For proponents of bank nationalization as a panacea for our problems, it should be pointed out that the FDIC nationalized IndyMac last year. They just sold it (after failing to find any larger banks that would buy it) to a consortium of former Goldman Sachs executives and hedge fund managers (including George Soros). They sold it at an estimated loss of $10.7 billion. The FDIC provided $9 billion in financing to the consortium and agreed to assume 80% of the losses on future (existing) loan defaults. That is what nationalization looks like.
Two points on this:
1. Notice that the FDIC had to go looking for hedge-fund owners and ex-Goldman Sachs execs when they couldn’t find any larger banks to buy out IndyMac. One of the major concerns we keep hearing about Geithner’s plan is that it will enrich hedge fund operators. How is nationalization different?
2. Notice that the taxpayer lost over $10 billion in this transaction and that we had to provide a loan of $9 billion and to assume 80% of the losses on future (existing) loan defaults. Once again, sweetheart financing and the assumption of risk by the taxpayers are key issues that are raised in opposition to Geithner’s plan.
I think it is safe to say that if no banks were able or willing to swallow IndyMac, no banks are going to be able to swallow Wells Fargo, CitiGroup, or Bank of America. Who will buy them back from the government? A: Hedge Fund managers and ex-investment bankers, that’s who. And they’re not going to buy them without sweetheart financing and the assumption of risk for future loan defaults by the taxpayer.
There are good reasons to nationalize the banks and (certainly) to fire current management. But don’t think we can avoid these fundamental realities by nationalizing banks.
Update [2009-3-21 20:57:19 by BooMan]: Jerome Guillet pointed me to an Economist article about hedge-fund manager John Paulson, who made $3.7 billion shorting mortgage products. He’s one of the hedge-fund managers, along with George Soros, who bought IndyMac. Short high, buy low. Few people have profited more directly off our misery, but this is one of the guys the FDIC has to go to to buy off a nationalized bank. I think there is a lesson in there for all of us, and it relates to the futility of trying to punish the bad guys.
No one says that Nationalization = Taxpayer Profit/Panacea. No.One. Fighting a strawman is pointless.
What nationalization does do, however:
Geithner’s plan to buy off banks’ bad assets at overvalued prices accomplishes none of that.
One final point- nationalization in this situation is nothing more than what the FDIC does all the time, so shooting at this as an option means you fundamentally think the FDIC shouldn’t exist.
It’s not like nationalization is luxury that we can simply have at a time of our choosing. Nationalization is something that is forced on us because of insolvency. Geithner and Obama (and you?) seem unwilling to admit that the core problem is that the banks are insolvent. This isn’t a problem of confidence or panic, it’s a problem of having wildly overvalued assets that the banks can’t/won’t unload.
I’m pointing out the rose-colored glasses people have on, not trying to put on rose-colored glasses.
On your points, though:
1. Recapitalizes a bank that has, for whatever reason, become insolvent.
Geithner’s plan certainly would recapitalize banks. I have no idea why you would suggest otherwise.
2. Establishes, for better or worse, a clear resolution in the midst of uncertainty and chaos.
Nationalization does hold the edge here, at least in theory. However, we don’t have the money to do nationalization of all the majors, nor do we know how the defaults would outflow and cause collateral damage. Don’t overstate the clear resolution aspects of nationalization.
3. Reestablishes the flow of credit to businesses.
How? How does it do this any better than Geithner’s plan, which also involves a lot of new federal lending?
4. Allows for the taxpayers to benefit if the bank is possibly undervalued (by profiting when it is inevitably privatized).
We lost nearly $11 billion on IndyMac alone. Geithner’s plan involves a share in any equity-based profits as well as interest payments on all loans. It has potential upside, just like IndyMac did.
My point, again, is not to talk-up Geithner’s plan, but to make clear that the bulk of our problems are unavoidable.
Nationalization is still the best plan of a sorry lot of plans. Not by much…but there you are.
But you’re absolutely right BooMan: much of the economic pain, chaos, and disaster is unavoidable. The entire financial system is broken beyond repair, and working through it will most likely reduce our standard of living in America precipitously.
Get used to living within your means again, folks. In fact, get used to making yourself as self-sufficient as you can. Go to the library (while your county still funds them). Get books on useful, practical skills: general repair, do-it-yourself type things. Get to know your neighbors. You’ll need them when things get bad.
From here on out we’re playing to avoid the worst effects of a depression. Best advice for the micro level in your neighborhood? Make yourself useful. If you can’t answer within 5 seconds how that whatever it is you’re thinking about buying is going to be useful to you and allow you to be useful to others, then you don’t need it. It’s that simple.
Geithner’s plan certainly would recapitalize banks. I have no idea why you would suggest otherwise.
I differentiate between injecting liquidity into banks for a little overpriced equity, and investing in a bank by purchasing its outstanding shares at market value. Otherwise, it’s not a “real” recapitalization, but rather a subsidized liquidity injection.
The difference is in how much risk is being taken on. Not all risks are the same. Given the high degree of likelihood that a lot of these banks portfolios aren’t worth that much, logic would dictate that the investor (the US government) ask for a larger stake in the upside.
Quite simply, if these toxic assets weren’t so toxic, then perhaps some low rate interest payments and just a sliver of equity would be an acceptable reward for the low risk. But that’s NOT what we’re dealing with here, and so we shouldn’t pretend that it’s acceptable.
How does [nationalization] do this any better than Geithner’s plan, which also involves a lot of new federal lending?
Uh, because these big banks aren’t lending right now, even though they’ve been given plenty of money to do precisely that? Because Geithner’s plan is designed to bail out the banks’ bad bets, which (as we see now) will not necessarily force the credit to flow again?
With control of the insolvent bank, the government has a vested, political interest in keeping the money flowing. That’s not necessarily true if the insolvent bank stays in private hands, as the old investors will be looking to actually tighten their lending and “ride out” the bad times.
We lost nearly $11 billion on IndyMac alone. Geithner’s plan involves a share in any equity-based profits as well as interest payments on all loans. It has potential upside, just like IndyMac did.
You misunderstand where the upside might possibly be. I don’t think there’s any likely upside to buying Insolvent Bank A and reselling Insolvent Bank A less than a year later. Rather, there might be upside in buying Insolvent Bank A, chopping it up into smaller, Profitable Banks B,C,D…n, and selling those individual units off many years down the line.
Obviously, that wasn’t done with IndyMac, but just because receivership didn’t profit us with IndyMac doesn’t mean it won’t ever happen. Our government failed to rescue our citizens after Katrina, but that doesn’t mean the government should stop trying to rescue citizens in future disasters.
The bottom line is these banks are insolvent. They’re not suffering from a “run” or a panic. Their assets aren’t enough to cover their liabilities. Period. You either are willing to admit that, or not. If you are willing to admit that, then you should also admit that the FDIC has a standard and time-tested treatment for insolvent banks. They’ve been doing this for decades.
Expensive and ugly and unlikely to end well for taxpayers, yes. But it’s the least bad option available. I have a vague sense of deja vu here- back in 04-06 I remember lots of liberals screaming that withdrawal from Iraq would be bad and ugly and therefore we shouldn’t advocate for it. Just because it’s bad doesn’t mean it’s just as bad as everything else.
First of all, let’s be clear about what I’m saying. Or, what I am not.
I am not saying that I oppose nationalizing insolvent banks. I am not saying that that is not the best option. I think we have to look at that on a case by case basis, and I think it’s wrong to argue without much evidence that all the banks are insolvent. But I accept that some and probably many are insolvent.
What I am doing here is looking at a concrete case of nationalization and pointing out how similar it turned out to be to all the concerns people have about Geithner’s plan.
Now, you’re right that the FIDC can hold onto banks for a long time, and that they can sell them off piecemeal, and that doing those things can improve their chances for breaking even or making a profit. I’d add that doing those things will help solve the too-big-to-fail problem.
So, I am not in full disagreement with many of the points you are making. But I also think you missing the mark by not really understanding what I am getting at with these posts.
Some things to focus on:
So, what I want to drive home is that a lot of the complaints we’re hearing about Geithner’s plan is really just howling about an unavoidable injustice. And, if that’s the case, we need to hone our reasoning a bit.
Provided it’s done right and given enough time (i.e. “provided government is run competently”), let me respond:
The reasoning is plenty honed among the veritable herd of economists that hate this thing, IMO. These assets are nearly worthless, yet Geithner continues to come up with newer, more exotic plans that always attempt to obscure this simple reality.
You’re right that we don’t have good evidence (yet) that these banks are insolvent, but who is responsible for that? Who should be doing everything in his power scrutinize the banks’ books, and who should be forcing receivership in the case of insolvency? Who has been the one that is constantly “vague” on the details? If only there was, like, a titular head of our nation’s banking system that could have the power to audit these banks and get the real scoop…oh wait.
Galbraith has a simple solution, and it involves your IndyMac example. He wants the FDIC to examine the loan records and extrapolate that to the other banks. If IndyMac’s portfolio ended up worth $.30/dollar, and that puts these banks underwater, then voila, there’s our evidence. How confident are you that Geithner is doing that, or even wants to do that? Yeah, me neither, Atrios.
Don’t you think that’s strange?
I think we have to use our imaginations a bit when discussing these things. You’re making an honest effort.
The first thing we need to deal with is the size of the banks that we’re talking about nationalizing, their diversity, and even their international components. I think we want to break these banks into parts, but we have to be realistic about how small the pieces are going to be. We’re not going to break Bank of America into 2,000 mom and pop savings and loans. If the government is going to hold on to BofA for 3-5 years and sell it off piecemeal, those pieces are still going to be huge and there is a very limited universe of investors that will be in a position to raise that kind of capital.
So, let’s keep that in mind.
The most likely scenario is that the IndyMac example will hold but there will be several different consortiums that come together to buy different pieces. And because there is so little competition, they will be able to dictate very favorable terms, even 3-5 years out.
Think about an asset like Terrell Owens. Tremendous upside, but not too many buyers. He winds up going to the Buffalo Bills because they are in danger of going under and they need the star power, they have to compete with great teams in their own division, and it’s worth rolling the dice. But they don’t have to pay normal market value because few others are willing or need to take on that much risk.
It might not be the exact same people, but they all know each other.
The reason Geithner wants hedge-fund managers to buy up toxic assets is the same reason that the FDIC wants them to buy nationalized banks. No one else can afford to do it.
And, on that Terrell Owens analogy, he’s valued low because he’s untrustworthy, but that doesn’t mean he’s worthless. The Eagles made the Super Bowl because of him before he became an intolerable distraction. These toxic assets should not be assumed to be worthless, not should we assume that any increase in their value is a mere inflation of the bubble.
Thanks for all your posts today, BooMan. These topics are not getting sufficient coverage elsewhere.
Bankruptcy is a better choice. Except Goldman Sachs would not get paid back 100% and that’s who really runs this country. In bankruptcy, the stock and bond holders lose, not the taxpayer. The business continues under Chapter 11. In the case of banks, the depositors are protected.
what I am trying to point out is that IndyMac went bankrupt and we lost $10.7 billion anyway. I hope I am clear on this.
Why was Indy sold into the current market – pretty much guaranteeing a loss?
Is there some law that says a nationalized bank has to be sold within some time period? – cuz that wasnt a ‘sale’, it was a give-away, with all the trimmings.
Why was Indy sold into the current market – pretty much guaranteeing a loss?
Is there some law that says a nationalized bank has to be sold within some time period?
To answer your questions: because our banking reform is currently being done incompetently; and NO, there is no requirement to reprivatize a bank within a certain timeframe (AFAIK), nor is there requirement that the bank be sold the same way it was bought- it can be sold in smaller chunks over a period of years, which is where the chance of upside comes in. But Booman won’t tell you that, instead choosing to shout “IndyMac OOGA BOOGA BOO!” in order to scare people away from the inevitable receivership we will have to undertake here.
Booman wants to make it clear to everyone that nationalization will most likely cost the taxpayers a lot of money, which means he’s disagreeing with…nobody. NOBODY. When Booman talks about those who regard nationalization as a “panacea,” he’s knocking down a strawman.
When Booman talks about nationalization, he talks about nationalization as practiced in the USA for the last 30 years or more not about some magical practice that will appear from the sky when we stamp our feet hard enough. What he points out is that the claim that just having FDIC take over Shittybank like it did IndyMac is being made in utter ignorance of what happened to taxpayers money in the Indymac takeover.
We lost money because Indymac was nationalized then spun off instead of being retained as a nationalized business or allowed to declare bankruptcy without nationalization.
Are we saying the same thing? Are you arguing for or against nationalization?
My point is that Geithner and Paulson before him are trying to make the fat cats whole (or better) instead of fixing the Nation’s problems. Why is AIG still selling derivatives? Why isn’t there a credit default swap moratorium while new regulations are under discussion? Why aren’t new regulations being discussed. Because Reagan and Bush made regulation a dirty word and Bill Clinton agreed. Why are the American people treated like children who can’t understand economics or business? Why was Paulson’s dire testimony to Congress secret and hidden from the public? Only thorough informed public discussion can bring about policy changes that benefit the country as a whole. Not closed door “father knows best,dear” negotiations with lobbyists. This is why I call myself the Voice in the Wilderness. Because, like John the Baptist, no one will listen to my reform message.
“I think it is safe to say that if no banks were able or willing to swallow IndyMac, no banks are going to be able to swallow Wells Fargo”
Why would we want them to, anyway? Wouldn’t the merger of two large banks create another bank that’s ‘too big to fail’?
Another question: I heard Sheila Baer say that the FDIC has no authority to seize transnationals like Citi. Is this true? And if so, how would the gvt nationalze a bank like this? If it is true, it would seem like it would require a change in a law and if such a change became public wouldn’t that tip off investors that such a bank was gonna be seized?
Thanks in advance.
do you have a link to the Citi speculation, or did you hear it on radio/tv?
.
Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on Modernizing Bank Supervision And Regulation before the Committee on Banking, Housing and Urban Affairs, U.S. Senate; Room 534, Dirksen Senate Office Building
March 19, 2009
“In the case of a bank holding company, the FDIC has the authority to take control of only the failing banking subsidiary, protecting the insured depositors. However, many of the essential services in other portions of the holding company are left outside of the FDIC’s control, making it difficult to operate the bank and impossible to continue funding the organization’s activities that are outside the bank.”
"But I will not let myself be reduced to silence.".
— Joseph Stiglitz, Nobel Laureate Joseph Stiglitz: Bail Out Wall Street Now, Change Terms Later, Democracy Now!, October 2, 2008
“What creates a crisis of the kind that now engulfs us is not economics but politics. The triumph of the global “free” market, which has dominated the world over the last three decades has been a political triumph.
It has reflected the dominance of those who believe that governments (for which read the views and interests of ordinary people) should be kept away from the levers of power, and that the tiny minority who control and benefit most from the economic process are the only people competent to direct it.
This band of greedy oligarchs have used their economic power to persuade themselves and most others that we will all be better off if they are in no way restrained–and if they cannot persuade, they have used that same economic power to override any opposition. The economic arguments in favor of free markets are no more than a fig leaf for this self-serving doctrine of self-aggrandizement.”
— Bryan Gould, Who voted for the markets? The economic crisis makes it plain: we surrendered power to wealthy elites and fatally undermined democracy , The Guardian, November 26, 2008
CHART: Losses and Bail-outs for US Taxpayer in Context
"But I will not let myself be reduced to silence."What a sad and pitiful post.
Shorter BooMan: Let’s not try to punish the people that created this mess, because it might reflect poorly on President Obama.
Correct?
No. Not correct.
Good. Populism can be your friend. Obama is screwing this up and it’s time to admit the public is way ahead of him.
Now is the time to push progressive solutions instead of bailing out the failed bankster class.
I appreciate the reasonable-ness of your essays on this subject today. Your assessments may be wrong — I don’t know — but, at least, you’re presenting your POV’s in a rational manner. It’s refreshing and somewhat soothing compared to the anger and hysteria coming from others.
I am not a fan of any form of nationalization. I don’t like what the government has done thus far with the banks. The Fed should have done something on a case by case basis to address liquidity requirements and otherwise the government should have kept its finders out of the shit pile.
As for the losses that FDIC took well that is a perfect example of why it should have been left to the private sector. All of these problem banks and toxic assets were significantly over-valued. Delusionally priced far beyond reality. There is not a single deal that could happen where there won’t be a significant loss for someone. That should be pricing the deals for the potential risk and the government should not be making any guarantees. Let the assets find their real value.
I wanted, from the start, for the government to buy the problematic MBA’s outright at the best price that could be defined. Then break up the packages, sell the best assets for whatever they were worth and hold the problems for sale as they improved. With the government renegotiating the remaining problems on a case by case basis for outcomes that would hurt the least for the most people involved.
And we all have to accept the fact that the entire market, real estate, stocks, the whole mess was over-valued by 30-50% and now has to return to reality.
What has happened in just 10-20 years that a hint of nationalization became politically unacceptable? Non-private banks (and transportation, communication, utility companies) were quite acceptable just 20-30 years ago in many countries. What were the problems then? How did political-economic thinking changed in the US so radically in just a few decades?
If the aim of FDIC was to get rid of IndyMac as soon as possible, nationalization does not make sense. But not so long ago the aim of state control was not money related. The aim was to ensure a public function. And that focus looked effective. These non-profit oriented subjects did not cause particular crises to the private sector either. Then the privatization imperative was agreed, and everything functioned in the booming times whatever the system. You can run anything almost anyhow while monetary flows are favorable. But now the problem emerges to maintain civilized social, economic and technological networks with an enormous drag from the financial breakdown.
The capitalist status quo of the Bush (plus Clinton?) era was not sustainable, and it is not recoverable in the foreseeable future. Reduction of the economy to “invisible” workings of profit seeking failed. It is time for governments to recall the job of taking care of public interest directly.
I would say Viva La Revolución! but I believe today’s Americans are infinitely more disposed to suffer – while evils are sufferable – than to right themselves by abolishing the forms to which they are accustomed, no matter how long the train of abuses and usurpations evinces a design to reduce them under absolute despotism, leaving them absolutely destitute.
Pitchforks and torches?
Nah.
Grande lattes for all!
Now, Oscar, you need to credit Mr. Jefferson or that’s just plagiarism.
I thought it was obvious, but I suppose a link would have been appropriate.
It was obvious to many of us from the “old school”. As for those who attended the “new school”, who knows.
As for plagarists: would Mr Churchill, who said “Americans can always be counted on to do the right thing … after exhausting all other options” be judged guilty of plagarism, or merely of translating the remarks of Mr Jefferson into a more modern vernacular.