February 13th, 2009

The Problem is Political
and Bill Seidman is right:
Nationalize, purge then re-privatize our zombied
Too Big to Fail banks

Posted in Money, President Obama by ed

Time for the President to heed sage advice and
See here, sir! — cut the Gordian Knot.

seidman.jpg

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21 comments

  1. ed says:

    It was a rough weekend for Tim Geithner, days after his uninspiring debut:

    1. Criticism from fellow finance ministers at his first G7 meeting, in Rome. They seem to have spooked the poor fellow:

    geithnerspppok.jpg

    2. Sunday Times heat from the paper’s top finance writer.

    3.  And calls for “nationalization” from various voices including Nouriel Roubini on the Washington Post op-ed page:

    QUOTE

    Basically, we’re all Swedes now. We have used all our bullets, and the boogeyman is still coming.
    Let’s pull out the bazooka and be done with it.

    END QUOTE

    His suggestion is in substance identical to the Seidman plan. That is: “Nationalization” is just a step and a moment in a process that winds up:

    (i) returning the healthy bodies of the purged zombies to the private sector, and

    (ii) harboring the wounded assets from all the seized zombies in one gov’t trust, where they live out their lives in peace and try to make amends.

    Come to think of it, why do people even use the term “nationalization” when discussing this notion? “Seizure” would be better. The N word conjurs eg “nationalized oil company” — an ongoing enterprise owned by the state.

    Meanwhile the President said yesterday that Geithner didn’t really mean it about restricting Wall Street top-dog pay in exchange for bailout favors.

    I see that Yves Smith at Naked Capitalism is now regularly using “Team Obama.” I’ve been using it much longer (and have had a few exchanges with her). Hope nobody thinks I’m mimicking her style (which I dig).

    That would be embarrassing.

    February 15th, 2009 at 11:39 pm

  2. ed says:

    A little more from Jamie Dimon (head of JPM) at Davos on nationalization:

    He said, “I think too much loose talk of nationalization hurts everybody. It confuses the market and it makes it harder to raise private capital if you want to do that. So I hope they come up with a plan with a clear vision, a clear mission statement and execute it.” END QUOTE

    I should say that of all the big US banks, JPM seems in best shape, is probably not now a Zombie and perhaps may never be one.  (This is why it’s not included in the Zombie stock charts linked in the main bit.)

    And Mr Dimon himself, who worked his way up the ladder from Queens, is well respected as a forthright, straight-shooting can-do guy.  You can see/hear this during video/audio interviews.  Not typical corporate fare. People who work for him seem to like him a lot.

    It makes sense then that he would be the one at Davos (rather than Pandit at Citi or Lewis at Bank of America) urging the feds to Just Say No to nationlization.   So far JPM has taken less fed assistance, and (story goes) tried (without success) to refuse the TARP cash-equity swap.

    And his point makes sense:  If nationalization is on the radar, of course it will be hard to convince investors to buy in (when the gov’t tomorrow might stamp your stock certificate DEAD).

    This to my ear however is just one more reason Obama should tell Mr G to start swinging the axe on the Zombies ASAP.  Consensus seems that Citi is the one just cruisin for a bruisin.’

    Instead, Geithner has suggested hodge-podge old-hat half measures.  Leaving nobody on the planet happy. Including Dimon, the theme of whose speech at Davos was just this (that the gov’t so far has said nothing of consequence and needs to get its act together).

    February 16th, 2009 at 6:30 pm

  3. Surfwalker says:

    Nice piece.

    I take it that what’s really at stake here is what you call “forcing the issue.”

    Why couldn’t that be done without a transfer of ownership of the banks to the government (i.e., by just threatening to remove the Treasury drip)? Is your view that the banks would, following the example of Lehman, sooner go down and take the world with them than cooperate? But if so, under what conditions would nationalization amount to anything more than calling their bluff and picking up the pieces?

    February 17th, 2009 at 7:31 am

  4. ed says:

    Surfwalker,

    The simple answer seems:  They’ve already done that pressurizing dance twice: During and shortly after passage of the TARP. And during the transition and January as Team O tried to put together a plan.

    Results: Nada in October — the whole TARP buy-up idea was dropped days after it was bought by Congress.

    And now, for the new prez, Dimon’s speech at Davos seems the answer: Get lost.  (“Stop talking about damn nationalization …”)

    The Paulson-Geithner soft shoe.  Two dances, no score.  Because both parties at the table have sound reasons for saying no deal.  Thus the need for a political remedy.  And somebody able and willing to swing the axe.

    THE LEHMAN PRECEDENT I imagine is like a shrieking ghost on the line during all these calls.

    You suggest (or wonder aloud) that anyone would be as irresponsible or anti-social as to wreck the world system just to protect his corporation and shareholders.

    Yet we have two big recent test cases:   Lehman, told that no gov’t “encouragement” for its sale would be forthcoming, goes out the next morning and pushes the bankruptcy button.

    Then, the next two days, AIG and Goldman do NOT back down, threatening (implicitly if not on the phone) to do what Lehman did — and Paulson caves.

    Any sign in either case of bank directors waxing pro bono publico?

    But Paulson never pulled back the flap on his trenchcoat to flash the executioner’s axe.  Whereas the Seidman plan smiles like Clint Eastwood as it does so.  Off with their freakin’ heads.

    Maybe if Geithner practiced the Eastwood grimace and move before the mirror for a couple weeks he might get somewhere with the pillars of the owner-operator class who run the big banks.

    But … Not yet clear to me that he wants to be anything but their boy.  The Doogie Howser ideal …

    doogiehouser.jpg

    February 17th, 2009 at 12:29 pm

  5. ed says:

    Alan Greenspan jumps on the wagon, in a Financial Times interview:

    QUOTE

    “It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”…

    The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

    END QUOTE

    See Naked Capitalism for more chat re Elmer’s latest vibe.

    So: don’t buy any bank stocks til this settles one way or another.

    I imagine the rest of the stock market would fly heavenward, at least for a while, if we woke up one day and Citi and perhaps BoA were in receivership.

    I do think Geithner has left himself an out — with the stress test” idea.  It’s a pretty easy press conference. Yes, certain Zombies have failed their stress test and so … well, in situations like these … There are times, you know, that uh bold steps are um …  So we’re going to take their heads off.  Their freakin’ heads off.

    And then Geithner’s ensemble of band-aid ideas can come into play for institutions this side of paradise …

    So perhaps things will work out.  Zombies laid to rest before Easter would be nice.

    February 18th, 2009 at 5:07 am

  6. ed says:

    It occurs to me to clarify (re the Price of Pork Bellies section in main piece):

    Sure, if Tsy buys assets from a seized Zombie, at a price lower than the Zombie has it marked in Level 3 — then fine, who cares, because the Zombie has already been beheaded.  The old corporate entity has passed on to the land of the fully dead.  But  …

    If the Accounting regs are read such that those sales (within the nationalization moment, where both parties are Uncle Sam) are read as triggers for FAS, then OTHER institutions still alive MIGHT INDEED get hurt, having to recognize those sale prices as current “market value” and thus having to write down there on (of same sort).

    One hopes (trusts …?) these “forced sales” are already explictly exempted somewhere in FASBeeland. And that thus this worry should not get in the way of the chainsaw work.

    But if not already exempted … Well, I figger part of the nationalization program has to be FASB supplements to make sure that the slaugther of the Living Dead doesn’t hurt other institutions.

    February 18th, 2009 at 6:07 am

  7. ed says:

    Japan and Sweden are the finalists in this season’s Zombie Slayer

    And they distinguish the Seize-Purge-Re-privatize way — Chainsaw Bill’s “Bridge Bank” (itself generally speaking a “Bad Bank”) — from the “Aggregator Bank” idea that’s also often referred to in the press.

    Here re same is something handy from SEEKING ALPHA:

    Many people like to associate nationalization with socialism, but I see it differently.

    Nationalizing banks is just controlled Darwinism. It’s a way of exterminating the dead banks in the least harmful way.

    This “aggregator bank,” as the early details describe, appears to be hinged on helping the zombie banks survive. This is, in essence, what Japan did.

    I have maintained since October, that some sort of Swedish approach would be the best approach.

    Sweden essentially performed triage on the largest banks in Sweden. If the bank needed government assistance they were nationalized & the equity was wiped out.

    Sweden did this with minimal moral hazard because they did not attempt to negotiate asset prices as the U.S. government plans to do. If you needed government funding to survive there was no price negotiation.

    In addition, they made sure that a nationalized bank did not become a government-run bank. A separate authority managed the nationalized banks.

    Within a few years Sweden’s GDP was growing at a steady 3%+ clip and their market rebounded swiftly …

    … and the Swedes lived happily ever after. Right, Surfwalker?

    February 19th, 2009 at 8:09 am

  8. ed says:

    Aha.

    After the embarassing story in the Times ten days ago, here in The Washington Post is Team Geithner, doing its sad sickly best to put a good face on the embarrassing affair.  Like something out of the tv show West Wing:

    – Separating Obama and his inner circle from the confusion and (to date) failure of Team Geithner as much as possible.

    Eg, Post sez it wasn’t that Geithner and the Inner Circle disagreed (as Times reported) but rather that Tim discovered obstacles at the 10th hour and changed his mind.

    ?? But Tim has been at the center of this storm since before it swirled together.
    – Even: Team Geithner (story says) didn’t talk much to the inner circle about what they were doing.

    It also trots out — as the core reason that made Tim change his mind at the last moment — the sad stupid fig leaf (do they trot?) that “toxic assets” are too complicated for “the government” to “price.”

    Sure kid sure.

    The world has been “pricing” them for two decades.

    What government CAN’T do — without seizing the Zombies and taking their freakin’ heads off — is compel a big corporate bank to SELL at prices too low, in the directors’ estimation, to fulfill the Highest Duty to shareholders (themselves).

    There are three or four other rather pathetically transparent offerings in the piece. Sad … Poor Tim. Off on the wrong foot (again).

    February 19th, 2009 at 8:23 am

  9. ed says:

    Ding ding ding. Another convert:

    The NY Times — indeed, the Sunday Times — editorial page.

    Calling in measured tones for nationalization.  And naming Citi and BoA.

    They seem to contemplate the gov’t operating the seized banks indefinitely, however — blind as of yet to that aspect of Chainsaw Bill‘s plan, which returns the purged body to private life as soon as it’s financially sensible for the gov’tal owner to to do so.

    The Times couches the basic point well, however:

    QUOTE

    Taking over big failed banks will be very difficult politically. But technically it could be easier than many of the elaborate rescues that have been tried and proposed.

    END QUOTE

    … and that have already failed in the past 18 months.  Whereas Seidman’s S&L template is tried and true.  Not that Citibank is a savings and loan …

    February 22nd, 2009 at 12:29 am

  10. Surfwalker says:

    The Swedish approach: my $ 0.02.

    1. It’s hard to understand anything that goes on in Sweden outside of a socialist context. Socialist traditions run deep here, even as the country is as deeply capitalist as the U.S., if not more so. I have long questioned the traditional distinction between capitalism and socialism and at this point see it as little more than rhetoric. One could quite successfully argue that socialism, to its deepest roots, aspires to be a form of “controlled Darwinism.” It is a matter of record that Marx greatly admired Darwin and that his basic position was that socialist economies would blow capitalist economies out of the water. The moral standpoint was secondary. But I digress.

    2. I previously aired a concern about what, in effect, nationalization (implicitly, Swedish-style nationalization) would amount to in an American context. What happens over here is that Finansinspektionen (more or less like the SEC but different) revokes a bank’s license and issues a statement that the bank’s assets have been transferred to Riksgälden (more or less like the Treasury but different). Presto! Various parties may piss and moan to reporters and even threaten feeble court challenges, but nobody seriously disputes what has happened. Needless to say, developments would not likely progress so politely in the States.

    3. To say that “Sweden did not attempt to negotiate asset prices” is an understatement. The nationalization this past autumn of Carnegie, Sweden’s erstwhile sole investment bank, was predicated on what Americans would regard as procedural improprieties, which is not to say that the bank wasn’t guilty as hell.

    4. The claim that Sweden, back in the ‘90’s, made sure that “a nationalized bank did not become a government-run bank” (given what “government” means in the U.S.) is preposterous, though it would be correct to say that the state honored its pledge to return seized bank operations to the private sector. The confusion may partly be explainable by the circumstance that discussions of the Swedish approach have failed to account for the circumstance that the Swedish word “regering” (“government”) is only properly used (more or less) to refer to the administration in power. A career civil servant employed by the tax authority would not be referred to as a “government employee.”

    5. As for living happily ever after, Sweden, along with much of the rest of Western Europe, is evidently at the threshold of a banking crisis that may turn out to be more severe than the one over there and that is certain to warp power relations within the EU (with Germany, naturally, emerging as the winner). It has been very convenient for Europeans to blame everything on America for a year and a half now, but the chickens may soon be coming home to roost.

    6. Notwithstanding the above, and in the spirit of preaching what I practice, I share your hopes that a Swedish-style approach to America’s problems will be pursued!

    February 22nd, 2009 at 6:19 am

  11. ed says:

    THANKS, Surfwalker.

    SOmething more thoughtful in reaction to come, no doubt.

    Meanwhile: Paul Krugman signs up for nationalization.

    Even as poor Ken Lewis of BoA is out there saying “we don’t need it!” Maybe not, Ken, but this isn’t about you. WE need it. We need to stop pouring money down your hole.

    It’s sad (truly).

    February 23rd, 2009 at 6:04 am

  12. ed says:

    Then again — it’s clear that so far the Obama admin is set against nationalization pure and simple.

    They favor half a dozen half-measures applied simultaneously in the appropriate spots.

    They favor continuing to give the big banks little shots of love when they need it most.

    The “stress tests” are said to be coming this Wednesday (two days hence, the 25th). But there are stories around that they are hardly staffed, will hardly be investigative and in essence are a publicity stunt — designed to support the Geithner approach by showing the world that the big banks can endure. With a little (more) help from the Tsy-Fed twins.

    Meanwhile Bennet Sedacca at Minyanville.com reports the the rating agencies are downgrading another ton of mortgage-related structured finance instruments:

    QUOTE

    Last week, there were 9000 [s-f issues] option ARM downgrades.

    If that weren’t bad enough, today S&P downgraded hundreds of prime jumbo deals. Some from AAA to C.

    This will hurt the supposedly “well capitalized” banks.

    The tsunami continues.

    END QUOTE

    February 23rd, 2009 at 1:31 pm

  13. ed says:

    Two loud voices today AGAINST nationalizing the big and technically insolvent banks: The Wall Street Journal and Jumpin’ Joltin’ Jersey Jim Cramer.

    Both say Citi and BoA are too big and their obligations too complex for the Gov’t to take on.

    Cramer also says it would be too expensive. Up to $5 trillion. I guess he is contemplating a seizure that would wipe out common shareholders but pay off all other stakeholders at par and maintain existing credit obligations. (But why not just allow them to hold their bonds and maybe pref’d shares and let hte operation continue to make their interest payments?)

    He also seems to contemplate the gov’t holding the banks for many years, instead of a quick turnaround the only aim of which is to seize the wounded mortgage, credit-card, auto loan (anybody else?) s-f assets that would have been bought by TARP if the banks had been willing to sell.

    In any case, it seems that Geithner is himself dead set against seizure and we are likely to see instead a panoply of small bore initiativea out of Tsy to keep the Zombies breathing until the sun comes out.

    Perhaps there is a way — I’m talkin’ about the law, eminent domain — to seize the wounded s-f assets without seizing the corporate entity that owns them?   If so, perhaps Geithner might get that show on the road — and before the curtain went up, perhaps the bank directors would say Uncle and hit the TARP’s bids — ie sell at (say, for mortgage bonds) 25 cents — thus giving the juice to the gov’t.

    The gov’t would then have to manage — rather passively — one huge trust that owns a ton of structured finance bonds bought at prices well below best guesses as to total return.   No time or regulatory pressures to worry about.  Let them live out their lives.

    February 24th, 2009 at 12:54 pm

  14. ed says:

    And of course:

    If Obama-Geithner actually set this eminent-domain type seizure into action, it’s likely that the ZOmbie directors would finally sit down at the TARP table and close sales — hitting Treasury bids for eg mortgage bonds at around 20 to 30 cents.

    So the most likely result seems no seizure at all — merely pressurizing the Zombies enough to give up the Juice on these wounded assets that are burning down the city.

    See this piece by Minyan Peter, a former banker at Minyanville.com, and my comments thereto, outlining this notion of direct seizure. Perhaps will generate some chat there …

    February 24th, 2009 at 2:51 pm

  15. ed says:

    For what it’s worth:

    Former Treasury Secretary James Baker comes out in the Financial Times for the Seidman plan (in essence, despite professed shyness for the word nationalization) for “hopeless“banks.

    March 2nd, 2009 at 5:35 pm

  16. ed says:

    Obama in a Times interview went out of his way to say he pays no attention to blogs calling for “nationalization” of the banks.

    Krugman replies accurately that the prez seems not to realize what’s being called for: a process involving seizure aimed at restoring solvent big banks to the private system ASAP.

    The tone of the interview:  We cool!

    651,000 jobs were axed in February.  Not cool.

    March 9th, 2009 at 1:31 pm

  17. ed says:

    ZOMBIE ALERT

    Wall Street Journal reports that Citigroup is again knock, knock knocking on the Gov’s door.

    The many silly propositions and implications the Journal here delivers are discussed at Naked Capitalism.

    My own focus is on the lead:

    QUOTE

    Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount …

    Federal officials describe the discussions, which are wide-ranging and preliminary, as “contingency planning.”

    Regulators are trying to ensure that they are prepared if Citigroup takes a sudden turn for the worse, which they aren’t expecting, these people say.

    Citi executives said they haven’t detected signs of corporate clients or trading partners withdrawing their business, even though … shares are hovering near $1 apiece …

    Citigroup says it has a strong liquidity position and that its capital levels are among the highest in the banking industry.

    END QUOTE

    These assurances ring familiar, of course.

    Alan Schwartz, of Bear Stearns, a week before it went under.

    Then that chick CFO of Lehman, repeatedly stridently brow-beating her naysayers …

    Then poor Bob Steele of Wachovia, toe to toe with Jumpin’ Joltin’ Jersey Jim Cramer.

    Seems it’s been about five to seven business days after such assurances are broadcast that the bank has gone under.

    Beware the Ides of March.

    March 10th, 2009 at 6:51 pm

  18. ed says:

    BUT ALSO, TODAY — three positive hints:

    – The WS Journal reported that with arm twisting from Barney Frank the SEC is likely to reinstate the “uptick rule” next month.   This requires short-sellers to wait until a stock “ticks” up (indicating net buyers at work) before able to execute a short-sale.

    This rule was rescinded … can’t quite recall, three years or so ago.  Under foolish Christopher Cox at the SEC, a move that will be looked back on along with the FAS 157 (mtm) and Glass-Steagall as disastrous deregulation at the fag end of what Reagan wrought that helped turn the pop of the housing bubble into fixed-income armageddon.

    – Bernanke talked at some length about revising the mark-to-market accounting to accommodate the fact that not all valuable assets always have markets and most valuable assets sometimes don’t.

    See here, sir, for more press and threaded discussion on MTM thru time.

    – Boom Boom also tried to soften the nasty FOMC minutes released on Feb 20, wherein the Fed govs were seen estimating that the depression would last another three to six years “absent further shocks.”  Pretty shocking, eh what?

    Today Boom Boom suggested that “recovery” might be evident by the end of this year.

    Wonder why he said that …

    THUS, IN ANY CASE, the Dow 30 was up nearly 400 points — having dropped an ASTOUNDING 22% in the month since Timmy Geithner gave his silly speech.  That’s two “corrections” in 30 calendar days.  That my friends is f&*#&$d.  The Invisible Hand of the market giving you the finger.

    But today they were up, on this regulatory rumor, despite the news (see prior comment) that Citigroup seems to be staggering toward receivership despite Timmy’s best band-aid efforts.

    The downdraft under Obama-Geithner has been so steep that nine out of ten traders seem now to expect a rally of a week at least.  Some more.  Some are saying this is The bottom. Burp.

    March 10th, 2009 at 7:30 pm

  19. ed says:

    Here’s a bank CEO talking about why he didn’t participate in the TARP.

    March 11th, 2009 at 2:19 pm

  20. ed says:

    With a friend like this, Timmy G needs no enemies.

    March 12th, 2009 at 8:57 pm

  21. ed says:

    At the weekend G20 meeting, the Big Banks told the ministers that Obama-Geithner should be pressured to buy wounded assets and put them in a gov’t trust (aka the Bad Bank).

    Familiar enough, and confirmation that the basic dispute here is about who gets the Juice — the current holders (banks) or the prospective buyers (gov’tal orgs).

    March 16th, 2009 at 11:29 am

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