Friday, January 23, 2009


A debate is underway about the idea of bank nationalization in the face of the continuing credit crisis. In some quarters, what the Swedes did in the 1990s looks like a good bet for the American economy now. According to the New York Times:

Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending.

In the process, Sweden wiped out existing shareholders.
That wiping out shareholder value part is a huge sticking point, of course. If you have a retirement account with exposure to the stock market, you stand to lose money if troubled US banks are nationalized. James Surowiecki sees deeper problems involving "political mischief."
But the F.D.I.C., for the most part, does not take over banks and run them with an eye toward turning a profit for the government. Instead, it tries to clean up the banks’ balance sheets and re-sell them, or their assets, as quickly as possible. But if the government were to nationalize the banks, the incentives would be different. As Steve Waldman put it, “We take the bank into public ownership because taxpayers who have been conscripted to accept extraordinary losses are entitled to whatever gains follow the reorganization they finance.” Once a program of nationalizing banks was started, then, one important goal would be to maximize the potential “gains” to be reaped. And one way to do that would be to declare banks that are solvent, and that have undervalued assets on their books, insolvent, which would allow the government to take them over and ensure that their profits would flow into the government’s coffers.
This "mischief" would be possible because of certain details about the definition of "solvency" when it comes to banks. If its liabilities are greater than its assets, it is insolvent. And yet, Surowiecki argues, under such conditions, a bank can continue to function because it typically can earn from its assets about three times what it pays towards its liabilities. His take is that declaring a bank insolvent is a judgment call, not a mathematical certainty.

Barry Ritholtz disagrees:

As previously noted, the dilly dallying around with these horrific banks and their grossly incompetant management must come to an end.

Sometimes the market gets it just right: The selloff in the financial sector might very well be the cumulative conclusion reached by traders that this sector cannot be rescued by nere recapitalization alone. The market, looking to open down 200 points, may also be sensing the inevitable nationalization.

The Brits, soon to nationalize Barclays, have the right idea: Go Swedish. Wipe out shareholders, bond holders, and all the bad debt and junk paper these firms hold. Zero it out, spin out the assets with clean balance sheets.

If the behavior of these corporate executives is nothing short than egregious: Their embarassing attitudes, foolish excesses, sense of entitled greed is annoying but tolerable when its on their ownshareholders dime; when the taxpayer is footing the bill, it is utterly unacceptable.

To paraphrase a Mellon, its time to liquidate the banks, liquidate capital, liquidate shareholders, liquidate bond holders . . .

He really is pissed about the abject failure of the top managers of financial giants like Citigroup and Lehman et al. They screwed things up so badly we're all hurting, and he's so mad, he can't quite type right.

I have no idea who's right, or even if it's possible to be right about all this. But I get the feeling we may be turning Swedish in a short while.

No comments: