White House Says Banks Should Stay Private

Lordie, is this crowd in denial? From the Wall Street Journal (hat tip reader Dwight):

Amid fears that Citigroup Inc. and Bank of America Corp. could be on the verge of being nationalized, the White House gave assurances that it prefers banks to remain out of the government’s hands.

“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” White House spokesman Robert Gibbs said Friday. “That’s been our belief for quite some time, and we continue to have that.”

Print Friendly, PDF & Email


  1. Anonymous

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

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

  2. Anonymous

    Gibbs made exactly the right calming comment, giving the feds time over the weekend to take over C and BAC. Look for it to happen Sunday night.

  3. Steve

    I think the White House was terrified by moves in markets overnight and this morning.

    But since they’re not addressing a bunch of dumb-ass voters, they quickly need to explain what exactly they intend to do — or do something over the weekend. Tiny Tim had better have something cogent, detailed, and politically workable to offer.

  4. Anonymous

    Dodd Says U.S. Bank Takeovers May Be Necessary for ‘Short Time’
    Email | Print | A A A

    By Alison Vekshin

    Feb. 20 (Bloomberg) — Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for “a short time” to help lenders such as Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years.

    Clear enough?

  5. Swedish Lex

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

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

  6. mmckinl

    More pabulum from the pols …

    These Wall Street Banks are pulling down the entire banking system, and, they know it …

    The scuttlebutt is that they will try to save share and bond holders. This is very bad news for tax payers.

    These banks should be taken over and the share and bond holders paid at current market value with QSPEs and level 3 assets at current book value …

  7. 2cents

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

  8. Chris

    More interesting perhaps the market indication of what these things are worth. C a $10 billion company. BAC $24 billion.

    Not much hair left on these things to cut is there?

    Good job they’re not so highly leveraged as the average European bank, isn’t it?

  9. bg

    Newspeak definition of “in private hands”:

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

    This isn’t denial. It is politics.

  10. Patrick

    Even if the Gov’t nationalized C and BAC and JPM and WFC, the banking system would still be overwhelmingly private. So, the statement by Gibbs is meaningless. But if they are planning to nationalize C and BAC, are deciding about JPM, and hope it doesn’t lead to WFC; they certainly aren’t going to say so.

    What we really need to do, for the future, is move inauguration up to Dec. 1st. We should also get rid of Senate confirmation for undersecretaries.

  11. ex VRWC

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

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

  12. John Rosevear

    Might be “private” in the “pre-pre-privatization” sense of private.

    If they move this weekend, it’ll be sooner rather than later… before Sunday night.

  13. eh

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

  14. eh

    Good, quit giving the dams thieves our money.

    Reform and a change in management should be part of the deal. Obviously.

  15. Anonymous

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

    no more gifts to the banks or their stakeholders.

  16. John Rosevear

    Seriously, my guess is they’re setting the stage to paint this as just ordinary FDIC receivership writ a bit large. There’s no denial in that statement, just a carefully-parsed dance between points with any possible substantive meaning.

  17. Jim T


  18. gregg

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

  19. Anonymous

    The US government most certainly does have credibility. Look at the Treasury yields. That is Credibility with a capital C. More credible than anyone else.

    The market has spoken. Gregg do you only accept the market verdict when you like it?

  20. Anonymous

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

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

  21. anon1

    The White House didn’t rule out nationalization with this statement.

    It rules out permanent nationalization but not temporary nationalization. It’s consistent with Bernanke’s earlier blurb. And there’s a difference between intended temporary and intended permanent nationalization.

  22. ruetheday

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

    When Obama says something as completely assinine as:

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

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

  23. mattw

    I don’t think this comment meant what some people think it meant. It was a classic non-denial denial. Personally I think that private jets are the correct way to fly, but for some reason I still generally fly coach.

    I don’t know if they will take over any banks this weekend, but they definitely need to stop dithering.

  24. Anonymous

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

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

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

  25. commonsensical

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

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

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

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

  26. Anonymous

    How much REO do C and BAC have? Add this in to what fannie and Freddie are already hanging on to and nationalization of C and BAC essentially means nationalization of housing.

    If this were to be a fast-track to price discovery I’d be very happy, But instead its bothersome when one sees the market denial of Fannie and Freddie.

  27. Anonymous

    Yves, I think you are being too hard on the government.

    Gibb’s recent comment and the president’s comments about nationalisation are interesting for what they didn’t say. They didn’t give the first, easiest answer: the banks are solvent so there’s no reason to nationalise. Instead they expressed a preference for keeping banks private. Until the very moment they have a complete plan ready to announce and implement, this is the only thing they can say. Unlike the rest of us and much to displeasure of my high school maths teachers, the government can’t show their work. We can’t have senior figures musing about the solvency of banks, publicly weighing possible solutions and chatting on CNBC about choosing the best exact approach to bankruptcy / nationalisation.

    While I claim no inside knowledge I think it’s clear that with their lack of reassurance about the health of the big banks the government knows there is a problem and will eventually do something, presumably some sort of government takeover, restructure and resale. But, I would bet the president and his advisers want to be COMPLETELY sure about the dire state of the banks. They need really strong information from unimpeachable sources to convince the public that the banks are bust. They want to avoid at all costs the claim that a ‘lefty’ government has expropriated a going concern business. The attack line for the next election would be: ‘President Obama stole some of the biggest businesses in amercia, are thy coming for you next?’

  28. Anonymous

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

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

  29. Early Withdrawal

    “Bond hair cuts?!! Cue the music! cue the music! Uh… thanks Yves we gotta get out of here!”


    good video Yves, good job on making it simple to understand.

  30. anon1


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

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

  31. lineup32

    Yves, you were excellent on the tube!

    The speed of the decline is wrecking havoc with the Obama team, it was fun marching around the country pointing fingers at Bush/Hilary but real time decision making by Obama seems about the same level as Bush which is confused and without direction.

    The lack of direction reflects the political landmines going off and their inability to face the reality that they really are responsible for what happens next.

  32. Printfaster

    I still see receivership/trusteeship as necessary.

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

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

  33. Anonymous

    Let’s get real: it’s inevitable that the Government will “nationalize” (no, that’s a bad word; let’s try “regulate,” no–also bad; okay, “provide temporary administration for”) some banks. There is no alternative.

  34. john bougearel


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

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

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

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

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

  35. Anonymous

    "I suspect that Geithner will have his Greenspan moment soon, and change the course towards nationalisation if/when necessary."

    I think not. I suspect he is buying time, I hope, by having teams of lawyers somehow figure out a way to Chapter 13 these beasts without causing additional substantial damage to the underlying financial system. Nationalization will accelerate the dismanteling of the American empire.

    Wall Street = Massive Accounting Fraud + A glutony of bad assets + STILL over leverage >> Govt's ability to rescue/bailout.

    What do you know of the $100B hole in Lehman's balance sheet. Fraud? Gee, you think.

  36. Advant Guard

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

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

  37. Keenan

    Very nice interview, Yves. You are becoming quite polished in your on-camera appearances. Unfortunately the production crew, or whoever is responsible for the camera work, periodically cuts to the curiously grinning panel while you are speaking.

    A major reason why I do not have cable teevee.

  38. Anonymous

    What does nationalization mean to the stock holder Do we loose our stock if they nationalize?? I do not want to be a victim like I was with WAMU who closed that bank

  39. Anonymous

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

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

  40. Anonymous

    I’m not a financial guru, but it seems to me that letting/waiting for the banks’ stock go to zero makes it easier for the government to say “okay, as you can all see, this bank has had it”. The common person will understand that a stock price of zero means “you ain’t worth anything”, even if they don’t understand about capital ratios, derivatives, etc.

    The government giving out billions (now trillions) of dollars is making everyone nervous. No wonder no one is spending money. If the government wants people to “act normally”, then they need to show us that they are going to stop nursing zombie bank and auto corporations, and let them die the death they have earned.

    Americans are raised with the idea of hard work leading to success; this is the “American dream”. But with these crazy, huge government bailouts, the message being heard by the public is “fraud and greed lead to riches; honesty and hard work makes you the patsy”.

  41. eh

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

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

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

  42. Terry

    Please note that NOTHING in Gibbs’ statement precludes the short period of nationalization-revitalization-reprivatization (“the Swedish solution”) that has been discussed a lot lately.

    …you just don’t want to tip your hand.

  43. Doc CEO Holiday

    Yves My Dear,


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

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

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

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

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

  44. Anonymous

    Ugh, the cut to the smirking giggling nubling heads of MSM is enough to entice low level violence (smack to the face).

    BTW these are the first to run at signs of trouble when confronted with it, where do they get these plastic town criers, burning bushes to the idiotic short horn financial believers, ohh I must get CNBC twitter now, how will I ever make money with out them shezzz. Can’t wait to see them ply their skill selling ribbon and string door to door when they lose their jobs. Plain old vacuum sales mentality, do a line make a sale repeat over and over.

    Skippy…Yves how you keep your last meal down when talking to them is beyond me.

  45. doc holiday

    All I got was this:

    Rumors about a possible nationalization are rocking Wall Street, driving Citigroup and Bank of America almost to penny stock levels. These two are considered the most likely targets if the government decides on a takeover. Taxpayers already have $45 billion invested in Bank of America, which today said quote, we see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization. Citi also has $45 billion in taxpayer funds and today it said quote, Citi’s capital base is strong and our tier one capital ratio among the highest in the industry. Investors trying to sort through the rumors have been unsettled by a series of ambiguous comments. Earlier this week, Fed Chairman Ben Bernanke implied a government takeover is possible.

    Meanwhile, credit default swaps on Citi and Bank of America rose sharply today. Those are effectively insurance policies against default and is a sign of declining investor confidence

  46. Anonymous

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

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

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

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

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

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

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

    The banks we have taken under FDIC protection are:

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

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

  47. Anonymous

    Check out Wiki history search:

    The main motivation for the third central banking system came from the Panic of 1907, which renewed demands for banking and currency reform. During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics. According to proponents of the Federal Reserve System and many economists, the previous national banking system had two main weaknesses: an “inelastic” currency; and a lack of liquidity.

    The chief of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions — one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central-banking systems and report on them. Aldrich went to Europe opposed to centralized banking, but after viewing Germany’s banking system came away believing that a centralized bank was better than the government-issued bond system that he had previously supported. Centralized banking was met with much opposition from politicians, who were suspicious of a central bank and who charged that Aldrich was biased due to his close ties to wealthy bankers such as J.P. Morgan and his daughter’s marriage to John D. Rockefeller, Jr.

    Aldrich fought for a private bank with little government influence, but conceded that the government should be represented on the Board of Directors. Most Republicans favored the Aldrich Plan,but it lacked enough support in the bipartisan Congress to pass.

    Current functions of the Federal Reserve System include:

    To strike a balance between private interests of banks and the centralized responsibility of government
    To supervise and regulate banking institutions
    To protect the credit rights of consumers.

    Federal funds are the reserve balances that private banks keep at their local Federal Reserve Bank. These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism through which private banks can lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy works by influencing how much money the private banks charge each other for the lending of these funds.

    Balance between private banks and responsibility of governments

    The system was designed out of a compromise between the competing philosophies of privatization and government regulation. While planning the design of the system, some people wanted the system to have generally private aspects whereas others wanted more government involvement. The system that resulted ended up being a compromise between these two philosophies. In 2006 Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:

    Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation’s bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.

    The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.

    In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is the part of government that regulates the private banks. The balance between privatization and government involvement is also seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the President of the United States and confirmed by the Senate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.

    Got that? They will keep “The System Private (wink, wink) but take over failing banks…

  48. Anonymous

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

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

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

  49. Anonymous

    Tip of the ice-berg. Great comments, as usual. Yves deserves credit for calling this crisis early and for calling for the nationalization of the banking system before tax-payers poured billions down the drain trying to prop up failed businesses (banks).

    Got off the phone with one Canadian friend who’s been consistently right about the scale of the crisis and the moribund state of the US economy.

    According to him, the real problems of un-wanted inventory (cars) and un-desired US brands (too many to name)will remain after the financial sector of the economy is repaired.

    Bad as things look, the un-employment numbers in Asia and Europe for this year are going to crush what little demand and consumer confidence remains. The dithering has already had devastating consequences. We’re all right for the moment and are actually making money here and there. But macro-factors are only starting to kick in. Depression like numbers may be the norm in many local and national economies if the administration doesn’t commit to a policy and a funding program businesses and consumers can believe in. I’m not optimistic.

  50. doc holiday bedtime stuff

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

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

  51. whitetower

    First sane thing I’ve heard Obama say.

    Let the insolvent banks fail. That doesn’t mean every bank will fail – after all, there are 8000 banks in the U.S. – just the ones run by incompetent and/or corrupt officers will fail.

    FYI, most (of course, not all)regional and small banks are essentially sound. It’s the largest ones that got involved with MBS’s over the past 5 years. They deserve to fail.

  52. Yves Smith


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

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

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

  53. Anonymous

    Yves, I don’t doubt the FDIC has broad authority to seize a bank but, as an intellectual exercise, it can’t be entirely discretionary can it?

    That some bank community bank in Georgia or California, without a leg to stand on has not fought its closure is not remarkable but when you move beyond them or even a $30 billion IndyMac up to these new Geithner decreed and, heretofore, unknown ‘stress test’ criterion for $100 billion and up entities I suspect you might get a ‘fight’ should the government try and seize them.

  54. Yves Smith

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

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

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

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

  55. Steve


    Minor point: it’s the chartering authority (OCC, OTS, or state) that closes a bank, not the FDIC. The charter revocation is done ex parte (the bank can’t argue the closing in court), but the shareholders can later sue the chartering authority (no suit of this kind has ever been successful, afaik) and can sue FDIC for its conduct as Receiver of the estate (for not maximizing the return to creditors).

    What FDIC can do is yank a depository’s deposit insurance. I don’t know that they’ve ever done so, but FDIC did use this threat against at least one state regulator in the 1980’s to force closure of an insolvent institution.

    Your point about bank closing being a form of nationalization is correct and not often understood.

  56. whitetower

    They have no right to contest.


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

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

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

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

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

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

  57. Anonymous

    Well you are the economist. I am the realist. Fannie and Freddie got into the shape they got in because they had the lobbyists to see to it they were not regulated and they had no branch offices in 20 states. Just money ( and China and Japan!)

    The big banks are different. They are sprawling beasts with thousands of branch offices and hundreds of thousands of employees in dozens of states. More community ties and relationships than even the auto companies when you get right down to it. Modesto might have one Ford dealer but it likely has half a dozen Wells or Bank of America branches. That is political power.

  58. Steve


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

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

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

  59. Yves Smith


    You are omitting some key facts about the First City Bancorp case. The FDIC sold the bank for a $430 million premium above the value of the deposits. That almost certainly gave rise to the suit. And note the shareholders only got 1/3 of the premium paid. The fact they did not claw back more says to me the facts at issue were more complicated. You’d expect at least 50% in circumstances that unusual.

    It also appears the case was based on some procedural irregularities.

    A bankruptcy filing in the absence of an FDIC resolution would lead to a bank run. That is precisely what bank regulators are out to avoid. Can you name a bank bankruptcy filing that was NOT pursuant to an action by a chartering authority to close a bank?

  60. Anonymous

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

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

  61. bg

    I want to thank white tower for sparking this debate. I knew nothing of FDIC actions before he was corrected.

    There is one other recourse to faulty FDIC actions. Political. I doubt Wamu or Wachovia were solvent. But there certainly was evidence of a bank run starting.

  62. Anonymous

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

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

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

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

  63. Anonymous

    “Nationalization” is the word they use when they don’t want to do something.

    “Receivership” is the polite word they use when they do want to do something.

    “Reorganization” is an even more polite word.

  64. Anonymous

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

  65. Anonymous

    Riiight… comrade Obama…
    Meanwhile, I’m looking forward to the new Federal Reserve branch down at grocery store, and I’m waiting for my Fed Platinum MasterCard to arrive in the mail… rumor has it, it’s preapproved for a trillion dollar credit limit…

    Vinny GOLDberg

  66. Anonymous

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

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

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

  67. Anonymous

    It is inaccurate to use the word “nationalization” to describe the seizure of a bank by regulators. It suggests that the government might bail out creditors and take control over lending decisions.

    Nationalization refers to state ownership. In a conservatorship/receivership, the government does not necessarily take an economic stake in the enterprise. It may well just perform the role a bankruptcy judge does by handing assets to creditors, and so on.

    FT has Rodgen Cohen shilling against “nationalization”. Cohen is obviously a lawyer who represents banks. Cohen likes the cash for trash plans that Summers/Geithner are proposing. He dismissed the Swedish approach by saying it’s like expecting strategies that work in high school sports to work in the pro’s. The arrogance. Cohen/Summers are totally corrupt. They want the federal government to overpay for bank assets, and give gifts to bank shareholders and bondholders.

  68. Anonymous

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

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

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

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

    Here’s my grand plan to help the economy:

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

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

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

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

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

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

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

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

Comments are closed.