NYT - Thomas Friedman On Banks and Nationalization - Finally! Someone Addresses The Logistics!

[Median Democrat]

I have posted on this before when folks are said that Obama should just nationalize the banks or question why Tim Geithner seemingly has not done anything. I also posted that the FDIC is shorthanded, and is apparently hiring thousands of employees as reported by NPR. Yes, Krugman and Roubini have said that (in theory) it makes sense to nationalize the banks. HOWEVER, they have not discussed the logistics. Lets generously assume, for example, that you only need 1 percent of a banks current employees to takeover and run a bank using most of the bank's current employees. Well, even using a low 1 percent figure, Citibank has close to 300,000 employees, thus you need 3,000 qualified FDIC employees to takeover Citibank, which is over ten percent of the FDIC's current workforce.

People who ignore the nuts and bolts of logistics are doomed to fail, and I doubt that the Federal Government will do anything dramatic with respect to the banks until they (quietly) have the resources in place to do something. Right now, the Feds do not.

http://www.nytimes.com/2009/03/04/opinion/04friedman.html

/snip

Climbing out of such a deep crater is going to be tricky. Any big step we try to take could trigger other problems — the full dimensions of which we don’t understand. We need to create a “bad bank” to buy and hold the toxic mortgage assets or have the government buy the first batch and create a market, but that would likely involve bailing out banks that have behaved very recklessly. It is a price I’d pay to save the system, but even doing that is very complicated. Buying securitized toxic mortgages is not like buying a yacht off the books of a bankrupt savings-and-loan.

Nationalizing Citigroup may sound good on paper, but putting Citigroup into receivership could trigger all kinds of defaults on derivative contracts that it has written. It may be inevitable, but we’d better understand all of Citigroup’s counterparty risks so we don’t inadvertently set off more falling dominos, à la Lehman Brothers.

/snip

[aquart]

1. Well, isn't he a big help.

[nadinbrzezinski]

3. He's pointing the obvious

problem is the bad bank is not this generation's idea, see Great Depression, see Sweden

But if they are quietly hiring people... that's exactly what they're getting ready for

And Friedlman will be the first one to squeal

[girl gone mad]

2. Both Krugman and Roubini have discussed the logistics.

As have Stiglitz, Greenspan, Posen and many others.

Try listening to this: http://www.npr.org/templates/story/story.php?storyId=101360253

Or reading this: http://www.businessinsider.com/nationalization-will-be-completely-horrific-2009-2

It's been covered. In detail. Friedman is an idiot.

[aquart]

4. Yes. Friedman is still an idiot.

[Median Democrat]

5. Your Business Insider Article Contains No Mention Of Krugman or Roubini

In fact, the title of the article is that "Nationalization Is Horrific" while Krugman and Roubini have been advocating nationalization. Did you link the wrong article?

[Luminous Animal]

6. Apparently, you did not...

1) read the article carefullly, and/or
2) read it through to the end.

[Median Democrat]

9. Maybe Its My Computer Then, Because Here Is The Article I Get

Where are Krugman and Roubini discussing the practical logistics of nationalization? I have heard Krugman and Roubini discussing it in very abstract terms regarding why we should do it, but there is no nuts and bolts discussion of how many people such a nationalization would take, and whether the federal government currently has the resources to make it happen if they wanted to.

It is sort of like invading Iraq without thinking through the consequences of maintaining the peace after the fact. What are the pragmatic requirements of running Citibank? How many FDIC employees will it take, and does the FDIC have the resources to make this happen? This is what I want to hear Krugman and Roubini address:

Here is the article you linked:

/snip

We're still pushing ourselves deeper into the zombie zone, with banks propped up on enough capital to keep the executives in perk-laden sinecures but unable to sustain a growing economy. Is there hope that we'll ever get off this path? Each day brings a new voice calling for us to avoid the path that Japan took (here's Krugman quoting Adam Posen's testimony today to the Joint Economic Committee), but so far these calls have fallen on deaf ears.

Part of the problem may be that regulators think those calling for the failed financial institutions to be seized don't understand the financial consequences that would follow. So let's push that out of the way and just say: yes, it will be horrific. There will be a huge domino effect from toppling an institution as large as Citi, and the lives of millions of Americans will be made worse.

Meghan McArdle, who is not exactly a socialist eager to see the government take over the banking industry, runs through the huge costs:

It's easy to blithely say "Why don't they just make the bondholders take a haircut?" Harder when you think about who those bondholders are: insurers. pension funds. the bond component of your 401(k). Financial debt makes up something like a third of the bond market, and the largest holders are pensions and insurers.

The insurers are the biggest problem, because they're just so heavily regulated. They're not allowed to hold risky assets. Convert their bonds to equity and they will be forced to dump that equity at prices that will trend towards zero. Many insurers will see their capital impaired below the regulatory limits, requiring a government bailout.

Pension funds are the next biggest problem. They're already in big trouble because of stock market declines. The bonds are the "safe" portion of their portfolio, the stuff that's supposed ot be akin to ready cash. Convert their bonds to equity--or worse, default--and suddenly they're illiquid and even further underwater.

Nor is the 401(k) problem small. Bond funds are typically held most heavily by the people closest to retirement; they're for income, not capital gains. What is your mother going to do when a third of her mutual fund income gets converted to equity that produces no cash and can't be sold because the insurers have all had to dump their shares on the market at once? Or simply disappears into the land of bankruptcy lawsuits?

We can add to the list. The market for muni bonds will be badly damaged as the pension funds assets get hammered. Corporate borrowing will become terribly painful. Bankruptcies will follow as some companies find it impossible to raise money. The credit crunch of 2008 will seem like pancakes and syrup for breakfast.

But the fact is that the alternative is far worse. We can't afford to underestimate the cost of the half-measures that are leading to zombified banks. The fingers-crossed implicit guarantees of bank liabilities and phony-baloney asset values, the drip-drip water torture of capital injections, the lies about banks being "well capitalized" threaten to cripple the economy for the foreseeable future.

Here's how McArcle concludes her item on the costs of allowing the banks to fail:

I think what Geithner et. al. fear is that nationalizing or reorganization will put the government on the hook for massive and immediate losses in both the banking system, and the "safe" entities that lent it money. I fear they may be right. But I think the lesson of Japan is that we have to do it anyway. I don't know what form the fix should take. I don't know how painful the fix will be. But I'm pretty sure any fix that makes us recognize the losses, recapitalize the banks, and move on, will be better than two decades of zombie banks and glacial growth.

/snip

[KharmaTrain]

7. Well Stated

There also are varying degrees of nationalization...taking control of the voting stock of a bank, like Citi is tantamount to a take over and when the logistics are appropriate, then using that proxy power either the company is remade or dismantled. But, as is stated, logistics are a tricky thing. Any rash actions will take down a lot of innocent people.

There will be the need for a bad bank or RTC or some other holding tank for these toxic assets and allow the banking system to recover. But that also will mean revising a system that prevents banks from becoming too big to fail in the future. These rules were in place until the "Raygun" revolution and a lot of what will ensure the future won't be new fangled laws, but just restoring and enforcing ones that were once in place.

The FDIC is too small to handle the big messes, but is in the proper place to ensure the stability of the smaller banks...and what would be the foundation of a rebuilt banking system.

[Truth2Tell]

8. If Tom Friedman is coming up with rationalizations

for why nationalizing the banks is a bad idea, then it must be a good idea.

Many hedge funds and investment companies take over and and guide the direction of huge businesses with very small staffs focused on the top management teirs. Just ask Warren Buffett. Freidman's argument is complete and total bullshit, as usual.

[Median Democrat]

10. How Many FDIC Employees Will It Take To Nationalize Citibank?

This is the nuts and bolts answer I am looking for. I hear a lot of generalized arguments, but nothing out there actually goes through what types of human resources are needed to accomplish a nationalization. BIG DETAIL!

Here are my facts.

1. I noted that the FDIC has shrunken by 2/3 under Bush from 15,000 to about 5,000.
2. The FDIC has been heavily (but quietly hiring) per NPR and opening new offices.
3. Citibank employs about 300,000 employees.

So, does anyone have an article or quote by Krugman or Roubini saying how many federal employees it will take to run a nationalized Citibank?

So far, a lot of the remarks sound like Republicans cheerleading for the Iraq War. How much will it cost? Not that much. Will we encounter resistance? We will be greeted as liberators.

The theory sounds great. Lets here some numbers on how do the feds pull it off.

[Truth2Tell]

11. Well, start by taking a look

at how many employees it takes for a buy-out firm to run a large corporation or bank after they buy it. And here's a hint: the answer is in the dozens not the hundreds. You see, these banks already have employees. It's not like the plan would be to fire hundreds of critical people. You simply take over the Board and the top management positions and run the place from the top down. Unless the FDIC is down to its last 500 employees then this argument is complete red-herring (Friedman's specialty).

[Median Democrat]

12. Any links to support your assertions? Look at Fannie Mae...

Fannie Mae is a fraction of the size of Citibank, and employs only about 5,000 employees. Yet, to handle the federal takeover of Fannie Mae and Freddie Mac, the federal government had to merge three separate federal agencies into a brand new agency, and as this article notes, despite this merger, it needed more employees to oversee Fannie Mae and Freddie Mac:

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/01/AR2008080102927.html

Now, normally the FDIC will take over a bank, then more to resell it. However, who is big enough to buy Citibank and BofA? Thus, the FDIC will need to run Citibank and/or BofA in the event of nationalization.

A lot of folks are making unsupported assertions that it is easy to nationalize Citibank and BofA with a few hundred employees, but I am looking for some real analysis or statements by someone who should know such as Krugman and Roubini who are pushing for Nationalization. Fannie Mae is small fraction of the size of Citibank, yet its takeover required the formation and consolidation of a new agency.

Are you suggesting that Citibank would be easier? How many federal employees will it take?

[Truth2Tell]

13. That article

implies that it took about 400 employees to supervise that takeover. And it also makes it clear that the merger of those agencies was in the works long before the Fannie and Freddie deals. It was just expedited because of them.

400, or even 4000 employees, is really a drop in the bucket when we're talking about the sums of money involved in bailing out these banks.

It almost seems like you're deliberately misrepresenting that article to exaggerate how difficult this would be. Weird.

[Median Democrat]

14. So, Help Me Out Here, How Many People? Or, Do You Agree?

Do you agree that there is not really any article or story out there that discusses the logistics of nationalization? I am not talking about an advocacy piece or a spin piece. I want to know what the nationalization of citibank would look like. What are the numnbers involved in terms of federal employees and money? Who would do it? The FDIC or the Fed?

Ideas are a dime a dozen. The real question is execution. Logistics. The point of basketball is to shoot the ball through the hoop. Simple in theory. However, the execution is what separates a Lebron James from someone shooting hoops on a drive way. Theory v. Execution.

You seem more intent on hurling insults than responding to a question by a fellow Democrat. This is why I am dubious about nationalization, because it sounds too good to be true. You suggest that it would only taka a relative handful of employees and that it would not take too long to hire them.

So, if you don't know the answer, that is fine, but then why are you wasting my time responding to these questions in the first place?

[dysfunctional press]

15. nationalize home mortgages, good and bad...

my thought would be for the government to be the holder of all first mortgages on owner-occupied homes(1 per owner). the mortgages would be written at 3% with terms as long as 100-years(in which case heirs would assume the mortgage with no additional fees or penalties), and anyone would be eligible- even if your mortgage is paid off, or you aren't in any trouble with your current one.

this would/could potentially put a nice chunk of money in people's pockets every month- which would certainly do wonders for consumer spending.