Skip to comments.Dr. Doom: Nationalizing Banks is 'Market Friendly'
Posted on 02/24/2009 12:15:10 PM PST by marshmallow
Nationalizing insolvent US banks is the best solution to avoid a Japan-like scenario in which 'zombie' financial institutions would eat up public resources while the US economy would teeter on the brink of depression, Nouriel Roubini, economics professor NYU and chairman at RGE Monitor told CNBC Tuesday.
Bank shares have fallen on news of abysmal losses and on fears that governments across the world would step in and wipe shareholders out, dragging global stock markets down, but temporary takeover by the state of the sick institutions will insure the survival of the system, Roubini said.
"The market friendly solution is temporary nationalization," Roubini told "Worldwide Exchange".
"Doing something surgical and radical actually may improve the market sentiment," he said. "If we don't do it, we risk ending up like Japan, that had zombie banks for a decade," he added.
Furious banking consolidation that took place in the years preceding the crisis has made matters worse, as it had created banks that were too big to fail but also too big to save, according to Roubini.
The US government has already provided between $7 trillion and $9 trillion in explicit or implicit support for banks, and taxpayers would actually benefit from nationalization, as they wouldn't have to bail out shareholders as well, he said.
"If you don't nationalize them on a temporary basis the fiscal commitments will be bigger," Roubini said. "The alternative is actually a dangerous debt spiral. We risk ending up in a near depression for the US and the global economy if we don't take this radical action as necessary."
Taxpayers could even make a small profit when the nationalized banks will be privatized again, he said.
AIG (NYSE: aig), which is seeking more government cash after getting ready to report a $60 billion loss, the highest in.......
(Excerpt) Read more at finance.yahoo.com ...
Roubini is in fact a socialist.
I'm sure there are more than a few virgins who after having lost it thought if I were celebate long enough and moved to a new city they'd be a virgin again, but it just don't work that way......
A fact. Why he is sourced I can only guess.
the alternative: change the mark to market rule and cut corp/capital taxes
You really do learn stuff on FR.
He has one thing which most of the major players in this mess and the majority of contributors to this board don't.
A track record of some gravitas.
While all were rushing to invest in the stock market and real estate bubbles he was warning of the approaching danger, along with very few others.
That by itself makes him worth a hearing.
He's been right about the avalanche of bad debt and derivatives problems we've encountered. Of course, the problem is that one can be very right about the problem and equally wrong about the solution. Marx was right when he said the harrowing conditions under which the industrial worker labored were unsustainable, and wrong when he said the solution was armed revolution.
Roubini is calling for the rapists to handle the victims recovery. Absurd.
He's is like any other stopped clock doom-sayer socialist and there have been hordes of them over the decades.
I saw the writing on the wall as did thousands of other well informed people. Why does Roubini have gravitas? Because the media loves socialists. It is the same reason they interview atheists, Greens, PETA people, professors who suggest aborting born children, etc. They want to destroy our way of life.
I regularly flush the kind of gravitas Roubini has.
I would reread Marx. You've drawn the wrong inferences. Marx expounded upon a narrow time period during the history of the island of England. The “harrowing” conditions of the industrial worker were a major improvement over the harrowing conditions of the agricultural worker. The conditions of workers just kept getting better and still are.
Marx got it all wrong.
Are you a college student?
Sure. We all saw it coming didn't we?
Last summer we were overrun with predictions of disaster in September. Right.
Thankfully, this site has a search function and it's possible to distinguish the Monday morning quarterbacks from those who really saw it coming.
Roubini predicted over $1 trillion in losses for banks and he was laughed at. Turns out he was on the low side with that estimate. Whatever Roubini's political leanings, he sure saw through the mist better than Bernanke, Paulson and Bush.
Call me when Roubini calls the bottom and I will be impressed. Don't you wonder why the liberal media love pessimists? They call them realists, but then report on socialist policies as realistic as well. Get the picture?
They hate capitalism, the free market and individual liberty.
Ironic that you focus on Bernanke, Paulson and Bush (who all share some blame), but ignore the Democratically controlled Congresses and Democratic Presidents who created the debacle.
Marshmallow, you are aptly named.
What's that got to do with Roubini's insights on the economy?
Post a link or two to the article of your choice which shows anyone who called this any better than "socialist" Roubini.
Let’s accept your supposition that Roubini called it not just right, but the best of any prognosticator out there.
Any Austrian economist would have and did say the same things. The difference is Roubini is a Clinton insider from Harvard. So he is thrust to the front. The myth and media darling all at once.
The danger is not in his prognosticating, but in his policy making. The Austrians know how to fix it. Roubini and socialists in general only know how to make it worse.
So what's the Austrian fix for this problem?
Whom do you take seriously, Jason?
Apart from yourself.
Lots of people and lots of institutions - career civil servant regulators, heads of major financial institutions, leading investors, financial journalists with their feet on the ground, sound economists with a sense of history and empirical reality, etc. Not doommongering men on streetcorners in washboards seeking fame, or ideologues grinding their axes and peddling their snake oil, or ignorant pols playing to the idiot galleries. You know, men with actual responsibilities or sober objectivity. Little things like that.
The US treasury, the federal reserve, the FDIC, all the major banks and wall street firms, foreign and domestic, the major investment houses, Barrons, Bloomberg, etc. Adults.
Packs of crying children should not be allowed within 500 miles of economic policy.
Lehman......Bear Stearns......Merrill.....AIG......Citi.....Madoff........Zombies......insolvent, defunct losers......
Don't allow private profits and public losses. Don't pass the stimulus bill which simply prints money and increases debt, both of which will harm the RE market and the general economy through inflation and interest rate hikes.
Remove the disincentives from the marketplace like SOX, quarterly reporting (makes the short term more important than the medium/long term), Mark to market rules should be eliminated, etc.
Eliminate tax disincentives like corporate taxes, capital gains taxes, and all double taxation. Make wealth creation easy and everyone gains. Locally, eliminate licensing requirements, minimum/living wage requirements, work requirements on young people and teens.
Split up banks that are allegedly too big to fail. Sell their assets. Bankruptcy works. All this will be painful, but freeing credit markets and getting government out of the way is best and the markets will respond. People will find a way and survive. Eventually, once the dead weight is removed they will thrive.
Roubini advised Argentina, but not Chile. Compare the results. Roubini as an adviser is a menace to America.
Roubini pretends to know and acts smart for the cameras, but his prescriptions are: 1. $700B stimulus package (now trillions) 2. Recapitalization of banks (bad banks) 3. Reducing the debt burden of households (socialize the losses) 4. Ease money supply and restore liquidity (the cause of the original problem)
The largest banks in America are in trouble. Citi and BoA are insolvent. Zombies. There are probably others. AIG also seems to be nothing more than a black hole which is beyond help.
There seem to be three schools of thought as to how we deal with this.
1) Nationalization. The school of which Roubini is a member. In fact, many of our banks including Citi are already effectively nationalized. The arguments against this are that firstly, it will likely lead to a more widespread nationalization. Once one or more banks are nationalized, short selling will completely undermine the rest, their stocks will crater and they will all become moribund. Secondly, the exit strategy. How long will they remain nationalized and who will buy them if and when they are privatized? Anybody?
The pluses to the nationalization argument are that the toxic assets can finally be ripped away, the banks broken down into their working parts, reorganized and given a new lease on life so they can begin working again.
2) Recapitalization. Keep pouring money down the same hole. This seems to be the current strategy. Nobody seems to know how much money will be required nor if it will work and so far, it hasn't. There are several variations on this theme including the "bad bank", buying toxic assets etc. It doesn't involve nationalization, so that's a plus for some but the negatives seem to far outweigh the positives. These banks are too big to fail but also too big to save.
3) Let 'em die. Let the bad banks crater and good banks will emerge to take their place. This sounds fine until one remembers what happened when Lehman went under and the convulsions it caused in the world's financial markets. Citi, AIG and BoA going under simultaneously would dwarf Lehman and would likely deliver a fatal blow to the world economy. Big banks account for about two thirds of our banking system right now.
I posted this thread in the interests of the furtherance of this debate. I'm not a socialist, nor a Roubini shill, nor am I necessarily sold on option #1. There's a real debate going on in government, the media and the finance world about how to do this and we should be able to toss around ideas on FR without calling each other names.
Major bank shareholders cannot be indemnified by the taxpayers against the consequences of their bad investment decision-making. And yes, that means major pension funds and Obama's union allies are going to take it in the shorts, to a certain extent.
Article to support Jason’s defense on B of A:
If you look at their current earnings and their current losses, their earnings comfortably exceed their losses. This would be to look at them on a cash flow basis, and only recognize losses that *actually occur*, *as* they actually occur.
If, on the other hand, you want to look *ahead* to all the losses they may ever take on anything, then you can get a higher figure for their overall losses. But you'd also have to look ahead to their future earnings that will occur at the same time as those future losses. And will comfortably cover them, in every single future time period, and overall.
The only way you can make them look "insolvent" is to capitalize their losses *now*, and to *not* capitalize their earnings, that they will in fact realize over the same period as those losses.
To see how screwy this is, picture a perfectly sound bank holding a portfolio of loans that incur *zero* credit losses, now or ever. Suppose, in addition, that its funding costs are *half* the rate it earns on its loans, initially - say 4% funding costs and 8% loan returns. Now, instantaneously increase the market rate of return on its loans from 8% to 16%, leaving its funding costs unaffected.
Is the bank insolvent?
In every time period, it will earn 4% of the capital value of the loans made. In every time period, its cash inflows will comfortably exceed its cash outflows. Over time, it will eventually realize $2 for every $1 in assets it began with.
Does the bare fact that in a later time period, it can lend at 4 times its funding costs instead of the 2 times it achieved before, render it insolvent, at the moment that increase in future returns becomes possible?
All the rest is noise. The actual loan losses are exceeded by the net interest earned on the entire book throughout. By a huge margin, incidentally, not a little amount.
It is a ludicrous supposition. Higher rates and wider spreads will render the bank more profitable in the future, not less, if those rates and spreads are actually sustained long term. If, as is more likely, they instead return to their original levels, then a mark to market "capital loss" in one period will be offset by an equal and opposite mark to market "capital gain" in another, and the income relations will remain the same as they were when the loans were originally made. Which, in case everyone forgot, were - the loans bring in twice what it costs to fund them.
They simple aren't insolvent. Insolvent means "unable to pay out cash demands on the institution as they fall due". Citi is cash flow positive to the tune of plus $45 billion *per quarter*, enough to cover its entire stock market capitalization *every month*.
All these companies need to do to meet all of their obligations as they fall due, is sit there and let their loan books run off into cash. They can in the meantime roll their short debts at record low funding rates. They simply are not going to go bankrupt doing this.
The only way they can fail is if the government seizes them at gunpoint.
The only reason their stock prices are so low is (1) irrational people can't add and (2) rational ones are quite reasonably worried that the government, listening to the previous, will recklessly seize them at gunpoint in a blind panic, and therefore leave present owners of the stock without any ownership claim on the future real earnings of the companies.
That is quite completely all. Without the threat of nationalization, these things would be fairly worth roughly 10 times their current prices.
Everyone is meanwhile talking about the prospect of the taxpayer doing well by destroying them, and then wondering why they can't generate any confidence or why the stocks won't go up. Earth to clueless populists - the stocks can't go up if you seize them. They aren't worth jack squat if you put your grubby paws on them. They are worth plenty if you don't.
You *can't steal capital*. The attempt to do so causes it to *evaporate*. This does not mean it isn't there, it means it has *no value* if it can simply be stolen at will.
Can it with the reckless nationalization talk, already.
Good explanation. I’m seeing more and more articles explaining what you just explained - some even recommending buying BAC and C now at their bargain basement prices. They’re basically penny stocks now - how much can you lose?
Why do you think Geithner hasn’t announced a plan yet? Was supposed to today, but that got called off (market didn’t like it much when that happened).
This is the second postponement. He’s looking very indecisive and that’s causing fear and lack of trust.
Bought any shares in Bank of America recently, Jason?
The reason is purely tactical and personal. I've recently levered up to buy Arizona real estate at distressed prices, and I've stretched doing that about as far as I can swing. Which isn't merely a different call on an asset return; I now live there etc.
My standing recommendation on playing the whole crisis is to buy the senior securities now, bonds and preferreds, and use the coupons to buy common. This will average in to the latter at depressed prices over the right time scale. Do not touch the high quality bomb-shelter fixed income things (like treasuries, CDs, etc, with rates at zero). The credit markets will recover first.
So basically they want a plan that helps the banks but don’t want it to be construed as helping the banks. If that’s the case, Geithner is definitely not the one to carry the water. He’s clearly not comfortable BSing-darting eyes-beads of sweat on the forehead.
They should get Bill Clinton out there to be the front man for that. He’d be perfect.
Saw today a plan might be announced on Friday to carve up AIG which might serve as a model to carve up other troubled institutions.
On Monday, supposed to be an announcement of more bailout money going to Citi. Wall Street should like that.
Look how well it worked for the railroads.
By the way, I caught this in another post:
Incredible amounts of populist pressure not to be seen helping the banks in any way. It is idiocy, but it is the political reality of the moment. Has been since Bear Stearns day, really. All the top regulators know what it actually required, but they think they need populist political cover to do any of it, and the bomb throwers in the gallery do not care a lick what they burn down, as long as they can cast the blame elsewhere. It is just epic irresponsibility fighting political weak technocrats.
So the trillions spent in attempting (so far unsuccessfully) to recapitalize banks in TARP I and Son of TARP doesn't qualify as "help"?
You crack me up.
Are you short all the banks? If you are, you are an interested liar, otherwise you don't believe a word you are saying. See how easy?
And no, the populist pols are not helping. Everything they've done since Paulson came to them has been obstructive and destructive. They would be in better shape now if the congress had rubber stamped and shut the heck up. Attacking insitutions at the same time you invest in them is flat stupid.
You're always lecturing us about how it's our patriotic duty to support the banks and that they need to be recapitalized ASAP (amount unspecified but presumably more than the paltry trillion or two already allocated).
I thought you'd be out there doing your part by giving them some of your own money.
Trillions? Where did you get those numbers?
LOL....we haven't gone over a trillion yet?
Still only in the hundreds of billions?
My profound apologies to the "exaggeration police" if I'm wrong.
You claimed trillions. That would be more than one. So what's the real number?
Yes I did.
I blindly assumed that TARP I (~$700-800 billion) plus Son of TARP (~$800 billion) allowed me to use the term "trillions."
Now skewer me for not saying "hundreds of billions". An unforgivable exaggeration.
I hadn't heard that the second part had been spent yet. You claiming it has?
Now skewer me for not saying "hundreds of billions". An unforgivable exaggeration.
Well, if you're just going to pull numbers out of the air.....
It hasn't. My error was in using the term "spent" loosely. It's been allocated. However, whether the money has been merely allocated or actually spent is irrelevant to the point I was making to Jason who was/is claiming that nobody is helping the banks for fear of populist anger.
My point is that over a trillion dollars (whether allocated or spent) certainly qualifies as "help".
Well, if you're just going to pull numbers out of the air.....
Funds either allocated or spent in current and previous rescue packages amount to over a trillion, no?
And ad hominem arguments are the lowest socialist fallacy imaginable.
That's a stretch.
I'm just curious to know whether you really believe this "the banks are fine" shtick you're always selling.
I closed on a property January 30. 6 figures. I levered up to do it. That is the only reason I haven't bought the banks to the tune of 5 figures since November - that transaction has been my whole "line". I am deliberately going long with leverage at these prices and terms. By maybe May I could be back in a position to add to financial assets.
In case everybody just forgot, the underlying cause of the whole thing is overvalued real estate and mortgages written against it. I am buying bank owned property in some of the hardest hit, but to my mind beautiful and promising long term, areas of that market. I don't need to flip anything, I can hold it forever.
This too shall pass. And those who are brave today will reap the rewards.