Kristof on Nationalization
Nick Kristof, who got to watch Japan be devoured by zombie banks first hand in the nineties, has an excellent column about the non-technical aspects of the banking situation. As he says “the larger conundrum is that a bailout is both: A) urgent and essential; and B) unfair and unpopular.” Thus far, officials have attempted to resolve that conundrum with timidity, but ultimately that results in measures that fail on both counts. What’s needed is more boldness — really decisive action to clean up the financial sector combined with measures that are tough enough on CEOs and shareholders to give the effort political legitimacy. He also has a neat idea for bringing bank nationalization closer into line with American norms:
Mr. Obama then suggested that it wouldn’t work in the United States, partly for cultural reasons. But a broad range of experts believe that some variation of nationalization is the only way to revive the banks quickly without squandering vast amounts of taxpayer dollars. Even the managing director of the International Monetary Fund suggested that Washington think of the Swedish model.
America’s horror of “nationalization” could be defused by handing out shares to all American households. President Bush used to talk about building an “ownership society.” Well, giving shares in big banks to all American households would be a terrific way to do that.
Admittedly, the Managing Director of the IMF is French Socialist (albeit from the PS’s moderate wing) Dominique Strauss-Kahn so I don’t think the “even” in “even the managing director…” really does a ton of work on the merits. Still, DSK is a smart guy! And he’s not the only one.
37 Responses to “Kristof on Nationalization”
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February 12th, 2009 at 10:59 am
A very important consideration to remember is that the GOP is largely insane or irresponsible at this point in time. A nationalization effort that doesn’t work quickly enough and helps sweep the Republicans back into power in 2010 is something to be avoided at almost all costs.
Mike
February 12th, 2009 at 11:09 am
For the record, I very much like Kristof’s suggestion. Handing out a hundred million shares (one per household) would work nicely. Very very nicely. Would solve deprivatization problem most excellently.
Quite serious. Limbaugh would complain, but a share in the hand is worth two Limbaughs in the ear.
max
['Kristof said something sensible. Damn.']
February 12th, 2009 at 11:09 am
What’s needed is more boldness — really decisive action to clean up the financial sector combined with measures that are tough enough on CEOs and shareholders to give the effort political legitimacy.
At this point, shareholders are nearly wiped out anyway; it’s not them that the bailout needs to be tough enough on: it’s stakeholders, especially creditors and management-level employees. Yes, Bill Gross will hate it, but subordinate debtholders in bailed-out institutions should be wiped out, and senior creditors should take a major haircut.
February 12th, 2009 at 11:11 am
What Americans have a “horror ” of is a corrupt US Government that is a RICO (Racketeering Influence Criminal Organization. A criminal gang that is using the threat of the military to confiscate every cent we have and give it to superrich patrons.
Even the worse parasites normally know enough not to kill off the host — but not these bloodsuckers.
After all, there are worst things than an economic collapse. Like an economic collapse that you enter penniless because the Democrats you helped elect voted to piss away $10 Trillion of your tax dollars.
February 12th, 2009 at 11:16 am
I can tell you a small but of what is going to happen. The GOP is going use the words socialism and nationalism to the point that they are conflated in peoples mind. They are also going to throw in a bit of 1970’s ears fear of communism.
They are going to be abetted by the mainstream media and most especially DC print and talking head news establishment who are going to follow their lead either because they are scared of being labeled with that “liberal media bias” and/or of loosing access or because they don’t know enough of what they are talking about to know when they are getting hosed.
Democrats are going to try and push something through but aren’t going to get help from anyone and are going to have to actively work against the above two groups who have no interest in being truthful. They are going to be out-gunned on the Sunday AM talk shows (like they already are) and out maneuvered (like they already are) and even Obama with his formidable skills may not be enough.
The end result? Nothing. Sure bold out of the box thinking is needed but this is D.C. they don’t like and can no longer do bold out of the box thinking. And those that do, aren’t in the D.C. power structure to go anything about it. Remember Congress is not necessarily populated with grown-ups or creative thinkers. They very type we need right now.
Or am I being too cynical?
February 12th, 2009 at 11:26 am
I liked the point at TPM, commenting on Obama’s explanation that we have so many more banks than does Sweden: we aren’t trying to bail out all of them, and we aren’t proposing to nationalize all of them either.
February 12th, 2009 at 11:30 am
Follow the money. Part of the problem is that the management folks of these banks are also the people who help bankroll many of our politicians’ political machines. Any real cuts in executive compensation end up cutting campaign contributions. A lot of politicians plan on getting jobs with the lobbying firms that are working behind the scenes to prevent any real restrictions on how the banks operate. Look at where Chuck Schumer’s (banking committee) money comes from.
February 12th, 2009 at 11:33 am
“the larger conundrum is that a bailout is both: A) urgent and essential; and B) unfair and unpopular.”
Kristol’s right. And the key thing is to deal with the ‘unfair’ part. If that’s done, it won’t be so unpopular that it’ll be a problem.
The financial institutions, or at least, major functions of those institutions, need to be preserved in working order. That doesn’t mean that executives, shareholders, or major creditors need to be rescued.
Contra SamChevre, there’s a big difference between shareholders being ‘nearly’ wiped out, and their being formally removed from an ownership role. If they’re still the nominal owners, then any cash infusion into the institution they own takes that institution further from the edge, and raises the value of their stake.
There’s no reason to leave this door open: if they’re ‘nearly’ wiped out, then let’s see if the banks they own are solvent or not. If not, then the shareholders’ stake is officially zeroed out, and the game continues without them.
February 12th, 2009 at 11:33 am
I liked Nicholas Kristoff’s column on Sunday about how Lehman Brothers would have been in better shape if it had been “Lehman Sisters”, as if the Lehman exec who spent the most time on TV last year claiming that Lehman’s finances were solid weren’t the company’s female CFO, Erin Callan.
Re: the political challenges of bank nationalizations, see your former Atlantic colleague Clive Crook on that.
February 12th, 2009 at 11:34 am
Re “Look at where Chuck Schumer’s (banking committee) money comes from”
———-
Exactly. Rep Kanjanski’s C-Span claim that “someone” dumped us into the Middle of the Atlantic Ocean is misleading — we all know who that “someone ” was.
Congress was supposed to be steering the Ship of State. Instead , USS USA was pirated because Congress was down in bilge giving blowjobs to big campaign donors.
February 12th, 2009 at 11:37 am
Nouriel Roubini says that at this point we have no choice but to nationalize. The banks are bankrupt.
See http://www.rgemonitor.com/roubini-monitor/255507/it_is_time_to_nationalize_insolvent_banking_systems and
http://finance.yahoo.com/tech-ticker/article/174326/Roubini-Nationalizing-Banks-Is-the-Best-Way-to-Go?tickers=C,BAC,MS,GS,^DJI,JPM,WFC
February 12th, 2009 at 11:39 am
“Handing out shares to every person may work in a socialist haven like Alaska, but you can bet the Rush Limbaugh crowd (meaning almost all of the modern GOP) will still complain about “sharing the wealth” with blacks, gays, atheists, people who live in cities, people who read newspapers, and so on.”
Actually, an op/ed in yesterday’s Wall Street Journal recommended something close to that, although he recommended that bank shares be given to income tax payers on a pro-forma basis.
February 12th, 2009 at 12:01 pm
How long before the public notices that Obama says some nice, soothing words and then takes a contradictory action?
February 12th, 2009 at 12:07 pm
Either the banks will FAIL or they need to be NATIONALIZED. I’d prefer letting them FAIL and be recapitalized with private equity. But the WORST of all possible worlds is what we’re doing now, which is pouring trillions of dollars into them, because that will not stop them from FAILING or from being NATIONALIZED.
This is a disaster of really truly astounding proportions.
February 12th, 2009 at 12:30 pm
“More boldness”? I think we’re getting into Green Lantern Theory territory here. This isn’t a failure of will, the fact is just that this is a really, really fucked up situation and the alternatives for policymakers range from unbelievably horrible to unimaginably catastrophic. In the circumstances I think playing for time and hoping that something magically happens before embarking on irreversible structural changes to the American economy makes good sense.
February 12th, 2009 at 12:37 pm
There’s no reason to leave this door open: if they’re ‘nearly’ wiped out, then let’s see if the banks they own are solvent or not. If not, then the shareholders’ stake is officially zeroed out, and the game continues without them.
Someone’s just obsessed with wiping out shareholders and private capital. So what exactly is the difference to the public benefit if they were “nearly” or “completely” wiped out? Wiped out is wiped out. The money in question, in comparison to the overall rescue, is chump change.
Only liberals could be so vindictive. and that’s why I am not one of those despicable species.
February 12th, 2009 at 12:49 pm
I do like Kristof’s idea of bankshares, though I think the ownership society is a corrosive debasement of the commons. Still, better an ownership society with broad-based participation than generalized poverty.
While we’re talking about non-technical responses, what’s so f*cking hard about nationalizing, but issuing current shareholders new share certificates that can be redeemed at some future date, at say 49 cents on the dollar after expenses and something like prime plus 2? The other 51% of equity ownership, and board control, remains with the People.
After a stress test, the insolvent banks can be invited to apply/beg for this deal after a free, simple majority vote by shareholders. I’d like to see this be one vote per shareholder rather than per share, but whatever.
February 12th, 2009 at 1:23 pm
A minor historical correction to Kristof’s column. the term “zombie banks” was not popularized in Japan. The “zombie” description was first applied in the 80s to savings and loan institutions during the s&l fiasco in the US. I think the term was devised by the academic writer on s&Ls, Edward Kane, and referred to institutions that had exhausted their capital and were kept running (fraught with moral hazard) on the fumes from regulatory forebearance and so called “regulatory good will” assets.
February 12th, 2009 at 2:04 pm
I agree that there is a definite diminishing return in the use of scare words like “socialism,” and so I encourage opponents of nationalization to keep using them. On the other hand, at this point in the economic disaster I think many, if not most Americans would be very favorably disposed to nationalization if it is aggressively sold as a populist measure – punishing the crooks who ran the economy into the ground while stuffing their pockets with billions of dollars, at the expense of the hard-working American taxpayer, teachers, firemen, police, soldiers, etc.
February 12th, 2009 at 2:23 pm
“First, that is a big “although”: it goes a long way toward directing the bulk of the shares to Rush’s in-crowd.”
Are you defining “Rush’s in-crowd” as “people who pay income taxes”?
February 12th, 2009 at 2:43 pm
Given that income tax payers would be the ones who paid for the nationalization, Kessler’s proposal that they receive shares on a pro forma basis seems equitable. Why do you think it would be more equitable to actively discriminate against income tax payers because you fear they might be “relatively wealthy, relatively white, and relatively old”?
February 12th, 2009 at 3:01 pm
(Cross posted at Mother Jones)
There are two things which I wish advocates of “nationalization” could address:
First, the cause of the problems facings faced by the Swedish banking system was different from what I think is the root cause of our current financial meltdown, namely, the culture of excessive risk taking engendered by the excesses of American banks executive compensation systems and our peculiar approach to corporate governance in which stockholders have little or no say over how much their “employees” are paid. Basically, these “masters of the universe” enriched themselves by being in control of a vast pool of “other people’s money” (“OPM”). The pool of money was so large that they could gamble recklessly. If they won, they paid themselves lavishly and took a king’s ransom as “bonuses”. If they lost, however, they themselves typically lost little and (as we’ve seen at MLPFS, for example) are able to bleed enough from these failing banks to make themselves vastly wealthy.
Consequently, if the Obama administration takes over these large banks (like Citigroup, in which I am a shareholder) it is difficult to see how they will be able to get a good price when it comes time to sell the banks. Investors have seen the consequences of investing money in a company, which is largely unregulated, highly leveraged, and where they have no control over how their supposed “employees” are compensated. Clearly, unless there is simply a Yeltsin-style give away of these state assets, it will be difficult to find new investors. That is why I believe that both the country and shareholders would benefit from a new federal regulatory system that limited both risk taking and executive compensation. Also, the federal system should impose new, uniform requirements of corporate governance to protect shareholders. Listed companies should no longer be able to forum shop for the state (specifically, Delaware) which makes it easiest for CEO’s to steal from shareholders.
Why would anybody gamble on these “new” banks without significant changes in both government regulation of risk-taking and executive compensation? Speaking for myself, I’d require a hell of a risk premium considering that the dangerous bets made by the bank’s executives, mainly for their benefit not mine, resulted in the loss of my entire investment (in the case of Citigroup, 70% share price decline due executive self-enrichment and the remaining 30% due to nationalization). Since the bank executives are gambling not with their money but with the shareholders’ money, why wouldn’t they repeat the cycle once the banks were again privatized?
Second, unless the new proposal from Geithner is a total sham, it is difficult to see how it will work since (a) any bid from a private buyer would necessarily undervalue the supposed “toxic assets” since they would be building in both significant profit and an equally significant margin for error (and therefore bids will necessarily be below the current value set by the banks); and (b) given the assumption of both profit and margin for error you will either have a massive government sponsored windfall for the so-called private investors (as the banks are nationalized) or possibly a worldwide, systemic banking crash because these assets will now have to be “marked” to the new, Geithner stress-test established market price (which will always be much lower than the current, already discounted price). Even healthy banks will likely be swept up in this cascading effect as they too are forced to market down assets from the current price to the new, heavily discounted price set by the “private investors” bid. I doubt whether any money center bank (including those now regarded as healthy) could survive the process.
In effect, then, if there is such a cascading failure, Geithner might well be forced to nationalize nearly the entire banking sector (and make a Yeltsin-like gift of the supposed “toxic assets” to the lucky—or well connected—private investors). I just don’t see the exit strategy. “Nationalization” seems to have significant risks that are not being addressed.
February 12th, 2009 at 3:03 pm
I’d like to see this be one vote per shareholder rather than per share, but whatever.
Do you not understand the very basis of capitalism?
And by the way, yes, INCOME TAX PAYERS financed the bailout out of their pocket. Logically speaking, INCOME TAX PAYERS should then get all the shares and proceeds.
Are you suggesting that INCOME TAX PAYERS pay, out of pocket, first for big financiers and then have the proceeds and shares of this bailout for people who are not INCOME TAX PAYERS?
February 12th, 2009 at 4:03 pm
I think it will remain the case for a few years that buyers of to be issued Treasury securities would be the ones who paid for the nationalizations if they occur. Would throwing in a warrant or two on nationalized bank shares be a good deal sweetener for raising deficit funds? More broadly, why not fund part of the nationalizations (if they occur) with sales of warrants of some sort on nationalized bank shares?
February 12th, 2009 at 7:29 pm
“I think the question of who owns what equity share of the federal government”
That’s not the question at all: it’s who will own what shares of the newly re-privatized banks. Kessler is saying it should be the Americans who paid to bail them out.
“I was just explaining why it would also happen to benefit Rush’s in-crowd.”
Again, you’re painting yourself into an unnecessary corner by conflating tax payers with “Rush’s in-crowd”. Whether they listen to Rush Limbaugh or Air America shouldn’t matter in any case; what should matter is whether their tax money paid for the bank bailouts.
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