Banking Industry: Bank Nationalization – By Whatever Name – Getting More Likely
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New York and London, 23 Feb 2009. It would have been unthinkable a year ago to go into the very heart of world and US capitalism, the New York Stock Exchange, and hear talk about bank nationalization (or bank nationalisation, depending on your spelling tendencies). Listen to traders talk now, however, and it seems the market increasingly believes that is where banking giants like Citigroup and Bank of America are heading.
Banking stocks have led the Dow Jones Industrial Average down to 7,367.50, its lowest close since October 9, 2002. Citigroup fell 20 per cent and Bank of America fell 12 percent on Friday alone. These stocks are effectively now penny stocks, and the market long since priced in the possibility that these companies will be nationalized, and is increasingly betting that it is an inevitability. [br]
Bad debts continue to weigh on the banking sector, and as the economy continues to get worse a vicious negative feedback loop has developed for banks, leading many to argue that the sector is in effect insolvent (see Zombie Banks).
Indeed, in the first seven weeks of 2009 alone, 14 smaller US banks have been shut down, including eight in February 2009 alone – the most for any month since 2000. Recent failures include Silver Falls Bank, Pinnacle Bank of Oregon, Corn Belt Bank and Trust Company, Riverside Bank of the Gulf Coast and Sherman County Bank.
It is perhaps ironic in this environment that Democrat President Obama is seeking to calm markets by saying that the best approach is to keep banks private, while Republicans such as Senator Lindsay Graham say that nationalization may be the way to go.
President Obama cannot rule out nationalization, however, and neither can Chairman of the Fed Ben Bernanke. While Bernanke also maintained that private capital is preferable, he also said, “Whatever actions may need to be taken, at one point or another, I think there’s a very strong commitment, on the part of the administration, to try to keep banks private or return them to private hands as quickly as possible.” Without categorical assurances, or better still actions, the market will continue to punish financial stocks.
Across the pond, UK Chancellor of the Exchequer Alistair Darling also could not rule out the possibility that he nationalises the Lloyds Banking group. This group was formed by a government-orchestrated merger of Lloyds and HBOS, but following record losses and a one day 32 per cent share price decline, here again there could be no other options.
The UK government have already nationalised the Northern Rock last year, and other European governments from Ireland to Iceland have been forced into similar moves.
Economists and politicians are now discussing the best course forward. Nationalization as it has been practiced historically has often been a disaster. Governments tend to be bad at managing capital. If loans start to get allocated to friends you are on the slippery slope of crony capitalism.
Supporters of the move, however, point to the success of the Resolution Trust Corp in cleaning up the Savings & Loans melt down in the eighties. They argue that it is not really nationalization, since it is a temporary move to restructure these institutions, clean up their books and get them back into private hands.
Some even argue that a new name is needed to ‘sell’ this approach to the public, with names such as ‘government receivership’ and even ‘pre-privatization’ being thrown around. The debate has drawn in heavy hitting Economists including former Fed Chairman Alan Greenspan and ‘Dr Doom’, Nouriel Roubini, who has written an op ed pieces in favour of nationalization; Mike ‘Mish’ Shedlock, who is strongly against that argument; and Mr. Econ 101 Greg Mankiw, who doesn’t know if it is right or not, but says that if it is necessary governments should focus on getting in and out as quickly as possible.
A parallel discussion in progress is the Good Bank/ Bad Bank idea. Willem Buiter from the London School of Economics argues that supporting the current large banks at the $1.4 trillion price tag put forward by Roubini is not sustainable and is spending new
money on old problems instead of new credit, which is what we need now.
Under this approach, new banks are created that take the healthy assets from large banks (over $100 billion in assets), and new public-private money to fund new lending. The old banks in effect become bad banks managing their portfolio of troubled assets back to profitability, or failing and letting their creditors decide the best course of action.
Whatever the final outcome of all these debates, there are no easy answers. The challenges are deep and the solutions likely to be slow and painful.
Hosni Afleck and Ron Portobello, EconomyWatch.com
