Thursday, February 12, 2009
The "one day" bank nationalization
I've been busy, so perhaps I have missed other discussion of this interesting idea:
Mr. Geithner should instead use his "stress test" and nationalize the dead banks via the FDIC -- but only for a day or so.
First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here's the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.
Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.
Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.
This is a great idea, but for two big flaws. The Democrats would never agree that the shares be distributed pro rata according to taxes paid in the past. That would "reward" the "rich" who, by dint of "greed," have already "taken" too large a share of the "national" income. More to the point, roughly 40% of the population -- generally, the least-advantaged 40% -- pay no federal income tax at all. It is hard to imagine Democrats leaving the
The second problem is that a great many people would not know what to do with shares if they got them. People who live paycheck-to-paycheck, or who are even less well off, would sell the shares quickly. Not only would that depress the value of the shares and make it difficult for the banks to raise additional equity, but if the value snapped back later on we would have to suffer through endless sob stories from regretful sellers who claimed they were victimized in some way. Apart from the burden of that tedium, the whining of the disappointed sellers would probably lead to another round of anti-business populism, which is really the last thing we need.
The question, therefore, is whether the "one day" nationalization plan could be tweaked to minimize or eliminate these fairly obvious shortcomings.
4 Comments:
By 
, at
Fri Feb 13, 07:25:00 AM:
No. Not with toxic Nancy, Harry and Barry around. Add Jesse, Al [Sharpton], Schumer, Dodd, Kennedy and Kerry. Another idea killed by socialists.
By , at
Fri Feb 13, 07:52:00 AM:
"...but if the value snapped back later on we would have to suffer through endless sob stories from regretful sellers who claimed they were victimized in some way."
Actually, this did happen, in spades, in the former Soviet Union. Within a few months of the fall of the USSR and the redistribution back to millions of citizens of shares in state enterprises, they were almost all bought up by well-connected apparatchiks for a song. The problem then was of course most of the citizenry was destitute, and didn't know the value of what they had. This is not a sob story, but actually a pretty accurate example of what the Lefty's like to call captilist greed.
However, in the US, even the poorest (who, by the way, still manage to own colour TV's, home PC's, at least one car, etc etc) don't compare to the old Russian pensioners of the early 90's.
By , at
Fri Feb 13, 08:46:00 AM:
This guy's at least right about the need to wipe out the shareholders, but he seems to be tying himself in knots trying to spare the bondholders any of the pain. They assumed risk as well!
Once the existing stock is extinguished, the junior bondholders should be required to take the toxic assets themselves in exchange for some of their bonds. Then we convert the more senior bonds into new stock in the reorganized bank, continuing the process until the balance sheet looks reasonable again. At this point the FDIC is done; what to do about the board and the management team can be left to the bondholders-turned-owners. The taxpayer is on the hook only for the cost of administering the reorganizations.
By , at
Fri Feb 13, 07:56:00 PM:
Not sure I'd agree with this attempt at a cleansing nationalization/privatization. But the issue bears further thinking, if for no other reason than that we'll all be better off if Fannie Mae and Freddie Mac are removed from Washington's books as soon as practicable.
Looking longer down the road, a program of other privatizations offers one of the few avenues that I can see of improving governments' financial positions. Everyone would have his/her own candidates for privatization, and we'll need many of them at both federal and local levels. My first nominee would be to revive Dana Rohrbacher's one-time proposal to distribute complete ownership of the US Postal Service to its management and employees, divided pro-rata according to each level's GS pay grade.
Interested to hear what, beyond the "GSE's," you'd privatize and how you'd go about it.
