The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.
In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.
”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”
Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.
“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”
Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.
The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”
I originally came out against nationalization. I wrote about the problems in detail in this article. However, here is the central thrust of my concerns:
In addition, we now have the same problem involved with all processes involving politicians -- undue influence. Within five years I am betting all of the following will happen:
1.) A person in government (elected or not) leans on a bank to make a sweetheart loan to someone/an entity/a group not qualified to take out the loan
2.) A major campaign contributor gets a sweetheart "consulting" contract to service a financial institution.
3.) A major campaign contributor gets a special loan package
4.) The issue of patronage enters the picture: campaign workers/politically connected people who are unqualified to work in the financial field or are minimally qualified get jobs in the financial field
5.) A bank that shouldn't have qualified for government assistance gets government assistance. Actually - that's already happened:
Troubled OneUnited Bank in Boston didn't look much like a candidate for aid from the Treasury Department's bank bailout fund last fall.
The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate.
Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use.
Nonetheless, in December OneUnited got a $12 million injection from the Treasury's Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.
Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging thatOneUnited be considered for a cash injection.
.....
On Dec. 3, Rep. Spencer Bachus (R., Ala.) forwarded a Dec. 2 letter from Alabama bank regulators complaining about the complexities of applying for federal funds. Alabama banks later received billions in funds.
6.) Less than 50% of the banks return to profitability.
7.) Of the remaining 50%, none of them achieve better than 80% of the previous institutional high of ROE. In other words -- the previous management made more money for shareholders
8.) Lending does not increase to pre-meltdown levels -- or to acceptable levels.
In short, my concerns were primarily that we would trade one form of stupidity, ignorance and gross incompetence for another form of stupidity, ignorance and gross incompetence.
However, I am left with a dilemma: what in the hell are we going to do to solve the problem? Simply put, I cannot find any answer that I like to any of these questions. Which leaves nationalization on the table. That does not mean I like the idea. In addition, I am still deeply concerned about the possibility of all the above scenarios happening in some way. And -- I should add -- I am not saying we need to nationalize (largely because I am an incredibly stubborn pain about such things). But I am also thinking it's back on the table if for no other option then there aren't many other options out there.
10 comments:
My take on nationalization is that it's probably no worse than what we have right now. It would also give us a means to break these banks down and address the "too big to fail" problem that is at the root of why we need to do these bailouts in the first place.
If we don't deal with the too big to fail problem, even if we resolve the immediate crisis, we're going to get into more trouble as these banks will know that they are in line for future bailouts if they get into trouble.
Sure there will be opportunity for corruption, etc, but that's already the case.
No need to eat crow. Your concerns are valid. The problem is corruption. Our situation goes beyond stupidity, ignorance and gross incompetence.
Crimes have been committed. To restore faith in the banking system solve you first have to have a criminal justice system that aggressively prosecutes corruption and puts some people in jail.
Until that happens, nobody is going to trust anything coming out of Wall St or Washington. They are all proven liars.
The main reason I doubt the Swedish Solution will work here is that Sweden isn't rife with corruption, and the US is.
Yummmmm, crow. I hear it tastes just like chicken. Not.
There's another way of restructuring banks, using an LLC as a framework.
Step One: put all the assets and liabilities into an entity which becomes a "Custodian" member of the LLC.
Step Two: transfer the Bank company shares into trust on behalf of the staff and management so that the Bank becomes the "Manager" member of the LLC.
Step Three: the existing investors and the government then together become "Investor" Member of the LLC.
The Manager shares revenues proportionally with the Investor.
Any losses of Capital (defaults) are shared proportionally between Private and Public Investors
It's not Rocket Science: but this "Not for Loss" Capital Partnership structure, which is in use in the UK in at least one commercial deal >£1bn in value - would IMHO actually work in practice better than any nationalisation
Return to profitability?!
Just how many banks would even be solvent if they were to take the assets that they're holding and mark them to market?
I suspect that many of the "too big to fail" banks would be shown to be gutless shells--mere ghosts.
"Too Big To Fail" must be eliminated as a problem in our economy.
I detail my proposal for a simple SEC regulation to accomplish it here.
While I wait for the world to see the wisdom of my plan, I suppose I'll have to be content to see it happen in the financial sector after we nationalize and break up the megabanks into smaller pieces.
It's lonely being a visionary.
The sharesholders have to be wiped out. That happens to any bankrupt company.
Nationalize or bankrupt - same thing. These banks are insolvent, what are we trying to hold together? Its the fastest, fairest way to recycle the good assets bound to a failed entity.
One more thing. Greenspan also said (virtually in the same breath):
”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,”
Senior creditors? Now, who could that be? Oh, right, the outfit that's currently employing Greenspan--PIMCO. Of course, the consequence of this is that PIMCO gets to save their ill-gotten booty and the rest of the stock- and bondholders get the shaft.
Why am I not surprised--and why, for the love of Mike, isn't Greenspan sporting a new coat of tar and feathers?
How odd, of your list of nine things that will happen if banks are nationalized could you please tell me which of the first 5 have not already happened? And regarding 6-8 do you think nationalization makes them more likely to happen?
Nationalization if done right has worked before. Japan tried to avoid it for 6 years before giving in and ended up wasting a decade...its time to take the medicine!
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