I had conversations with a few friends yesterday. And what came out of those discussions was that even among pretty knowledgeable people there’s still very basic confusion about what bank ‘nationalization’ even means. My point is not that there’s one thing true definition and others are misinformed. But the collective ‘we’ is talking about this; but what’s clear is that the conversation is muddled by different people meaning different things by the same word.
So, for what it’s worth, what I think we’re talking about, what I’ve been talking about when I’ve been blogging on this topic is basically a super-powered version of what the FDIC does when it seizes a failed bank.
The bank is taken over and treated as bankrupt. The federal government takes over the bank, cleans it up and then runs it for a while, before selling it back to private investors. It doesn’t involve all banks — only ones that are judged insolvent — and it’s not permanent. It would be longer than would normally be the case with a small bank that gets taken over by the FDIC because a) banks like Citi would probably be much more complicated to unravel, b) there is no big healthy bank that you can have take over, say, Citigroup over, and c) the economic situation is so bad that it’s probably going to take a while to find investors who are prepared to take the bank or its successor banks into private hands. This is why ‘receivership’ is really a better term for what we’re talking about.
Now, how long is “a while” under federal management? I’ve heard 2 to 5 years. How much do the bondholders, as opposed to the shareholders (who presumably lose everything), lose? That’s not completely clear to me, but a very big question.
The key point is that the entire exercise is focused on getting healthy, privately-managed and owned banks back into private hands as soon as possible, though not sooner.
Now, this is what I understand this to mean. But I strongly recommend reading Paul Krugman’s take on what we’re talking about from the 22nd. Also see Matthew Richardson’s and Nouriel Roubini’s column from the Post on February 15th. They both have the added benefit of really knowing what they’re talking about.
So, to some up, what we’re talking about is very much a private sector, perhaps the ultimate market based response to the problem. The choice is between keeping a series of de facto insolvent banks on long-term life support, subsidizing them with vast amounts of tax payer money and involving the government in various aspects of their management or biting the bullet, take them over for a while and reprivatize them as totally private banks. Like I said, it’s really no different from what the FDIC does to a couple banks every week this year.
The really outstanding questions that come up when I discuss this with people are basically two. First, how much do the bondholders and counter-parties of the bankrupt banks take a hit? This is one essential question since it’s really a zero sum between how much they lose versus how much tax payers pay. Second, during the period of government receivership, are the banks run in such a way as to bring their management priorities into line with government policies? In other words, are they run in such a way as to minimize foreclosures for policy reasons? Or are they just run entirely on profit-maximizing goals? Perhaps a more granular question is whether the incentives are still in place which lead to excessive risk-taking.
This comes up in our interview with Joe Stiglitz at about 6:00 in. As he says “We would align the interests of the majority owner, which would almost surely be we, the taxpayer, and … what the bank does. We would reduce the scope for the conflict of interest …”
What that means exactly — about an alignment of interests — seems like a very big deal.
From the Dallas Morning News:
Ralph S. Janvey, who was appointed by the U.S. District Court in Dallas to take control of Stanford’s assets, asked Democratic and Republican national political committees on Monday to return donations from Allen Stanford and his company’s political action committee.
Very, very interesting.
Late Update: Elana Schor has more.
Former Sen. Norm Coleman spotted attending Senate GOP caucus luncheon today on the Hill.
Hooker-scandal
survivor David Vitter says Sen. Burris (D-IL) should resign.
“I honestly don’t know anybody who would compare these situations,” he told The Hill on Tuesday, comparing his pay for sex and diapers scandal with Burris’s failure to detail his dealings with Blago. “They are dramatically different.”
Turns out Jim Cramer is pretty down on the idea of bank nationalization. “We must take the debate out of the hands of the dreamer academics, and into the hands of practical business people, no matter how much we despise them for getting us into this fix in the first place.”
In this video interview he says nationalizing Citi, BofA and Wells Fargo would be the “end of capitalism.”
Curious what others think. I’m not knowledgeable enough to evaluate what Cramer says about the collateral damage to insurance companies and the entire real economy. His history of the 1930s is completely whacked. But that’s out of his area of specialty. Alas, I suspect his macroeconomics may be no better.
Late Update: TPM Reader BM not feeling the love for Cramer: “If the voice of the opposition to ‘nationalization’ is Jim Cramer, than I think that works as a pro to go through with the absorption of the insolvent banks. The man is consistently wrong on everything. “Subprime, a bunch of hullabaloo!” -> “Market’s doing fine, don’t worry about it” -> “TAKE ALL OF YOUR MONEY OUT NOW”. Let alone the infatuation he had with Sears. I’ve actually made a point to do the opposite of whatever a screaming maniac says, and it has suited me well so far. TPM has been great info with the interviews of all the economists btw, thank you for picking up where tv outlets are failing.”
Latter Update: TPM Reader CG doesn’t see it either: “Cramer is an almost perfect contrarian indicator. He is virtually always wrong about everything. His lemming instinct to both lead and follow the herd off of a cliff is uncanny. With my clients, all I need say is, ‘Cramer said this is a good idea’ and they run for the exits. To me he has always been an idiot that is useful, but now I guess he is truly playing the Republican and Banking communities role as useful idiot. He truly is the Rush Limbaugh of investing – bellicose, without shame and always wrong. Here is a link if you are interested.”
In recent days we’ve been digging into accused fraudster Allen Stanford’s decade of political giving and what he got for it. A lot of our attention to date has focused on two 2001-2002 era bills that his lobbying appears to have played some role in stymying or killing. But now we’re looking at a 2007 bill sponsored by Sens. Levin, Coleman and Obama that would have cracked down on off-share banks like Stanford’s. The bill eventually died in the Finance Committee. Never even came up for a vote.
Now, there were a lot of organized interests who did not want this thing to happen. Many more than just Stanford. But given the scale of Stanford’s fraud we’re trying to get a handle on what role if any his lobbying may have played. We have a lot of DC readers, so if you have any pointers on what happened to Sen. Levin’s bill back in 2007, drop us a line.
Here’s what we’ve come up with so far.
RNC Chief Steele considering pulling support from GOP Senators who voted for the Stimulus Bill.
Hmmm. Seems like being on Fox got the better of Chairman Steele. Now he’s backtracking.
See more at Foxnews.com.
As you likely know, President Obama will be giving an address to a joint session of Congress tonight at 9 PM Eastern. We’ll be here covering it live with live-blogging from me here at TPM and Matt Cooper at TPMDC. Elana Schor will be in the chamber itself, sending dispatches and talking to the members of Congress who Obama will need to get the budget and health care reform enacted into law.
Join us.