Nationalization Pro/Con

[Beet]

http://www.ritholtz.com/blog/2009/02/favoring-nationalization-are/

In Favor:

Alan Greenspan
Gordon Brown, UK PM
Senate Banking Committee Chairman Christopher Dodd
Senator Chuck Schumer
Sen. Lindsey Graham
House Speaker Nancy Pelosi
Republicans (some)
Joseph Stiglitz
Paul Krugman
Alan S. Blinder, Princeton
Nassim Taleb
Nouriel Roubini
Greg Mankiw
J. Bradford DeLong
Elizabeth Warren, TARP Oversight Panel
Dennis Gartman
Chris Whalen
Josh Rosner
Jeff Matthews
John Mauldin
Jack McHugh
Bill King
Matthew Richardson
Dylan Ratigan (CNBC, Daily Beast)
Jesse Eisinger, Conde Nast Portfolio
Martin Wolf, FT
Aaron Task (Yahoo Tech Ticker)
Paul Kedrosky (Infectious Greed, CNBC)
Nicholas Kristof (New York Times)
Mark Gongloff (WSJ)
Richard Parker (Newsweek)
Michael Hirsh (Newsweek)
David Reilly (Bloomberg)
Paul Vigna (Dow Jones)
Henry Blodget (Silicon Alley)
Willem Buiter (FT)
Adam Posen (Peterson Institute for International Economics)
Jeff Macke
Todd Harrison
Calculated Risk (Preprivatize the Banks)

Mark Thoma (Economistsview)
Karl Denninger
naked capitalism
Eddy Elfenbein (Crossing Wall Street)
Bronte Capital
Aaron Krowne Mortgage Lender Implode-O-Meter
Prieur du Plessis (investmentpostcards)
Roger Ehrenberg, Information Arbitrage
Felix Salmon
Interfluidity (Nationalize Like Real Capitalists)
Urban Digs

And those opposed:

Ben Bernanke
President Obama
Tim Geithner
Lawrence H. Summers
Financial Services Committee Chairman Barney Frank
Republican Senator Jon Kyl
George Soros
Meredith Whitney, Oppenheimer
Deroy Murdock (NRO)
Larry Kudlow
James Cramer
Hale Stewart
Tyler Cowen

As one commenter notes: "Ron Paul, Marc Faber, Jim Rogers, Peter Schiff and just about every member of the Austrian School of Economics is against"

[Marokai Backbeat]

We really should just get it over with and do it. We can't afford to sit around with minor attempts to solve the problem or exhausted our options with giant wastes of money right away.

[Sam Spade]

I read Denninger regularly, as he has been one of the most correct people about this whole thing.

He is certainly not in favor of nationalization - he is favor of liquidation/receivership by the Feds, which is quite different (mainly because of point #2 - see below).  Quite frankly, I think he has it right on the money - and it represents my position also.

I don't follow some of the others closely, but I am concerned about certain others being forced into the nationalization meme, when they really mean liquidation/receivership by the government in some form.  Roubini, for example, is clearly in favor of nationalization, but Wolf/Buiter's solutions really lean towards a "liquidation of the bad bank assets"-type model.

Anyway, there are three key points:
1) We must stop propping up dead private banks using taxpayer funds.
2) We must ensure that the dead private banks toxic assets *do not* end up on the government's balance sheet, in any way, shape or form.  We will be screwed if this occurs - why do you think Fannie/Freddie and AIG remain "private" institutions?
3) We must make some type of decision soon, as market confidence is slowly going to zero and another market crash automatically leads us to a "Greater Depression", regardless of what happens to the banks.

As I have said before - a nationalization such as Roubini proposes leads to problem #2 in all likelihood, which is probably why it will never happen.

[Beet]

I read Denninger regularly, as he has been one of the most correct people about this whole thing.

He is certainly not in favor of nationalization - he is favor of liquidation/receivership by the Feds, which is quite different (mainly because of point #2 - see below).  Quite frankly, I think he has it right on the money - and it represents my position also.

I don't follow some of the others closely, but I am concerned about certain others being forced into the nationalization meme, when they really mean liquidation/receivership by the government in some form.  Roubini, for example, is clearly in favor of nationalization, but Wolf/Buiter's solutions really lean towards a "liquidation of the bad bank assets"-type model.

Anyway, there are three key points:
1) We must stop propping up dead private banks using taxpayer funds.
2) We must ensure that the dead private banks toxic assets *do not* end up on the government's balance sheet, in any way, shape or form.  We will be screwed if this occurs - why do you think Fannie/Freddie and AIG remain "private" institutions?
3) We must make some type of decision soon, as market confidence is slowly going to zero and another market crash automatically leads us to a "Greater Depression", regardless of what happens to the banks.

As I have said before - a nationalization such as Roubini proposes leads to problem #2 in all likelihood, which is probably why it will never happen.

Looking on Denninger's blog it looks like he advocated seizing the insolvent banks and selling off their assets. But once the assets were seized, wouldn't they temporarily be on the government's balance sheet? There is no way the government would be able to sell them off at anything close to current assessed/assumed value. Roubini also proposed selling off the assets to private buyers and breaking up the large banks into smaller banks. Both want to protecte depositors, and it sounds like both are willing to let long term creditors go. So what's the difference? Short term creditors?

[Sam Spade]

I read Denninger regularly, as he has been one of the most correct people about this whole thing.

He is certainly not in favor of nationalization - he is favor of liquidation/receivership by the Feds, which is quite different (mainly because of point #2 - see below).  Quite frankly, I think he has it right on the money - and it represents my position also.

I don't follow some of the others closely, but I am concerned about certain others being forced into the nationalization meme, when they really mean liquidation/receivership by the government in some form.  Roubini, for example, is clearly in favor of nationalization, but Wolf/Buiter's solutions really lean towards a "liquidation of the bad bank assets"-type model.

Anyway, there are three key points:
1) We must stop propping up dead private banks using taxpayer funds.
2) We must ensure that the dead private banks toxic assets *do not* end up on the government's balance sheet, in any way, shape or form.  We will be screwed if this occurs - why do you think Fannie/Freddie and AIG remain "private" institutions?
3) We must make some type of decision soon, as market confidence is slowly going to zero and another market crash automatically leads us to a "Greater Depression", regardless of what happens to the banks.

As I have said before - a nationalization such as Roubini proposes leads to problem #2 in all likelihood, which is probably why it will never happen.

Looking on Denninger's blog it looks like he advocated seizing the insolvent banks and selling off their assets. But once the assets were seized, wouldn't they temporarily be on the government's balance sheet? There is no way the government would be able to sell them off at anything close to current assessed/assumed value.

As I read it from his blog, no.  Mainly because the end of his solution, in some way or form, is to have the FDIC takeover said bank and "flush it".  This dissolves the bank permanently.  There is no BAC/Citi left.  There are no bondholders to pay off.  There are no shareholders to pay off.

The insured depositors are dealt with in the usual FDIC manner.  Granted, Congressional funding may be needed to pay the depositors off.  Or they may transfer it to another bank.  But that can be dealt with.  The assets can be properly priced, because, well, there's no one left to pay them off to (except presumably they can be used to pay off FDIC-insured depositors)

The most recent example I can find of him talking about the issue is here.

http://market-ticker.org/archives/818-On-Bank-Nationalization.html

He actually addresses the Roubini solution within the post as well with the problem I have noted before.

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As Denninger notes in this article, the difference is:

Roubini's solution "consolidat[es] these bank balance sheets onto the debt of the United States." 

http://online.wsj.com/article/SB123517380343437079.html

Remember, with Roubini's solution via nationalization, the banks still exist but the government can't let them go and default because the debt has been backed up by the full faith and credit of the US government, as you have noted.  Henceforth, that's why it's called nationalization.    You see, Fannie/Freddie and AIG have not been backed up by this full faith and credit guarantee.  Wonder why?

In short, I would put Denninger in the Paul/Schiff/Austrian solution model.  Which is where I stand.  And yes - there is a place for government in that - a big place.

[Beet]

[snip]
As I read it from his blog, no.  Mainly because the end of his solution, in some way or form, is to have the FDIC takeover said bank and "flush it".  This dissolves the bank permanently.  There is no BAC/Citi left.  There are no bondholders to pay off.  There are no shareholders to pay off.

In this article, Roubini says,

"So if you took over a big bank, and you split the assets in three or four pieces, maybe you create three or four regional or national banks, and they're stronger! Nationalization -- or 'temporary receivership,' if you like, if the N-word is a political liability -- is an occasion to undo the sort of consolidation that has created an even bigger systemic problem. And the only way to do it is by essentially taking them over and breaking them up."

Is there a Citi or BAC left after it's been split into "three or four regional or national banks"? It doesn't sound like it. It sounds like Roubini is basically saying the same thing here.

In this article, he writes:

"Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off."

And here again:

"The good news is that much of the risk will be borne by the banks' common and preferred shareholders and their long-term unsecured creditors -- as opposed to by taxpayers"

Again, this sounds very similar to your "there are no sharedholders left/there are no bondholders left." The only difference is that Roubini seems to put 'other short-term creditors on equal footing with depositors. I'm not familiar with the proportion of the banks' bonds that come in short term maturities. On the other hand, if you assume he supports the "Swedish model", then yes, there is a big difference there.

Edit: And looking further at Roubini's writings, it does seem like he wants some sort of entity that will try to recover assets for debt holders- however, he suggests that once the assets are sold off, depositors are paid off with the proceeds and only if the proceeds exceed deposits (e.g., the government breaks even) do the debt holders get paid off.

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Ah , that entry had just scrolled off the page for today's entries, so I missed it. Well, he does see a difference between his plan and Roubini's, but he doesn't seem to be very clear on what exactly the difference is: He seems to be assuming that Roubini would assume all of the banks' debts on its balance sheet, but the above snippets suggest otherwise.

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Oh, I agree that the non-insured debt must go. I'm not sure Denninger is being entirely fair to Roubini, is all.  But you are right in that the term "nationalization" does not answer every question here and the difference between this being a good idea and a bad idea will be in the details of implementation (you also don't want to start an equity or bond market run on the banks, for instance; that could screw over healthy banks very quickly, which gets us to March 1933).

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Of course, the other option is to move toward a spectacularly large ($5 trillion) bailout and hope that the bond markets hold up. It would probably cause riots, but if it works, equities will surge and the crisis will be over.