets.

    Once we know this, we can do it in a slightly different way:
    Again, establish X.
    Now, create a new “bad” company, and give it all the bad assets, and PAY it X at the same time. As you have MTM of X, you should be able to get the money from Fed, if nothing else (with nice funding rate of 0%). This is actually easier, as you don’t have to novate all the deals, just the toxic ones. Given that a lot of the toxic ones are securities (i.e. there’s no cpty to novate with in case of bonds and CDOs – it’s a straightforward sale, or the cpty is the bank as in originated loans), it’s operational faster and easier (no staff changes, no real estate sales with related legalese, taxes and whatever).

    It’s easy to say how much you need to establish the new company – it’s X + regulatory requirements for X (all known, assuming the assets are known). X could be funded by Fed – after all, it’s MTMable, so can be put in as collateral. RR could be topped up by the existing shareholders, or anyone else. The advantage or recapitalising this company is that it’s extremely clear what the RR’s are and why, and with a bit of conservativism built in, it would be much easier to argue that it would be profitable concern (or at least no-suprise concern). It beats dumping another billions into an entity where you don’t know how much losses are still there. Existing shareholders/bondholders are forced to take the new “bad” company. This is the only bit of forced, but since buyer would be paying market price for easy-to-value assets, say just Level 1, I think it could be argued that they won’t be materially worse off, especially if they were given the first right on recapitalizing the old (one that can be valued) company.

    In general, problem of legality: Obama likes to link himself with Lincoln. A number of things Lincoln did were extralegal (suspending habeas corpus say in whole of Maryland), some in fact revolutionary (confiscating slaves in seceding states – remember, slaves were property – how’s it fundamentally (based on assumption that you can own another human being in first place, which is necessary of course) different from shares?). So, he can start acting like one, not just talk the talk. Another thing of note – most of Lincoln’s successfull generals (Grant/Sherman) weren’t big names soldiers-for-life in Old Army – which was one of the reasons why they were able to take creative steps, even if extremely painful.

  73. Anonymous

    What no one here has yet explained as how nationalization–sorry, “receivership and restrucuring” will get around Citi’s massive exposure to risky consumer finance.

    In other words, there is a political objective via the Obama administration to “lend more”; yet the very idea of lending more through Citi’s toxic trio of Citifinancial (subprime), Citi Mortgage and Citi Auto is unprofitable.

    How do you fix this impasse? Or do you simply close down all three consumer finance divisions and allow healthier lenders to pick up the slack?

  74. dfb


    Thank you for taking the lead on this and giving a voice to the rest of us who won’t (or can’t) be heard.

    Please keep this as an open post or open one that remains open for further comment. It will take some time for us to all compile our issues and suggestions (and solicit further feedback from others who are better qualified to speak). :)

    I also encourage you to reach out to others in the blogosphere and to economists such as Krugman and ask them to take part. Perhaps they can help build the framework this process brings out and amplify the voice of change that results.

  75. Anonymous

    cftc does not just regulate commodities. they regulate futures on interest rate products. banks have lots of hedges in interest rate futures.

    if the bank hedges portfolio risk that is sec and cftc )stocks versus sp500 futures, for instance)

  76. Anonymous

    Given the lack of understanding of derivatives on the balance sheets I’d call it an “X-shaped” recession.

    One thing I’d suggest is to temporarily subsidize brokerage service fees (for personal investment accounts), so trading is free. I wouldn’t suggest lowering capital gains taxes (lol, capital gains) as the money needs to go to paycheck-to-paycheck Americans. If Canada had a $8 discount broker fee I’d probably have a few stocks. If the fee was zero in USA you might see a tiny market cap pop.

  77. tz

    And to clarify: I am not a fan of nationalization or otherwise taking financial firms out and shooting them per se,

    One ought not think of such banks as zombie, but rabid.

    Rabid dogs are shot, since they will die anyway, and if not shot can cause a great deal of damage if not actually spreading the fatal disease. Let us mourn the cute little dead dog, and not remember when it foamed at the mouth attempting to bite anything nearby.

    Rabies and other diseases might have been the origin of the undead mythology, so don’t dismiss it.

    When some entity is infectious, one can mourn deeply over what needs to be done, but a firewall must be erected.

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