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Friday, 20 February 2009
Nationalization is inevitable – U.S. should get on with it
Like it or not, the United States will be required to nationalize large swaths of its banking system by the time the leaves fall from the trees in Washington.
Nationalization is inevitable – U.S. should get on with it
By James Saft, Reuters 12 February 2009
Like it or not, the United States will be required to nationalize large swaths of its banking system by the time the leaves fall from the trees in Washington.
The bad news is that we will have to wait that long and that the costs will mount.
The plan to rescue the banks - or, er, the people - as enunciated by Treasury Secretary Timothy Geithner is no plan, only an apparent set of contradictory principles: an ideological one not to nationalize and a political one not to subsidize too obviously.
The plan will fail unless the administration comes out in favor of either subsidy or seizure of failing banks. Either the United States will have to nationalize when that becomes apparent, or perhaps it is waiting until that failure makes nationalization more politically palatable.
In either event, it is a terrible mistake, and the cost will only grow, both in direct terms for taxpayers and more broadly for the growing number of people with too little income to pay tax.
Geithner laid out a plan to apply stress tests to large banks and to require those that do not pass either to raise capital (from whom, exactly, I hear you ask) or to accept an injection of convertible securities from the government on terms that have not been defined. Banks that take government coin will have limits placed on their compensation and other actions.
There is $500 billion to $1 trillion to finance an aggregator bank that will “partner” with private capital and set prices for distressed bank assets, presumably with some sort of insurance wrapper to limit private capital’s downside. There are also measures intended to generate lending directly to consumers, house buyers and businesses.
All in all, it is a bit like watching a man trying to eat a steak without using his teeth.
“The financial system needs at least $1 trillion in tangible common equity to be sufficiently capitalized - the capital holes on financial balance sheets are just too large to be plugged with convertible securities with vague terms,” Paul Miller, an analyst at FBR Capital Markets who has been very prescient in his calls for financial markets, wrote in a note to clients.
He said another concern “is that it does not adequately address the toxic assets on bank balance sheets. It does include a variation of a public/private aggregator bank, but private investors will want to buy assets at distressed prices, and the banks will only sell assets at above-market prices.”
Those two points form the crux of the issue; for the banking system to work without widespread failure and nationalization, governments either have to hand out huge subsidies to banks directly, in the form of cheap capital, or indirectly, by giving a subsidy to investors who will pass on part of it to banks as a condition of getting their share. The first is unfair, the second unfair and inefficient.
Of course, it could have been worse. We seem to have escaped calls to magic solvency up by suspending mark-to-market accounting, which would have worked as well as making “six” the new “zero.”
And in fairness, we do not know how the stress tests will work or whether it is possible to fail one. But President Barack Obama did tell ABC News that nationalization “wouldn’t make sense” because the scale and complexity of the U.S. economy and capital markets would make it too tough to manage and oversee. He is right, and government would do a terrible job of managing banks, but it will have to and may as well get on with it. The administration seems now to be hoping that the economy turns and bails it and the banks out of their pickle, but that is a dangerous bet.
By the time we figure out it is not working, when whatever capital we have injected is swamped by falls in asset prices - and remember, deleveraging and asset-price falls go hand in hand - things will be that much bleaker and the United States will have less room to maneuver.
But ironically, maybe the most hopeful sign Tuesday was the negative way in which the stock market and shares in banks reacted. Bank investors clearly thought that this raised the chances that their equity would be extinguished or, at the very least, their share of future profits diminished.
And Obama is not Franklin Roosevelt coming in after a depression was already entrenched; he is leading a country that is only beginning to wake up and to suffer. It is just possible, though not likely, that the administration realizes it will have to take more drastic steps but that it needs more time to prepare the ground and make that politically possible.
1 comment:
Nationalization is inevitable – U.S. should get on with it
By James Saft, Reuters
12 February 2009
Like it or not, the United States will be required to nationalize large swaths of its banking system by the time the leaves fall from the trees in Washington.
The bad news is that we will have to wait that long and that the costs will mount.
The plan to rescue the banks - or, er, the people - as enunciated by Treasury Secretary Timothy Geithner is no plan, only an apparent set of contradictory principles: an ideological one not to nationalize and a political one not to subsidize too obviously.
The plan will fail unless the administration comes out in favor of either subsidy or seizure of failing banks. Either the United States will have to nationalize when that becomes apparent, or perhaps it is waiting until that failure makes nationalization more politically palatable.
In either event, it is a terrible mistake, and the cost will only grow, both in direct terms for taxpayers and more broadly for the growing number of people with too little income to pay tax.
Geithner laid out a plan to apply stress tests to large banks and to require those that do not pass either to raise capital (from whom, exactly, I hear you ask) or to accept an injection of convertible securities from the government on terms that have not been defined. Banks that take government coin will have limits placed on their compensation and other actions.
There is $500 billion to $1 trillion to finance an aggregator bank that will “partner” with private capital and set prices for distressed bank assets, presumably with some sort of insurance wrapper to limit private capital’s downside. There are also measures intended to generate lending directly to consumers, house buyers and businesses.
All in all, it is a bit like watching a man trying to eat a steak without using his teeth.
“The financial system needs at least $1 trillion in tangible common equity to be sufficiently capitalized - the capital holes on financial balance sheets are just too large to be plugged with convertible securities with vague terms,” Paul Miller, an analyst at FBR Capital Markets who has been very prescient in his calls for financial markets, wrote in a note to clients.
He said another concern “is that it does not adequately address the toxic assets on bank balance sheets. It does include a variation of a public/private aggregator bank, but private investors will want to buy assets at distressed prices, and the banks will only sell assets at above-market prices.”
Those two points form the crux of the issue; for the banking system to work without widespread failure and nationalization, governments either have to hand out huge subsidies to banks directly, in the form of cheap capital, or indirectly, by giving a subsidy to investors who will pass on part of it to banks as a condition of getting their share. The first is unfair, the second unfair and inefficient.
Of course, it could have been worse. We seem to have escaped calls to magic solvency up by suspending mark-to-market accounting, which would have worked as well as making “six” the new “zero.”
And in fairness, we do not know how the stress tests will work or whether it is possible to fail one. But President Barack Obama did tell ABC News that nationalization “wouldn’t make sense” because the scale and complexity of the U.S. economy and capital markets would make it too tough to manage and oversee. He is right, and government would do a terrible job of managing banks, but it will have to and may as well get on with it. The administration seems now to be hoping that the economy turns and bails it and the banks out of their pickle, but that is a dangerous bet.
By the time we figure out it is not working, when whatever capital we have injected is swamped by falls in asset prices - and remember, deleveraging and asset-price falls go hand in hand - things will be that much bleaker and the United States will have less room to maneuver.
But ironically, maybe the most hopeful sign Tuesday was the negative way in which the stock market and shares in banks reacted. Bank investors clearly thought that this raised the chances that their equity would be extinguished or, at the very least, their share of future profits diminished.
And Obama is not Franklin Roosevelt coming in after a depression was already entrenched; he is leading a country that is only beginning to wake up and to suffer. It is just possible, though not likely, that the administration realizes it will have to take more drastic steps but that it needs more time to prepare the ground and make that politically possible.
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