Afternoon Reading: Should the Government Take Over All the U.S. Banks?
So what can you buy for $700 billion?
Well, according a chart over at Bespoke Investment Group, the rescue plan’s $700 billion represents over 55% of the S&P 500 financial sector’s market cap.
All of which raises again the question: Should the U.S. government nationalize its banks?
At the heart of this current crisis is the lack of trust banks have in each other. Yet every move the Treasury and Fed have taken to get banks to start lending to each other has failed.
Economist Paul De Grauwe, writing in the Financial Times today, thinks the answer to that question is yes. He argues that recapitalizing banks during a liquidity crisis won’t work. The only way to solve this issue? The governments of large countries should take over the banking system or at least the significant banks.
Over at the Big Picture, Barry Ritholtz lays out his plan to solve the crisis of confidence:
“So what would solve it? The first step to accomplish this is triage. Identify the banks that cannot survive, and like Old Yeller, “gently” put them down. Euthanize the bad ones so the good ones can survive. Nationalize ’em, sell their accounts to strong banks, and prevent further liabilities to the FDIC (which insures all accounts up to $250,000)…Next, recapitalize the banks that can survive by buying preferred stock.”
Meanwhile, Jim Rogers, CEO of Rogers Holdings, tells CNBC that the only way to solve the current crisis is to let firms go bankrupt and then the stronger firms will take over their assets. Rogers warned:
“The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems.”
Tidbits
- Who’s to blame for the current mess? The Aleph Blog plays the blame game and the list is long.
- From Slate: “Is the European credit crisis U.S.’s fault? Not really –they were dumb enough to buy the mortgages.”
- The National Debt Clock in New York has run out of digits for the first time, reports the Times of London.
- U.S. exchanges may seek to impose a temporary ban on short sales for individual stocks, Bloomberg reports.
- From Clusterstock: Now may be a good time to buy. Roger Ehrenberg has some different advice.
What will be the difference between the former china under Mao, Soviet under Brezhnev & US under whoever he/she/it is? Today banks & insurance cos. tomorrow our own homes also.
I think they should attempt a preemptive strike at all the world’s banks. Own it all, so there’s no need for the concept of a “loss”. Now that’s innovation!
Does the govt compensate the current shareholders or just seize the banks?
Since we appear to be headed to a more socialist future, let’s do it right. No, the government should not own banks. All right, the government can own preferred shares. But let’s do it this way. If they don’t lever the preferred shares, the cost is 15%. If they lever it slightly, the cost of the preferred is 12%. If they lever it modestly, the cost drops to 8%. If they lever it responsibly but on the aggressive side, the cost drops to 6%. And maybe we should restrict the program to banks under $200 billion in assets. We don’t have enough choice when it comes to banking anyway.
But there is more. Banks are regulated so Regulators – do your damn job! How is it that JP Morgan buys WAMU and immediately takes a big write down on performing loans? How is it that Citi and Wells look at Wachovia’s portfolio and throw up? Where is the accountability at the OTS and the OCC?
I don’t like this future, but it’s coming. If we are going to say goodbye to capitalism, let’s get something that works .
Marx and Engel say ‘do it!’
Then again, the Chinese banks seems to be doing OK…
Unless we want to start resembling communist or socialist Russia, China and so forth, it is NOT a good idea to nationalize anything. It lets the government do anything they darn well please because who is going to stop them? It would start with the banking sector to “mitigage losses” and “level the credit playing field”. Then we’d move right along into the insurance market, then we’d socialize medicine, then come the bread lines and it just spirals further and further out of hand. Let the market hit it’s bottom. It’s a circle. It will come back, it just takes time. Everyone banked for too long on the housing bubble. Uhhh, bubbles burst people. Bubbles are temporary. I believe that people were wrong to get houses so completely out of their budget it’s laughable. But, people live on credit. It’s sad, but something like 86% of people live on credit cards and loans. That’s terrible. It’s a cycle that has to run it’s course for us to recover. Give it time.
If the U.S. doesn’t buy up the banks, someone else will. The Japanese just floated the idea of an internationally coordinated effort to recapitalize the banks. Unlike the U.S. government, the Japanese (and Chinese) have the resources (US dollar reserves) to make it so.
Nationalizing the banking system is no different than nationalizing our education system. Our education system has been on a downward slope since the government started mandating their agenda. Government equals education, license branches, post offices and inefficient programs that cost money and reduces efficient behavior. A lean banking system would have forecasted the derivative fiasco that we are in. The more complicated the financial market the less involvement the efficient hard working people of this great country will involve themselves to grow our foundations.
@Kristen:
With the Treasury already injecting capital into banks, the nationalization train has left the station. So maybe we should be asking if we want the banks to be owned by the US government, or by some other government. The Chinese and the Saudis are holding trillions of US dollars from selling things (oil, clothing, electronics) to us, and could use that money to buy controlling interests in the largest banks (Citi, Chase, BofA, Wells Fargo), which would give them de facto control of our banking system. I would note that health care is already partially nationalized (Medicare), as is the largest pension system (Social Security). From my perspective, the nationalized health care systems of France, Italy, Sweden, and other advanced countries look much better than the health care mess we have here. Could you afford to be *really* sick in the US?
@Kristen:
You’re emotional and cute. The truth is that 700 billion isn’t meant to stop the financial crisis….mearly slowly it down.
Hank the Tank Paulson reminds me of The Emperor from Star Wars. The Senate just gave him powers to shape the entire financial universe to his vision.
Long live the Goldman Empire!
No…and why don’t the ceo’s stop going on junkets with taxpapers money…..they should jailed for what they are doing…..
do we ever need change in our US politics…..we’ve been thru hell the 8 years…time for change…..
Our own countymen have done more damage to our nation and world than the terrorists we’ve been fearing. Securing banks is a homeland security issue; a rather horrible thought, but apparently now true.
Want To See – How Stupid Neo-Cons Are?
Russia conducts ballistic missile tests.
There putting up – a missile defense – Making people thing there safe.
Easy to beat – How you may ask – Just like all the other stupid things – The Neo-Cons have done.
Send a lot of dummy – missiles – Let them waste there ammo – Then send the real ones – Ohh they might not fire wanting to save there ammo – send a couple real ones.
10 mill plus cost – don’t have many.
That’s how stupid – the repub neo-cons are – Wolfowitz – Iraq war pay for itself – just a couple billion – Then put him in charge of the IMF - world bank.
Now what God fearing person – Would dare to believe anything – These people would say?
The JOKER – Still has not fallen YET.
The current meltdown of large U. S. financial institutions has been brought about by creeping socialism from political correctness [actions starting in the 1970’s Carter administration and worsened over the years by further contributory actions], greed, political corruption, risky investment practices, lack of functional regulation over these entities, government intervention into mortgage loans, and the grandiosity of mega-financial entities. We are still waiting to hear how many financiers will serve time behind bars. It would restore the confidence of the American people in the financial system for those who made risky investments to pay the consequences of their actions. Now what do Americans hear? The government is proposing to take over all U. S. banks. How dare the government propose to take over banks who have been financially responsible? More socialism will only worsen our situation. We need fixes that will return the system to free enterprise system with rational regulation. Fannie Mae and Freddie Mac are much too large, and our government should never back mortgage loans. These two institutions should be broken up into smaller entities not associated with the government. An educational home buying program could be offered to low income, prospective borrowers with poor credit.
It could be sponsored by the banks to help borrowers attain home ownership, getting loans on affordable homes that could actually be repaid. An educational program could cover credit counseling, the responsibilities of home ownership [home inspection of a proposed purchase, maintenance, property taxes, homeowner’s insurance, etc.], and knowledge about the different types of mortgages [A. R. M.’s, fixed rate, balloon loans, etc.]. In the meantime taxpayers should not be responsible for those who have been irresponsible—bankers, high credit risk borrowers, politicians and government bureaucrats. To take care of one’s individual finances one has to be responsible. We expect fiscal responsibility from banks and government, also.
Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles.The Wall Street Journal's Heidi N. Moore is the lead writer, with contributions from other Journal reporters. Send news items, comments and questions to 
