This drastic step, so far being resisted by the Obama administration, would wipe out shareholders and cause pain in the short run but spark the quickest rebound, the economists said.
“Paradoxically, nationalization may be a more market-friendly solution,” said Nouriel Roubini, chairman of RGE Monitor and an NYU economics professor. “It provides a fair upside to the taxpayer . . . by allowing the government to sell the assets to private investors after a cleanup of the bank.”
Treasury Secretary Tim Geithner is still hoping for a private solution to the bank crisis — outlining a vague plan to draw out private capital to invest in the banks’ toxic paper — but the problem may be too big to fix through asset purchases.
“It’s clear there are divisions in the administration about where the financial bailout should be targeted as well as how much authority the government should gain over financial institutions,” said Princeton professor Julian Zelizer.
Under the Geithner plan, a “stress test” would be administered to the ailing banks’ balance sheets. The results, experts predict, will show a tremendous need to bolster Tier-1 capital — most likely through common-stock purchases. But the billions in additional capital injections will all but wipe out current common and preferred stockholders.
Geithner’s alternative idea, of enticing private equity and hedge funds into purchasing the toxic paper through government loans, seems equally fraught with peril.
Under this plan, Treasury would be empowering two totally unregulated entities — one of which recently brought us Bernie Madoff — to help bail out the banking industry.
If Washington were forced to nationalize several large banks, it would be best to take them over all at once to avoid a run on the weaker rivals, said Roubini. Under such a plan, there would be no change for any bank customers and no deposits would be lost.
Some expecting at least a partial bank nationalization plan to emerge feel Geithner is not up to the task of solving the problem. Quantum Fund co-founder Jim Rogers said Geithner, who was president of the New York Federal Reserve Bank, “has been dead wrong about everything for 15 years in a row,” as was President Obama’s economic advisor Lawrence Summers, who acted as Treasury Secretary under Pres. Clinton. “It is mind-boggling to me,” Rogers said on CNBC. “These guys have been wrong year after year after year consistently, and here they are making the same mistakes again.”
Geithner is stuck with nationalization as a likely scenario because the US can’t afford to fund a solution that would keep banks private — namely, buying up at least $5.7 trillion in toxic assets. Rep. Paul Kanjorski, (D-PA), member of the House Finance Committee, said that former Secretary Hank Paulson originally said he would buy toxic paper, only to change his tack to capital injections through preferred stock once he saw the size
of the problem.
“The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable,” said Richard Bernstein, strategist, Bank of America. “The latest Treasury program is simply another attempt to stymie the consolidation process,” Bernstein added.
In the days after the Lehman Brothers bankruptcy, there was a run on the country’s money market funds as investors feared the bonds held by the funds would collapse — which I reported in a Sept. 21 story entitled “Almost Armageddon.”
Rep. Paul Kanjorski, ranking member of the House Finance Committee, confirmed the bank run recently.
“At 11am [on Sept. 18] the Federal Reserve noticed a tremendous outflow of capital from the money markets — $550 billion was drawn out in an hour or two,” the Congressman said.
“The Treasury opened up its window and pumped $105 billion into the system and quickly realized they could not stem the tide. We were having an electronic run on
the bank. Kanjorski added: “If they had not done that, their estimation was that by 2pm, $5.5 trillion would have been drawn out the money market system.
“If they had not done that, their estimation was that by 2 pm, $5.5 trillion would have been drawn out the money market system. And that would have collapse the entire US economy and 24 hours later the entire world economy would have collapsed. ¶
“Now we talked at the time about what would happen if that happen it would have been the end of our economic system and the end of our political system as we know it. And that’s why when they made the point that we have to act and act quickly.”
Here’s a link to the video:
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