Thursday, February 26, 2009

YOU SAY NATIONALIZATION, I SAY BANKRUPTCIZATION, AS LONG AS WE CALL THE GEITHNER "PLAN" OFF

An excellent post by Barry Ritholz on the "nationalization" issue. As someone said to me, this piece reads like a primer on the topic. But it's a very short, extremely readable primer, so there's no reason not to check it out. A highlight or two:
As Bloomberg’s David Reilly writes, “The nationalization debate is a smoke screen. We’ve already nationalized the big banks. Let’s just accept it and move on” — and I could not agree more.

* * *

why don’t we call it by a more accurate, precise, and less scary name: FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

That is an accurate description of what occurred with Washington Mutual (WAMU) now part of JPM Chase, and Wachovia, now part of Wells Fargo. The Feds step in, seamlessly transfer control of the assets to a new owner, while simultaneously wiping out the debt, the shareholders, and giving a huge haircut to the bondholders.

* * *

What emerges is a clean bank, no debt, well capitalized, and free of deadly toxic assets.

If we do this correctly, we accomplish two or three things at once: re-capitalize the banks . . . but eliminate the moral hazard of bailing-out the banks' current management and shareholders and the moral unpalatability of throwing our money down the drain as we twittle our thumbs and await the inevitable.

Of course, the longer we wait to do this, the less we end up accomplishing, both in terms of positive outcomes and avoidance of the negative. And, most importantly, we need vigilence and oversight all the way to the end, which is something I really worry about. In other words, if we go to the goal line and then sell the re-capitalized banks right back to the same fucking shysters that drove us into the ditch in the first place -- and sell at a grossly discounted rate -- we will have completely rewarded the wrong people. At our own expense.

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12 Comments:

Anonymous Applesaucer said...

" And, most importantly, we need vigilence and oversight all the way to the end, which is something I really worry about. "

Agreed. I'm with you about the need to nationalize now, but I worry, too, that it will be botched.

Here are several "donts"

1. Don't pull an AIG. The government owns a vast majority of AIG's equity (~80%, I believe), but refuses to put AIG out of its misery. Management doles out lucrative retention bonuses, arrranges fancy company events, goes back to the government time and again, hat in hand. Plus, a government-run entity writing insurance contracts screws up the whole industry. If an employee can put up numbers underpricing hi product because he knows Uncle Sam will make good, how can privately-run insurance companies correctly price their products?

The government needs to get out of the way as soon as possible.

2. Don't send everything JP Morgan's way.

First, we don't want the government to create a 1600-pund banking gorilla (it's already 800 pounds), for trillions of reasons.

Second, IMHO, the dirty little secret out there is that JP Morgan is probably insolvent, too, regardless of how much the press fawns over its CEO. But lucky for JPM, it just so happens to be the government's favorite little pet.

Applesaucer

9:03 AM  
Blogger Mike said...

Unfortunately, if we leave this in the hands of Geithnerians or similar Insiders, we're gonna get something like the two scenarios you point out.

I really hope when the day comes, this is managed by someone who knows what he's doing, with minimal connection to the Looters.

9:20 AM  
Blogger Mr Furious said...

I agree 110%.

I don't like Geithner one bit. And none of Obama's stimulus or recovery plans are worth the white paper they're printed on without a serious plan for the financial sector.

I can only hope all of this is a head fake, because they can't telegraph a takeover, but I fear exactly what you do...last chance at the trough. Then a too-gentle restructuring.

11:37 AM  
Blogger Mr Furious said...

Krugman.

12:00 PM  
Blogger steves said...

Excellent analysis Mike. Biden is the stimulus chief, but who do you think should do it?

9:20 PM  
Blogger Yophat said...

I really hope when the day comes, this is managed by someone who knows what he's doing, with minimal connection to the Looters.

Yeah that will be the day!

Looters have the power. The only way you will get it away is by force. Force requires conviction, determination, and ultimately, sacrifice.

We are not a society interested in sacrifice.

At the end of the day, anarchy will have its way!

12:40 AM  
Blogger Mike said...

who do you think should do it?

I haven't thought of that much, beyond the fact that I want to see Geithner and Summers out, and Volcker in, as the top of the economic team.

But it needs to be someone like Volcker -- a non-insider with the gravitas to take the reins and make decisions outside the interferences of the usual suspects, inside DC and out.

6:15 AM  
Blogger Mike said...

We are not a society interested in sacrifice.

True dat.

At the end of the day, anarchy will have its way!

I doubt it.

6:16 AM  
Anonymous wfta said...

I agree with a lot of this and in fact bankruptcy is what should happen to these companies, but I’ll point out a few differences with the FDIC insolvent bank model:
1. Real commercial banks are (and were) regulated. They would never have the amount of leverage that the brokerage / investment banks have. Instead of insolvency times 1, we have insolvency times 30.
2. The insolvent commercial bank is the exception rather than the rule. There are other healthy banks available to buy it once you wipe out the shareholders and the non-performing assets.
But trust me I am no fan of TARP. I don’t really have an opinion of Geithner, but he may be trying to do the “Dance of the Seven Veils” with too few veils. The market for fixed income is huge. It dwarfs equities. And the demand for collateralized debt obligations was so great that when enough sub-prime mortgages could not be found, the brokers created phantom bonds to sell based on short sales of low rated paper. I recommend this article by the author of the late ‘80’s book Liar’s Poker. http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page1

12:35 PM  
Blogger Mike said...

There are other healthy banks available to buy it once you wipe out the shareholders and the non-performing assets.

Don't doubt it. But we have to wipe out the shareholders . . . and fire the officers.

The market for fixed income is huge.

The latest bubble. It'll pop before year end.

8:49 PM  
Anonymous wfta said...

I think you misunderstood what I meant about fixed income. It is where most money wants to be most of the time. It is where most of Main Street finances its activities. It needs to be as pure as Ceasar's wife. And I don't think we know how corrupted it may have become.

7:48 AM  
Blogger Mike said...

you misunderstood what I meant about fixed income.

I think so. Feel like letting me in on it? I assumed you meant the bond market.

9:24 AM  

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