No one has successfully nationalized a bank in the circumstances that we are now in.

[EmilyAnne]

The more I read, the more I believe that there is absolutely no precedent to nationalizing banks while dealing with the major issues of our day.
What are these issues?

1. Collateralized Debt Obligations (CDO) or Credit Default Swaps (CDS). Sweden didn't have to deal with them in 1992 because they were virtually nonexistent. FDR didn't have to deal with them because
they were literally nonexistent.
It was the Gramm-Leach-Bliley Act in 1999 that allowed banks to participate in CDOs.
It was the Commodity Futures Modernization Act of 2000, signed into law by Bill Clinton, that allowed CDSs to be grossly unregulated and led to the Enron disaster.

2. Multinational banks. No multinational banks have been nationalized. Swedish banks were not multinational. Nor were the banks of FDR.
There is no legal authority to take over multinationals. Even if there was such authority, the FDIC could not handle this. We would need help from abroad and right now, as the rest of the world
blames this mess on us, our credibility here is shot. Other countries have their own regulatory authority over these banks and they may not allow the US to take any role in regulation or controlling
of any sort. And once again, world opinion comes into play again.
I just read this European Central Bank report about the complicated business of regulating multinational banks, by the way.
http://www.ecb.int/pub/pdf/scpwps/ecbwp431.pdf

3. We are in the worst financial crisis in the last 80 years. That means any sudden changes such as nationalization will make massive waves.

4. The United States is a world wide financial center that uses and issues a default currency (USD$). Once again, compared to Sweden, we are comparing an apple to an apple tree.

5. This a world wide crisis in the truest sense of the term "world wide". FDR's world wide depression was much smaller, less interconnected, much less of the world.
Sweden was on its own in this department.

Add all of these together and we are in completely unchartered territory.

What do any of you guys think? Am I wrong? Any ideas?

Can we talk about this without calling anyone a PUMA, a shill for the banks, a poutrager, a cultist bowing at the feet of the leader, etc.?
Please?

[Jennicut]

1. This is what I have though all along. We simply have never seen anything like

this. Nationalization could work or this plan we have currently could work, who knows? This is a huge interconnected economic mess. All the other countries in the world are pissed at us because we unregulated it all and yet they participated too. Just check out AIG's connections to other countries.

[MadHound]

2. Go research Sweden's bank nationalization

That is the model we need to be following. Instead, Obama seems bound to follow the Japanese model of not nationalizing, instead opting to prop up zombie banks for years and consigning us to a decade or more of economic hell.

[EmilyAnne]

4. But I have read so many accounts of Sweden's bank nationalization and I referred to it all

throughout my post.

What do you think about he unique circumstances that I mentioned, mainly the existence of CDOs and CDSs. These were absolutely not factors in Sweden in 1992! They were practically nonexistent there, if not completely nonexistent.

Multinational banking was not a part of Sweden's system.

The massive scale of nationalization that we would be taking on has NEVER been even been attempted. Not even close.

[elleng]

7. There were no CDOs and CDSs.

You are right; our situation is not comparable.

And as Prez O has said, we have MANY more banks than does/did Sweden.

[EmilyAnne]

10. And these CDOs and CDSs, correct me if I am wrong, make up the dreaded "toxic assets" that we keep

talking about. Along with mortgage backed securities.

Aren't these all about estimates on their risks?
Could be that the pendulum is now swinging in the other direction?
From incredibly overvalued to incredibly undervalued?

[elleng]

14. Don't know about valuations,

but yes, I think (as a NON-expert) that the 'Cs' contain the so-called toxic assets. (Too bad someone made up that name, as it masks or keeps public from understanding a major part of the problem.) And if that is correct, they then ARE mortgage backed securities which are sick because they are all bundled together, and no one knows or can tell how much of which are how sick. Got it? But that's MY weak understanding. SO others here are invited to correct and clarify.

[KakistocracyHater]

37. no it's just the scale that puts you off

it is still viable to nationalize the banks. Yes it is on an astronomical scale, but technically a huge amount is just guessing the level of toxicity with the interst rates at where it is now. We have many 'knobs & controls' to our advantage, all we need to do is to act on an enormous level, gently/flexibly synchronized with the rest 'in trouble' countries.

[MadHound]

11. So the only way to save them is the Geithner plan?

Geithner studied the Japanese method of dealing with the crisis of the ninties, and unfortunately he is applying those lessons to our situation. Throwing more and larger amounts of money at the banks, little regulation, all of which gave Japan a bunch of zombie banks and a recession that lasted a decade. We can't afford that here.

Sweden's banks, while not having to deal with CDO's and CDS's, did have to have a lot of toxic assets taken off their books. They were nationalized for a few years, then reprivatized, and both they, and Sweden are much better off because of it. Oh, and yes, Sweden's banks were multinational in scope.

Sorry, but the Geithner plan would consign us to wasting more and more taxpayer money with little, if anything to show for it. Nationalizing the banks, for a time, will be a quick way to clean out the banks, get rid of toxic assets, sort the wheat from the chaff and then let them go. A large part of the problem we have right now is no confidence because nobody knows who has what in terms of assets. Rather than having the public blindly buying a bunch of toxic assets and getting stuck with the tab, nationalize the banks, go through all of them and show what is good and what is bad in the light of day. That way confidence can be restored quickly and we can avoid a long drawn out crisis.

[EmilyAnne]

15. I don't think there is only one plan that can turn the economy around. I am sure there are parts of

every plan that could work well. And there are good points made by all economists, save a few fools such as Phil Gramm.

It is my understanding that no investors will be engaged in blind bidding.
Auditors are compiling portfolios on the toxic assets as they sort through the bank books.
These will be made public for all of the investors, both public and private.
As a side note, an interesting thing I recently learned about Sweden's case is that the government did not manage the nationalization nor the separation of assets. It was actually handled by professionals in the private sector.

The unprecedented massive scale of our banks will make the separation of good assets from the bad much more difficult, especially given the type of assets we are talking about.
The differences between good/ bad assets were much more apparent in Sweden.

And relative to our current system of multinational behemoths like Bank of America or Citigroup, Sweden was just not much of a multinational player.

You and I agree that the assets need to be taken care of so confidence can resume.
I don't think that nationalizing our banks would be a quick solution.
And then there is that huge problem with our global economy. We would need to guarantee all of the liabilities of our banks. Not impossible, but a massive undertaking.

In my opinion there are compelling reasons to not nationalize at the moment.
And reasonable arguments for Geithner's asset plan can also be made.

[girl gone mad]

19. You need to explain why you think that matters.

Derivatives function as bond options and insurance. What, specifically, about options and insurance makes these instruments impossible to handle in a receivership situation?

Sweden didn't have multinational banks? You're kidding, right?

http://www.amazon.com/Multinational-Restructuring-Internationalization-Small-Economies/dp/0415122864

[TexasObserver]

3. I oppose nationalization. I favor the method of seizing them.

I favor the method used by the FDIC. A bank is seized. Its owners lose their entire investment. Its depositors are covered up to limits by the FDIC. The bad assets are removed, and the good assets are bundled for a new bank to open immediately in place of the failed one. They used to get banks that were doing well to take over those that failed.

Letting a bank fail does not mean that we ignore the needs of the public, the depositors, the borrowers, or the financial system. It means we hold accountable first the bank's owners, directors, and officers. They all walk the plank.

[Christa]

5. Thank you. nt

[EmilyAnne]

6. So the bad assets are just absorbed, in a sense? They disappear?

What do you think about how the FDIC seems very supportive of Geithner's plan, by the way?

Also, isn't your method a version of nationalization? Just curious about terms because I learn a lot of new things in ref to the economy everyday.

[TexasObserver]

8. It's not my system, but how the FDIC has long handled such failures.

I am not sure what the Nationalization advocates really believe, but I assume they mean the government would own and operate banks seized. I prefer the old way, where the FDIC quickly cleans up the mess and gets a new owner for the newly created banking entity.

As for the bad assets, they get stuck in a pile for eventual attention. When we had the last big banking collapse, in the mid to late 1980s, they created the RTC to handle all the repoed property attached to bad loans. The logic is that the bad assets won't likely be sold any time soon, so the focus should be on saving the banking system, not dealing with assets that aren't going anywhere and won't sell for two years in all likelihood.

[EmilyAnne]

12. But that was property. In the 1980s, there were no CDOs or CDSs. None. Not one.

I can still accept the parallel about waiting on dealing with them, though.

I think the government owning and operating style nationalization is the sort of thing that Republicans claim to be fearful of. Similar to Venezuela. The government dictates mortgage terms, car loans, etc. Is that what you meant in your example of what you think the nationalization advocates want?

If so, I don't think that is true. It seems that they do want a system like the one you have described. And they consider it nationalization. Not that it matters. The concepts are far more important than the term.
Thanks for your response!

[TexasObserver]

13. I agree its worse now because of such things as Credit Default Swaps.

We did not have that additonal layer of bad bets on top the entire pile of overvalued properties.

I don't mind the notion of the government seizing banks that have lost enough capital that they are insolvent, but I want the government to immediately reconfigure that failed bank's assets into a new bank, to best serve the public, the depositors, the borrowers. Saving the bank's owners' equity should never be part of any bailout process.

[EmilyAnne]

16. I agree with you on that point. Still, I wonder what to do about the foreign holders?

If we just bail on their investments in US securities, we will be very screwed for a very long time.
At a time when our manufacturing industry continues to take hits, we will need foreign investment.
Maybe we can honor their investments and tell the US investors to suck it up?

[elleng]

9. Read about FDIC.

Someone did a tv story about it recently.

http://www.fdic.gov/

[girl gone mad]

20. What you just just described is nationalization.

[TexasObserver]

22. No, it's what we've been doing with failed banks for decades.

It's not nationalization, which entails the government seizing and running banks, instead of merely reconfiguring them by seizing their assets and placing most of them with a new owner.

[girl gone mad]

24. Every economist I read defines nationalization as a temporary

takeover, precisely what the FDIC does on a weekly basis, just like we did with the S&Ls, exactly what you are describing.

[TexasObserver]

26. That's not nationalization.

Nationalization entails ownership and operation by the government. It lacks the component of handing off the assets and operations to a new entity owned by individuals or companies run for profit.

[girl gone mad]

28. It's temporary nationalization.

Exactly what Stiglitz, Krugman, Roubini, Galbraith, et al propose. You can call it "receivership" or "preprivatization" if you prefer. No need to get too hung up on the terminology.

[CAcyclist]

30. That is nationalization. nt

[TexasObserver]

38. No, it isn't. It's how the FDIC has handled failing banks for decades.

It's not nationalization and it's not new.

[jeanpalmer]

36. Maybe these banks are too big

to apply that approach. Maybe there's no orderly way to dissolve or reconstitute them. And would they have to do them all at the same time? The task could be overwhelming.

[TexasObserver]

39. What do you think they did with WaMu?

That's exactly what they did with WaMu.

[w4rma]

40. Yes! We need to just go ahead and do this *yesterday*!!! The Geithner plan is a huge failure that

is trying to save the INVESTORS over our entire nation.

[TexasObserver]

42. Yes, indeed! When they save the shareholders, they save the officers & directors, too.

When a bank fails, traditionally, the shareholders lose all their stock equity, the directors and top officers no longer run things, and in fact, they become targets of those attempting to hold the bank responsible for its failings and defaults. Claims are made against the bank's insurance for Officers and Directors' liabilities.

Bush cooked up this scheme: that the focus should be saving the ownership, the directors and the top officers. By allowing these scoundrels to remain in place, they gave federal cash to them so they can help cover their tracks further.

[Enthusiast]

44. I like the way you think!

Can we put you in charge?

[TexasObserver]

47. We just need to return to how we have long dealt with bank failures.

I'm only proposing they do it the way they've done it for decades. Bush decided the most important thing is to save the banks, their shareholders, their directors and their officers. As usual, the GOP approach is all top down, trickle down.

[cali]

17. Interesting and informative thread. Thanks, EmilyAnne, and thanks

everyone else here for demonstrating what DU can be.

[Bjorn Against]

18. I don't know that we have ever been in the circumstances we are in now...

There are certainly similarities with the beginning of the Great Depression, but they were by no means the same circumstances. Sweden successfully nationalized banks in the past, and while it is true the circumstances were different the fact is that we have never been in the circumstances we are in now. With the changes in our world over the past several decades even the Great Depression is not really that good of a comparison.

[girl gone mad]

21. Research what happened to the

CDS and CDO contracts written by and on Washington Mutual, Freddie Mac, Fannie Mae, IndyMac, and Lehman Brothers.

Since it was done relatively well in most of these cases, you need to make a better argument for why we can't do it with AIG, Citi and (maybe) Bank of America. Yes, you could argue that Lehman's bankruptcy didn't go smoothly, but I would counter that this was due almost entirely to the sudden and unexpected nature of the collapse.

If the FDIC believes they lack the authority to take over the multinational parts of Citi, that still leaves the domestic bank (with about $400B in assets and $400B in liabilities) which we could indisputably seize. That would leave $1.5T in assets and $1.4T in liabilities to be managed by foreign governments or to allow to fail in a more controlled manned than Lehman Brothers did.

[tama]

23. Cuba? n/t

[ljm2002]

25. No one has ever *been* in the circumstances we are in...

...therefore it is inane to say that no one has successfully nationalized banks in this situation.

The question is, why let the damn banks keep running the show when it is they themselves who have put us all in this unprecedented situation? Why shore them up while maintaining their private ownership? Why make good at 100% for the derivatives holders, many of whom were making side bets on outcomes where they had no stake at all? How the hell does that make any sense at all?

What we desperately need right now are some new ideas, and those are not going to come from the likes of Summers and Geithner -- with all due respect. No I am not being snarky, obviously these are smart people who got a long way by believing in and practicing a certain financial philosophy. Oops, it blew up in all our faces. The fact that they are trying to save this corrupt system -- as usual, on the backs of the working stiffs -- while keeping the pay, privileges and perks of the Big Banking Boys intact, says it all.

[EmilyAnne]

31. Maybe its inane to state the obvious, but there are many people who insist that there is a

precedent that is so clearly the singular, correct path.

I am simply pointing out that there really isn't a precedent and that there are many reasonable arguments for not nationalizing the banks right now.

I don't know what you mean about Geithner trying to save a corrupt system.
What system exactly?
Could you be more specific?

Thanks for your response, by the way!

[PA Democrat]

27. My personal observation is that we are in pretty much uncharted waters right now.

I ran across some eye-opening figures:

$1.14 quadrillion -value of derivatives held globally

$13.4 trillion -value of derivatives held by Bear Stearns last year

$14.3 trillion -estimated US GDP for 2008

http://jutiagroup.com/2008/07/24/global-derivatives-market-now-valued-at-114-quadrillion/

[jeanpalmer]

35. I believe JPMorgan is far and away

the leader in terms of holdings of CDS. The number I've seen is $70 trillion in notional value. No other bank is close.

[PA Democrat]

46. Yes. The article I linked says they had $77 trillion and then they acquired Bear Stearns

with assistance from the Fed, bringing their combined total to $90 trillion. The magnitude of the problem is so great that it pretty much incomprehensible to most people.

[CAcyclist]

29. I disagree on the basic premise but you are absolutely right that CDS

were not an issue before.

Why ? Because in 1909, bucket shops were specifically made illegal and the credit default swaps of the day thereby eradicated. Bucket shops were places where people who did not have stocks could bet on the rise or fall of stocks - the same as what the banks and brokers are doing today with credit default swaps. 60 Minutes had a great piece on this a few months back.

Thus, by the time of the Great Depression, this issue wasn't bloodying up the waters.

I believe we cannot get a handle on the banks until we deal with the credit default swaps.

First we have to make them illegal.

[EmilyAnne]

32. Absolutely. Laws must be changed in regards to CDSs and CDOs. For the record, none of this kind

of investing really existed until 1988 ( I think).
Then, it wasn't until the deregulation acts of 1999 and 2000 that allowed them to start taking steroids.
Unregulated investing and allowing banks to participate has made this bed.

What do you think should be done about the swaps, by the way?
I have heard some argue that they should be completely rescinded by the US government.
The major problem with that, in my opinion, is with foreign investors.
We can tell our own to suck it up, but to tell China, Europe etc to accept that US securities are a pile of shit? That their investments are not safe?
That would have huge consequences.

I'll try to find that 60 minutes episode.
It sounds interesting and I want to learn as much as I can.
Thanks for your response!

[jeanpalmer]

33. Do we have to make them illegal

Or are they already illegal? Which law is it that authorizes side bets not related to any insurable interest? Isn't that just illegal gambling? Declare them void as the product of illegal gambling.

[Enthusiast]

45. Does Geithner support making them illegal? nt

[buzzard]

34. This is interesting commentary by Greenspan regarding what would happen in a downturn. It had not

been tested but even then he seemed to grasp the effect but still didn't give a shit.

http://www.federalreserve.gov/BOARDDOCS/TESTIMONY/1998/19980724.htm

I do not mean to suggest that counterparties will not in the future suffer significant losses on their OTC derivatives transactions. Since 1994 the effectiveness of their risk management skills has not been tested by widespread major declines in underlying asset prices. I have no doubt derivatives losses will mushroom at the next significant downturn as will losses on holdings of other risk assets, both on and off exchange. Nonetheless, I see no reason to question the underlying stability of the OTC markets, or the overall effectiveness of private market discipline, or the prudential supervision of the derivatives activities of banks and other regulated participants. The huge increase in the volume of OTC transactions reflects the judgments of counterparties that these instruments provide extensive protection against undue asset concentration risk. They are clearly perceived to add significant value to our financial structure, both here in the United States and internationally.

[Kaleko]

43. Breathtaking. In hindsight, it was Greenspan who was irrationally exuberant

about a "self-regulating free market" whose dangers he could clearly see.

[Undercurrent]

41. I'm really enjoying reading this thread.

I'm learning, and getting varied perspectives on this breathtakingly complex issue. All with out a bunch of rancor!

Thanks all! This is a great thread.

[Nicholas D Wolfwood]

48. I hadn't considered the multinational facet of nationalization.

Very good observation - thank you for pointing that out.