On the rough road toward nationalizing the banks
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The blogosphere is filling up with ideas about what to do with big banks and their still-monumental pile of toxic or potentially toxic assets.
The Irish and the British are heading further down the rough road toward nationalization of their sickly lenders. In the U.S., Citigroup Inc. still is owned by its common shareholders, but with the shares at $3.50 many investors obviously believe the company has been effectively nationalized because of the level of government aid it has sucked up.
If U.S. bank stocks dive further as trading resumes on Tuesday, it will be a sign that more investors figure nationalization is inevitable here. The average U.S. big-bank stock is down 29% year to date, and some have fallen even faster: Bank of America, down 49%; Wells Fargo & Co., down 37%; and Zions Bancorp, down 33%.
One argument for full nationalization comes from Willem Buiter, an economics professor at the London School of Economics and a Financial Times blogger. . . .
Instead of piecemeal government measures including capital injections and asset-insurance schemes, he thinks it makes much more sense for the feds to take control of ailing banks, split each into a ‘good bank’ and a ‘bad bank,’ and go from there.
His idea differs from one the Obama administration appears to be considering, which is to create one federally managed bad bank that would buy assets from lenders to clean them up, while leaving them in shareholders’ hands.
With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard. Although [state] owned, the banks would be mandated to operate on ordinary commercial principles. Managers could be incentivised by linking remuneration to multi-year profitability. The incentives for excessive liquidity accumulation and for excessively cautious lending policies that exist for partially nationalised banks and for banks fearing nationalisation would, however, be eliminated. In addition, full [state] ownership of the banks would greatly facilitate the creation of a ‘bad bank’ that would hold on its balance sheet all the toxic assets (illiquid assets of highly uncertain value) currently held by the high street banks. The key problem with any bad bank proposal is the price it pays for the toxic assets it acquires from the banks. If all the banks, and the bad bank, are publicly owned, this problem goes away. The toxic assets are simply moved to the balance sheet of the bad bank. They could be valued at anything from zero to their notional value or historic cost (or even higher). It would be a redistribution of wealth from one state-owned entity to another state-owned entity.
Blogger Felix Salmon at Portfolio.com also argues that ‘nationalization is the best alternative’ at this point.
Except, of course, if you’re a bank shareholder.
-- Tom Petruno