Nationalizing The Banks?

[Mammon]

http://uk.reuters.com/article/rbssFinancia...0090220?sp=true

Turkey's banking index .XBANK was trading 4.15 percent lower after U.S. futures fell and Frankfurt-listed shares of U.S. banks Citigroup (C.N) and Bank of America (BAC.N) traded lower on Friday, with traders and analysts citing fears that big U.S. banks could be nationalised.

"The news that Bank of America and Citibank could be nationalised is pushing U.S. futures lower and affecting the Istanbul Stock Exchange," said a portfolio manager on condition his name not be used.

This is the first time I've heard about this. I've been out of the loop lately so I don't know how long this information has been out there, does anyone know where this is coming from? I saw on the front page of OO.net that Alan Greenspan said something about it in the Financial Times. Is that true?

Basically, I'm wondering if this is speculation or if it's been officially proposed or not. Does anyone know?

Edit: I saw yesterday that Venezuela nationalized a bank, I expect such from them, but not from America. If these types of fears hover around it could lead to the same thing that happened during the Great Depression, which is a lack of people participating in the economy because of a fear of nationalization.

Edited February 20, 2009 by Mammon

[softwareNerd]

Basically, I'm wondering if this is speculation or if it's been officially proposed or not. Does anyone know?

It appears to be much more than abstract speculation. More like trial balloons being floated in all seriousness. A bank like Citi is pretty close to being nationalized already. If the government give the bank substantial capital, and stands behind its debt, and dictate terms on a range of issues, it is more like a government entity that has been given considerable managerial latitude rather than a private entity with onerous controls.

Some GOP folk appear to approve, and people are all complimentary about the "Swedish model" where Sweden took over their banks for a while. In fact, Obama's folks have already coined an Orwellian term for nationalization: it's "pre-privatization".

[Mammon]

It appears to be much more than abstract speculation. More like trial balloons being floated in all seriousness. A bank like Citi is pretty close to being nationalized already. If the government give the bank substantial capital, and stands behind its debt, and dictate terms on a range of issues, it is more like a government entity that has been given considerable managerial latitude rather than a private entity with onerous controls.

I read through that a few times and something occurred to me. Since when did loaners have so much power? If I buy a lot of bonds of a company I don't have any managerial clout at all. At least I've never heard of anything like that. Banks even don't give orders to people when they make loans. They usually just demand to get the money you own them, they don't tell you how to spend it and when to spend it.

That's an equity issue. It just looks to me like the government is treating it's debt like its equity.

Some GOP folk appear to approve, and people are all complimentary about the "Swedish model" where Sweden took over their banks for a while. In fact, Obama's folks have already coined an Orwellian term for nationalization: it's "pre-privatization".

Do any sources on those? It's not that I don't believe you, it's that I don't believe this entire situation. Then again, a lot of crazy things have been happening lately.

Edit: I've always understood that the banks were controlled by the government to a certain extent, but what I find unbelievable is talks of out right, shameless nationalization. It's something I don't want to take lightly.

Edited February 20, 2009 by Mammon

[softwareNerd]

Since when did loaners have so much power? ... ...

That's an equity issue. It just looks to me like the government is treating it's debt like its equity.

The closer a debtor gets to bankruptcy, the more his creditors can dictate to him. Some banks are way beyond the "close to bankrupt" point.

Do any sources on those?

IA few good Googles should give you all you need. Here's one ABC News story to get you started.

Edit: I've always understood that the banks were controlled by the government to a certain extent, but what I find unbelievable is talks of out right, shameless nationalization. It's something I don't want to take lightly.

It looks increasingly likely. Insolvent banks ought to have gone into bankruptcy. However, if we have the choice of the government de facto running zombie banks versus the government openly running those banks, then we're between the devil and the deep blue sea. If done right, nationalization can be the preferable poison.

[aequalsa]

http://uk.reuters.com/article/rbssFinancia...0090220?sp=true

This is the first time I've heard about this. I've been out of the loop lately so I don't know how long this information has been out there, does anyone know where this is coming from? I saw on the front page of OO.net that Alan Greenspan said something about it in the Financial Times. Is that true?

Basically, I'm wondering if this is speculation or if it's been officially proposed or not. Does anyone know?

Edit: I saw yesterday that Venezuela nationalized a bank, I expect such from them, but not from America. If these types of fears hover around it could lead to the same thing that happened during the Great Depression, which is a lack of people participating in the economy because of a fear of nationalization.

http://forum.ObjectivismOnline.com/index.p...mp;#entry207706

Also consider that the FDIC has been lowering the capitalization rates from 16 to 1 in the 90's down to 14 to 1 then 12 to 1 1 1/2 years ago. This recent crisis was instigated by lowering it to 10 to 1 In December they lowered it to 8 to 1. This has effectively put almost all of the banks, even small well run regional banks into the position of being "undercapitalized." So then the government hero with all of my money comes riding in and offers to provide money to "free up liquidity in the market." But it is not enough to loan anything out so they are leaving it on their books to provide the arbitrary government mandated level of of capitalization.

Simply, the government took trillions of dollars out of the economy through a regulatory pen stroke, and has come back strong arming the banks into taking their money with new regulations and requirements and repayment plans. If they didn't meet the new capitalization requirements they could be shut down, so they have to take the money and the yoke to get a reprieve since there is no private capital available, since all of the banks are in this same situation. So a small bank that had $120 million in loans out needs to reduce their loans by $40 million dollars.

So then your buddy Obama gets on TV and accuses these banks of not using the federal funds for loans to "mainstreet" and paying themselves too much. Now they have to make under $500k and must have a certain percentage of loans in each industry. Further, they must pay back this TARP money to the federal government with interest. Effectually, they are nationalized in all but name. To make it official would be sloppy politics and and catastrophically bad.

My guess is they'll turn the spickets back on towards the end of the year and everyone will say "hip hip hoorey, Obama saved us," then reelect him in 2012. Then for several years the government will have additional income streams from the interest these banks must pay back.

As a side note: I have no facts to corroborate this, but my guess is that John Allison got put in this squeeze which caused him to have to take TARP money.

[utabintarbo]

It looks increasingly likely. Insolvent banks ought to have gone into bankruptcy. However, if we have the choice of the government de facto running zombie banks versus the government openly running those banks, then we're between the devil and the deep blue sea. If done right, nationalization can be the preferable poison.

This merely postpones the inevitable. Better to take our economic medicine fast and hard than draw it out, only to have a larger dose forced upon us later.

Bad debts need to be forced out into the open and written off. Nationalization will merely allow them to be hidden and serviced by the government (read: you and I) until the inevitable capitulation is forced upon us all (rather than "just" the shareholders/creditors of the insolvent bank). This will likely result in Weimar-style monetization of the debt and epic inflation. Let's not go there.

[Mammon]

So a small bank that had $120 million in loans out needs to reduce their loans by $40 million dollars.

And that's exactly what we don't want.

Anyways, thanks for the posts. I'm going on vacation so I'm jetting out of here in a few minutes. I'll try to talk about it more when I get back.

[aequalsa]

And that's exactly what we don't want.

That's exactly what we already have.

The worst part is, they could fix it in a second. I think they will, but not until they control more of the banks though.

[Mammon]

I read through that a few times and something occurred to me. Since when did loaners have so much power? If I buy a lot of bonds of a company I don't have any managerial clout at all. At least I've never heard of anything like that.

As a side-note, I looked this up and found major bondholders can sit on the board of directors for representation. I don't know how much power they actually have though. Interesting.

[adrock3215]

This likely will not happen.

WASHINGTON -(Dow Jones)- Amid fears that Citigroup Inc. © and Bank of America Corp. (BAC) are 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."

...

Asked if his comments on nationalization left the White House with some wiggle room, Gibbs said a private banking system regulated by the government is "what this country should have."

"I think I was very clear about the system this country has and will continue to have," Gibbs said.

Edited February 20, 2009 by adrock3215

[Ordr]

I'm wondering if that was a "pragmatic" statement to help ease the psychological stress from the market losses today. I don't believe him.

[brian0918]

"I think it is unwise to believe that either everything we do is designed to cause an immediate market reaction or that the score should be kept by that"

So they didn't just whip up this press release to get stocks to go back up? Seems unlikely.

a private banking system regulated by the government is "what this country should have."

Of course, that leaves plenty of wiggle room. They can either say that banks temporarily need to be nationalized to get them back to the way they "should" be, or they can hide the nationalization in the "regulation". Experience shows that that's more than enough room for doubt.

Edited February 20, 2009 by brian0918