January 27, 2009

Nationalization gets a second look

via NYT

Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”

I talked about this last week and I'm not exactly opposed to it, I'm not in favor of it either. For one thing, the issue isn't any longer recapitalizing the banks. The issue is restoring liquidity to consumers and businesses which is what the banks should have been doing. As for their continued write downs, this is kind of a shell game. For one thing, they've now got really nice tax writeoffs and they get to keep the written down assets. Which means when people start buying again, they're going to sell and realize some really nice gains.

That's the dirty little secret as to why the banks aren't selling. There are some bids coming back into the market but they're no where near what you'd get in a fully functioning market.

If nationalization of a bank is what's required to get things moving again, then may I suggest Bank of America. It's got a lot of money, a good business and lousy management that should be removed. Which makes this part of the article so damn funny...

Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?

This REALLY makes me laugh considering that our universities are churning out B-school grads semester after semester that, frankly, are a lot cheaper than current management and probably far more competent. The best part? They don't need millions in salary and stock options. Hell, most of the folks who come out of this program make fractions of Ken Lewis's salary.

Posted by mcblogger at January 27, 2009 12:57 AM

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