As we found in the case of Ponzi schemer Bernie Madoff, we’re now discovering that numerous government agencies had heads-ups or even started investigations (that were later shut down) into Sir Allen Stanford’s Antigua-based banking empire. Of particular interest is an investigation the SEC began back in 2006, only to be asked by another unnamed government agency to “stand down”. Zack Roth reviews the timeline and key events.

TPM Reader AC reacts to ‘Scary Nationalization‘ …

Rick’s conclusion that “nationalization” would remove shareholders’ chance of recovering their losses misses two important points. First, the only reason that the 90% to 95% losses that many have taken is not 100% is because of the chance that the feds bail out the banks but leave some equity outstanding (e.g., the 40% Citi solution). This, of course, is just a transfer of wealth from taxpayers to bank shareholders–like Paulson’s funding of Citi greater than their market cap, to take meaningfully less than a 100% stake. The second point that he misses is that if it’s just about keeping some money in the game with a chance of a recovery, bank investors can always sell their remaining investment in banks and put the funds in another investment with a chance of growth. The only thing that makes the bank investment more attractive than any other equally high risk investment is the chance that the bank investors will get a free transfer of wealth from taxpayers. With apologies for the double-negative, Rick’s “leaving the equity in the game” argument is no reason not to temporarily nationalize the banks.

Over at US News, Rick Newman has an article on why bank nationalization is allegedly such a scary prospect. Now, let me start by saying that it is scary. Not because it’s ‘nationalization’ and that’s somehow inherently scary. But because we’re in a midst of an historic financial crisis — and it’s global. There are so many moving parts that the results of any potential actions are inherently unpredictable. And the stakes are very high. (The biggest fear I have is that the take over of a few big banks could start a cascade effect with runs on others, though I don’t have the specialized knowledge to have a good sense of how likely that is, what steps you’d take prevent it.)

But one point in Newman’s list stuck out at me — that nationalization would ‘vaporize’ a lot of wealth.

This is why the markets freak out every time there’s a rumor, or a rumor of a rumor, about nationalization. If the government took over a bank, public shares would suddenly be worthless and shareholders would lose everything. With Citi and Bank of America shares down more than 90 percent over the last 12 months, many shareholders have already lost a fortune. But there’s still a chance they’ll get some of it back if the bank recovers. That potential upside would disappear if the feds stepped in.

Even worse, the banks’ bondholders and other creditors could lose a bundle too. Same with depositors and institutional customers whose account balances exceed the amount guaranteed by the FDIC. To prevent a panic, the government would probably cover those stakeholders up to a certain level – with taxpayers footing the bill once again.

Now, this is a key point. I’m frequently told that the whole issue of wiping out the shareholders is a non-issue, or an overblown issue, since the shareholders are already basically wiped out, having lost like 90% or 95% of their investment on some of the big bank stocks. But this is the point — if the US government takes responsibility for keeping Citigroup on life support and nursing it back to health over 5 years or so at massive taxpayer expense, the value of that stock is going to go way up. That’s especially the case since the equity the government is getting doesn’t come close to market value for the money being invested. So yes, it’s scary how many people could ‘lose a bundle’, unless you come to grips with the fact that that bundle has already been lost and that the only thing preventing them from coming to grips with that fact is the assumption that the taxpayers will come in and make all those folks whole.

As Joe Stiglitz says (and many other do too) it really is a zero sum. How much do the investors pay for and how much do the taxpayers pay for?

Perhaps because there’s so much else going on, the fact that this is budget week still doesn’t seem like it’s really broken through in the headlines. Today you’ve got the president’s ‘fiscal responsibility’ summit. Tomorrow he gives his speech to a joint session of Congress — which is like a quasi State of the Union address — to present the outlines of his budget. And then the president’s actual budget is presented on Thursday.

The White House has been saying they want to find significant savings from Medicare and Medicaid to free up money for a major down payment on health care reform this year. My own sense is that a lot of the chatter about the administration wanting to move in any way on Social Security is overblown.

In this post Jon Cohn games out what the White House has in mind on the health care front.

As we noted last night, Citigroup had gone back to the Feds for a further restructuring of the government’s ownership stake in the company based on converting preferred shares to common stock. According to this article in the Post, the federal government has agreed to that and also made the same terms available to the 350 other banks that have accepted government money. Bloomberg has more details. Here’s the joint statement from Fed, Treasury, FDIC, et al.