Cui Bono?
| Tue Feb. 24, 2009 11:24 AM PST
Bond king Bill Gross thinks it would be a bad idea to nationalize banks and force bond owners to take a haircut. This would "create an instability policymakers should not want to risk," he says, and might undermine other financial sectors such as insurance companies and credit unions. Megan McArdle is unimpressed:The problem is that seeing as he's a gigantic manager of bond funds, this is also the policy that will make Bill Gross best off.
This is, writ large, the problem faced by Geithner and Bernanke: the people who know the most are those with the most to lose or gain by their actions. If they do not talk to the experts, they will do something incredibly stupid through not having thought through the possible consequences. If they do talk to the experts, their ears will be filled with advice that is both plausible and self-serving.
....I am concerned about the sudden consensus about nationalization — I haven't yet seen a good reason to believe that a tiny bank in a tiny nation like Sweden presents a good model for tackling the problems of the largest financial services company in the world. But the fact that Bill Gross is worried about bondholders taking a loss makes me more inclined to favor the notion. It's perverse, I know.
Nationalization should be a last resort. And there's no question that nationalizing a multinational giant like Citigroup is a far more complex undertaking than nationalizing Nordbanken. On the other hand, there's just no way that taxpayers can be expected to continue shoveling capital into big banks in return for tiny minority shares. In the case of Citigroup, for example, the government has so far handed over $45 billion to a company that could be purchased lock, stock and barrel for only $10 billion. There's just no way that taxpayers are going to keep putting up with that, and they shouldn't.
In any case, it's also possible to overstate the difficulty of nationalizing a big money center bank, I think. It's not as if we'd fire the entire staff, after all. What would happen in reality is that the board of directors would be dissolved, some of the senior staff would be replaced, shareholders and bondholders would take a hit, and the bank would continue running as normal except with a stronger capital base and government guarantees behind it. Then, in a few years, it would be refloated and put back in private hands.
It would be nice if it doesn't come to that. But there's a pretty good chance that it will. Not because anyone wants it to, but because, eventually, it will probably be the least bad option left for the weakest of the banks.
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Comments
Haircuts.
Submitted by BigTom (not verified) on Tue Feb. 24, 2009 11:41 AM PST.
Of course when we talk about giving bondholders getting haircuts, we have to realize that most of these in 401Ks, and many of the rest in various institutional bond funds. And the purchasers thought this was low risk low (relatively) interest rate stuff. It is not just fat cats that will lose some skin, but millions of retirees (or woulda soon been retirees -who now have to work into their old age).
Receivership
Submitted by kishin (not verified) on Tue Feb. 24, 2009 11:55 AM PST.
"What would happen in reality is that the board of directors would be dissolved, some of the senior staff would be replaced, shareholders and bondholders would take a hit, and the bank would continue running as normal except with a stronger capital base and government guarantees behind it. Then, in a few years, it would be refloated and put back in private hands."
Let's quit calling this "nationalization," shall we? Nationalization is when the government sets up or takes over a bank, and then runs it, with profits going to the government, etc., forever more. What you describe above is more correctly called "receivership," something the FDIC does all the time with no problem. I think we just need to get on with this.
Self-interested experts
Submitted by Ken D. (not verified) on Tue Feb. 24, 2009 12:02 PM PST.
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This is not specific to this issue; it is a chronic problem across a wide range of issues that come before governments at all levels. This is just a particularly clear-cut example.
Citi and B of A should be allowed to fail - sort of
Submitted by Dave Brown on Tue Feb. 24, 2009 12:09 PM PST.
We aren't doing anyone a favor when we allow bankrupt institutions to survive intact. In the past, I've supported a carefully executed bank bailout, not because I thought it was the best course of action, but because I reasoned that postponing the inevitable reckoning had some value. Unfortunately, the banks proved to be in worse shape than I had expected, and the recession was deeper than I had hoped. We can no longer afford to postpone the inevitable; no institution is too big to fail, and some must be allowed to fail.
The part of Citi, B of A, et al that acts like what we traditionally call a bank - collects deposits, makes loans, etc. - is sound. It's the non-traditional part of these banks that is insolvent. The solution is simple. Spin off the banking and non-banking functions as separate entities, giving the various stakeholders proportional shares in each. Then sit back and watch as the banking side thrives while the non-banking side collapses into a black hole.
Gross's net worth: $1.2 billion
Submitted by SteveHigh on Tue Feb. 24, 2009 12:33 PM PST.
Where do these guys who've never lifted anything heavier than a martini glass have the guts to whine and threaten the rest of us when asked to make any sacrifice at all?
BigTom: Of course when we
Submitted by alex (not verified) on Tue Feb. 24, 2009 12:44 PM PST.
BigTom: Of course when we talk about giving bondholders getting haircuts, we have to realize that most of these in 401Ks, and many of the rest in various institutional bond funds.
I seriously doubt that most are in 401k's. If you have data to the contrary, please share it.
More importantly, nobody ever said that capitalism was risk free. Somebody has to pay for this mess, and the bondholders are second in line after the shareholders. Why should all taxpayers take a haircut just because some bondholders don't want to? Nobody is going to compensate me for my shares of XYZ Corp. that are now worth pennies on the dollar, and why should they?
If a company fails what happens to the bond holders? Isn't there established law with regard to this?
Yes, the big banks which fail Geithner's stress test really are too big to be allowed to disappear and would have to be continued by the government until they could be fixed and/or broken up into smaller units.
I know of nobody in America who really wants to see the government taking over and running companies for an indefinite future. Even those who say they do are probably just confused about what that would mean to our whole system.
kishin: What you describe
Submitted by alex (not verified) on Tue Feb. 24, 2009 1:01 PM PST.
kishin: What you describe above is more correctly called "receivership," something the FDIC does all the time with no problem.
Quite right. It's hardly expropriation when you take over something that's worthless. Even Krauthammer noted that the FDIC is taking over two banks a week, and showed no grief over it. Obama's "not the American way" is pure bullshit. As long as Obama has serial incompetent Summers around (and perhaps Geithner) Obama has no credibility and we're basically screwed.
MarkH: If a company fails
Submitted by alex (not verified) on Tue Feb. 24, 2009 1:03 PM PST.
MarkH: If a company fails what happens to the bond holders? Isn't there established law with regard to this?
In the case of bank receivership there is no obligation whatsoever to pay the bondholders.
Bail Out
Submitted by Dutchman (not verified) on Tue Feb. 24, 2009 1:03 PM PST.
All the overpaid pompous wags running our industry and financial institutions should have their mental skills reviewed on the TV program called "Are You Smarter Than A Fifth Grader?".
We've all seen teachers with high degrees ask the kids for help and still lose. High school and college honor students have failed. This program should be made the national compulsory standard for all CEOs and the bankers of Wall St. Those who fail, and most will, should then be forced to resign and apply for a real job! Politicians will oppose my idea, because they will fear they may also have to take a "fifth grade" exam.
The dude in the picture
Submitted by kth on Tue Feb. 24, 2009 1:04 PM PST.
The dude in the picture could definitely use a haircut; i.e., something more age-appropriate and less creepy.
why the sudden worry?
Submitted by Bob (not verified) on Tue Feb. 24, 2009 1:10 PM PST.
No one worried about the complexity of taking over money center banks when they were merging themselves into existence.
Why not?
Submitted by SqueakyRat (not verified) on Tue Feb. 24, 2009 2:28 PM PST.
Why exactly would it be nice it didn't come that, Kevin? I think it'd be nice, very nice.
Why so complex?
Submitted by santamonicamr (not verified) on Tue Feb. 24, 2009 3:09 PM PST.
What Bob said.
Citigroup's market cap is currently $14B, down from its one-year high of $150B. If some really rich private entity swooped down and took it private, would we say, oh no, that's too complex. What makes it so much more complex if the government basically does the same thing?
Big Tom: Those with 401k's &
Submitted by bob in fla on Tue Feb. 24, 2009 5:08 PM PST.
Big Tom: Those with 401k's & pensions invested in these 2 banks have already been screwed as much as they can be. Once a stock falls below $5/share, they must sell it by law. Thus, there are no longer any retirement accounts invested with these banks.
bonds aren't the same thing as shares
Submitted by Jasper on Wed Feb. 25, 2009 9:36 AM PST.
Those with 401k's & pensions invested in these 2 banks have already been screwed as much as they can be. Once a stock falls below $5/share, they must sell it by law. Thus, there are no longer any retirement accounts invested with these banks.
Bob in Fla: what we're referring to is funds and pensions that have loaned money to banks -- the discussion has moved beyond the holding of bank shares, which, as you note, have largely cratered in value. My guess is the price of bank bonds can indeed fall much further, given continued poor economic conditions, and/or a government plan that is insufficiently generous to bond holders (i.e, one that forces holders of bank debt to convert the bonds into shares). I favor this latter approach (nationalization), for what it's worth, but I'm under no illusion plenty of ordinary people won't see additional losses as a result.
they managed to kill over
Submitted by tiffany jewelry (not verified) on Sat Aug. 15, 2009 8:07 AM PDT.
they managed to kill over 3,000 americans in the matter of a few hours with thousands of miles of emptiness under their control. Last thing is the psychological effect. We can't give them a victory in Afghanistan. We would suffer that consequence 1000 fold in the form of emboldened jihad all over the world. That is why they fight the hardest there. It is the alamo for AQ and they know it.
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