Wednesday, February 18, 2009

Nationalization / Preprivatization / Receivership AGAIN!

Academia weighs in on the above topic.

Prof. Mankiw from Harvard University mentions as well the language issue regarding bank nationalization but believes there is more to it than semantics:
"The search for alternative names can be amusing at first, but I think there is more here than mere semantics. Why are people scared about the idea of nationalization? One reason is that it is a sign of the depth of our problems. A second, more substantive reason is that it seems to point in a bad direction. I certainly do not want the government deciding who deserves credit and who does not, what kind of investments are worthy of financing and what kind are not. That is a big step toward crony capitalism, where the politically connected get the goodies, and economic stagnation awaits the rest of us. If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure. Bankruptcy could become, in effect, a massive bank recapitalization. Essentially, the equity holders are told, "Go away, you have been zeroed out." The debt holders are told, "Congratulations, you are the new equity holders." Suddenly, these financial organizations have a lot more equity capital and not a shred of debt! And all done without a penny of taxpayer money" ... "But there is one thing I am sure of: If this is the route we go down, the government had better get in and out as quickly as possible. If it is done right, nationalization will be the wrong word to describe the process."

Paul Krugman via his blog points to Greenspan's view on the subject as reported in the FT. Elsewhere he argues "Focus just on the big four money center banks: Citi, B of A, Wells Fargo, JPMorgan. According to this estimate, they need around $450 billion. Meanwhile, their combined market cap is only about $200 billion — and part if not all of that market cap surely represents the “Geithner put,” the hope that stockholders will in effect get a handout from the feds. Given these numbers, it’s extremely hard to rescue these banks without either (a) giving a HUGE handout to current stockholders or (b) effectively taking ownership on the part of we, the people. Of these, (a) would be politically unacceptable as well as bad policy — but the Obama administration isn’t ready to go for (b), because it’s not in our “culture”. Hence the perplexity of policy. Our best hope right now is that the “stress test” will make (b) inevitable — that Treasury will declare itself shocked, shocked to find that the banks are in such bad financial shape, leaving government receivership unavoidable."

Prof. James Hamilton from UCSD writes about the Prospects for the U.S. banking system and proposes a way to frame the problem: "Figure out what are the possible parameters for the capital loss that is to be allocated among the various parties-- specifically, a loss that must be borne by some combination of stockholders, creditors, managers, employees, and the taxpayers-- and try to reconcile those numbers with the current liquidation value of the banks." He remains unsure of the solution though: "For myself, I don't know the true value of the assets, but I suspect it's well below 90 cents on the dollar. And I fear that the debt-for-equity swap, though attractive in principle, could prove to be quite a destabilizing process. It would be nice if there were a painless way out of this, but I don't see one. What we need is not a painless resolution of the crisis, but rather a plan that puts the pain behind us."

Mr Hamilton also refers to a great piece by John Hempton from Bronte Capital that I will have to come back to in a next post.

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