Nationalization After All
If I’m reading this correctly, Timothy Geithner’s financial rescue plan actually might lead to bank nationalizations after all. The key thing is provision 1b of fact sheet:
Capital Assistance Program: While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of “contingent equity” to ensure firms the capital strength to preserve or increase lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
There’s clearly a desire here to avoid nationalization. A strong desire. But if the situation in the banking sector is as bad as the skeptics tend to think, this plan is going to end up with the government owning a substantial share in at least some large banks.
41 Responses to “Nationalization After All”
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February 10th, 2009 at 12:06 pm
But it looks like this nationalization would be pretty roundabout and ‘voluntary’ on the part of the bank. Until this happens it is just a plan.
February 10th, 2009 at 12:08 pm
And you think that’s nationalization?
February 10th, 2009 at 12:10 pm
Yes, after Obama’s patrons have sucked the taxpayers for every last trillion they can steal, the taxpayers will get the bill for the toxic waste cleanup. They will be prepared for decades of debt peonage with class for “fiscal discipline” and “entitlement reform.”
February 10th, 2009 at 12:12 pm
Yeah, I don’t get how the sections Matt is bolding are different from the previous TARP plan of buying equity in banks to recapitalize them.
The way this *might* be nationalization-after-all, I think, has more to do with the stress test. Ask yourself what’s going to happen to the banks that don’t pass it. Bankruptcy, govt ownership, reorganization.
February 10th, 2009 at 12:15 pm
Part of the Grand Plan? Is this another rope-a-dope? Who is the ropee and who is the dopee?
February 10th, 2009 at 12:18 pm
No, that may be what your half-ass understanding of nationalization, but that’s not what nationalization is.
February 10th, 2009 at 12:19 pm
Yep.
Early blogospheric responses to the Geithner bailout plan were squinting at the chess board and complaining about where the checkers were being moved.
The NYT leak and the Brooks piece are transparent attempts to spin the markets. Not to be taken seriously as windows onto the actual thinking in the Administration.
The whole game is for Geithner to seem non-threatening while populists in the congress and in some vague other place in the White House (”the political operation”) loom as bad cops.
Then in the fine print of the plan are the mechanisms whereby banks WILL get processed when they prove unfunctional, etc etc.
But the Administration couldn’t lead by describing that process, since its an absolute necessity that they minimize any panic, which makes things exponentially worse.
Pretty clever, actually.
February 10th, 2009 at 12:24 pm
From Mike “Mish” Shedlock’s excellent site
http://globaleconomicanalysis.blogspot.com/
“The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands…In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.”
Translation: Wall Street wins, you lose.
Bookmark Shedlock’s site – you’ll get the truth about the economy without the GOPocratic spin.
February 10th, 2009 at 12:30 pm
Uh, kafka, your buddy Mish didn’t write that. It’s an excerpt from a NYT story that I’ve seen excerpted a dozen other places this morning.
Better self-promotion, please.
February 10th, 2009 at 12:32 pm
It’s an excerpt from a NYT story that I’ve seen excerpted a dozen other places this morning.
Like here, for instance.
February 10th, 2009 at 12:36 pm
Stop ascribing qualities to Obama, Geitner et al that dont seem to exist.
Just because substantial government ownerhsip may occur, that does not mean nationalization. We could very easily be owning large portions of banks without actually controlling them, more lemon socialism than true nationalization.
February 10th, 2009 at 12:38 pm
Here’s a stimulus plan to free up some cash for a large chunk of the population.
How about if the government writes off all federally backed student loans and buys and writes off all student loans held by banks. This will instantly free up billions for the market.
May be a little self serving, but I know it’s not just me who owes.
February 10th, 2009 at 12:40 pm
“If it turns out that a given firm needs a certain amount of new capital above what it can get from private sources”? What planet are you on?
February 10th, 2009 at 12:55 pm
If I understand correctly,having the conversion price for government money fixed to the current stock price means that the stock can’t tank too badly. If the stock went down to say, 1/4 the current price, it would have to be seen as a deal, because you know the government will be buying stock at 4x what you are paying. So maybe it makes more sense for a private investor to buy stock because they have more confidene that they won’t be wiped out if they put money in now.
February 10th, 2009 at 1:13 pm
Matt:
There’s clearly a desire here to avoid nationalization. A strong desire. But if the situation in the banking sector is as bad as the skeptics tend to think, this plan is going to end up with the government owning a substantial share in at least some large banks.
Wasn’t FDR elected on a pretty fiscally conservative platform but was willing to pragmatically try different things because things were so dire? Maybe that’s what’s going on here.
February 10th, 2009 at 1:14 pm
I love this story.
I love how finacial reporting equates healthy share prices with a healthy Wall Street. To me it’s good news that shareholders don’t like Geithner’s plan.
February 10th, 2009 at 1:36 pm
joejoejoe Says:
“To me it’s good news that shareholder’s don’t like Geithner’s plan.”
And just how does a further loss of shareholder faith in the Guv’ment free cheese plan do us any good?
Do you hope this will cause Geithner to rewrite his plan so as to be more citizen friendly?
Get over it.
It is simply the market pressing for bigger slices of free cheese and nothing we have seen should suggest that Geithner will not serve them up.
It cannot be repeated too often:
Obama is the largest recipient of Wall Street bribery in history and he is not going to even nibble on those fat greasy fingers much less bite the hand.
Just think again on who he has appointed to move the levers.
February 10th, 2009 at 1:42 pm
one thin puzzles me about the plan. So they’ll be setting up a “Public Private Investment Fund” to encourage private capital to buy up these toxic mortgage-backed assets.
But what incentive does any private investor have to buy these assets? And if a private investor feels inclined to buy them, why would they need the Public fund to do so? It seems to be implied that the government would somehow gaurantee funds. Or perhaps the Public Private Fund would have more power to look into a bank’s books before purchasing assets. Can anyone give details on this part of the plan?
February 10th, 2009 at 1:46 pm
If these banks are that fucked up shouldn’t FDIC be shutting them down by law anyway?
February 10th, 2009 at 1:58 pm
Willie… I believe that you are correct and the notion is that the Public Private would guarantee investors against losses. In other words reinflate the bubble. In other words more goldmine capitalism, they get the gold and you get the shaft.
It is telling that so much of the many rescue plans details (a $15,000 credit to buy a house!) amount to reinventing the mistakes and stupidities which got us here.
February 10th, 2009 at 2:05 pm
Via AFP / Yahoo News:
FWIW.
February 10th, 2009 at 2:05 pm
Ed,
The Fed is shutting down banks on a regular basis. They are focusing on smaller localized banks for fear that a major takedown would be the coup de grace to their hopes of avoiding depression.
Imagine the across the board shareholder flight…
February 10th, 2009 at 2:51 pm
Obama’s still trying to be everyones’ president, because he’s going to need all the support he can get as things get worse. If he does anything that can remotely be construed as nationalization, Limbaugh, et al, will scream “told you so” to high heaven and any chance BHO ever had of winning guys like my father over is gone.
February 10th, 2009 at 3:11 pm
Dude, what Obama should do is force the banks to mark their assets to market, watch the stocks tank and then take over the banks. There would be no loss in ‘value’ from their current position and I think the government could make money by inducing a panic and then buying at rock bottom prices. Then the new shareholders (all Americans) could reap the benefits. That seems like the quickest road to recovery to me. Sure, nobody would want to invest in banks for 20 years, but I’m not really seeing the problem there.
February 10th, 2009 at 4:15 pm
Is it at all controversial to say that speculative capitalism is to blame for the banking crisis? So why are we looking for a speculative capitalist way out? Aside from the general corruption of our way of life.
What’s wrong with trying something that worked for Sweden 15 years ago? Why try something that just failed for us 6 months ago?
February 10th, 2009 at 6:07 pm
Yeah, if the “can” in the “can convert” applies to banks and not Treasury officials, this is entirely voluntary. A Geithner fig leaf.
February 10th, 2009 at 7:08 pm
The stress test means that the government gets to look at the bank balance sheet. We don’t know if they are insolvent, and the banks are not letting on either. In order to get money in the future, the Treasury gets to value the company, including their assets. But if they are insolvent, there will not be any private investors.
February 11th, 2009 at 7:38 am
Matt picks apart the fine print in TARP 2.0. Maybe we’re getting closer to nationalization than we think, but it appears that this form of government takeover is at the option of the banks. I continue to fear that taxpayers may be getting all the disadvantages of nationalization (putting up huge amounts of cash) with none of the advantages (mainly sharing in the potential upside down the road).
http://eclecticdialectics.blogspot.com/2009/02/nationalization-or-no.html
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