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Why is nationalization a better choice than the more typical FDIC Receivership? Already this year, the FDIC has taken control of 13 banks, compared with 25 all last year. The way this happens is that the primary regulator declares the bank insolvent, and it names the FDIC as receiver. In the case of a state-chartered bank, a state agency makes the call. In the case of a national bank, chartered under federal law, the primary regulator makes the call. There are administrative procedures for making this appointment. Neither the regulator nor the FDIC has to go to court and get a judge to do the appointment, or to supervise the receivership.
The Ocala National Bank was closed by the Office of the Comptroller of the Currency. The Corn Belt Bank and Trust Co. was closed by the Illinois Department of Financial and Professional Regulation, Division of Banking. The FDIC was aware that the banks would be closed, and it was ready with a plan. For Corn Belt Bank, the plan was to sell the deposits (other than brokered deposits) and certain assets to another bank. The buyer paid a premium for the deposits, and apparently paid the face value of the most of the assets. The remaining assets will be sold when possible by the FDIC.
This is a streamlined and cheap procedure. But the FDIC is straining at the seams with the steadily increasing number of failures. The New York Times reports that the FDIC is currently trying to unload some $40bn worth of assets, and is having a real problem doing it. Some of the loans are sold at internet auctions. Real estate and other collateral are sold by local agents. And, of course, we are moving to privatization:
And — in the most closely watched tactic — the F.D.I.C. is negotiating a series of billion-dollar deals with private equity partners who will take over huge batches of loans in exchange for a chunk of the sale proceeds.
The biggest bank closed this year had assets of $1.7bn. Last year saw a couple of huge failures, IndyMac and Washington Mutual. WaMu was sold outright to J.P. Morgan Chase for a premium to deposits and assets. IndyMac was sold in a complicated transaction, which is leaving the FDIC with maybe $25bn in assets the private buyer wouldn’t take.
IndyMac is pretty big, but its securities portfolio was $6.9bn, all of which was sold in the transaction. Compare that with Citibank (page 87): its trading portfolio is $202.8bn. The bank’s trading portfolio alone is 29 times bigger than IndyMac’s. But Citibank is part of Citigroup, and on a consolidated basis, the trading portfolio is $457bn. This really is a lot of money. And it is complicated. It isn’t just a bunch of bonds: here is the mix:
| In millions of dollars | September 30, 2008 |
|---|---|
| U.S. Treasury and federal agency securities | $ 36,090 |
| State and municipal securities | 17,893 |
| Foreign government securities | 60,401 |
| Corporate and other debt securities | 106,593 |
| Derivatives(2) | 92,908 |
| Equity securities | 70,280 |
| Mortgage loans and collateralized mortgage securities | 38,242 |
| Other | 35,055 |
| Total trading account assets | $ 457,462 |
That portfolio ought to give anyone pause. Someone needs to monitor and take care of it when the bank is taken over, regardless of how it is done. And remember, Citibank is just one unit of Citigroup, and no one knows how the $202bn portfolio of the bank is related to the $457bn portfolio of the whole group. In fact, probably only insiders know exactly how inter-related these entities are. And here’s an interesting factoid, the total liabilities in the trading account for derivatives, netted out, are $103.4bn (page 135). Derivative assets are shown at $92.9bn. Hmmm, looks like a net loss on derivatives of $10.5bn just waiting. Or is this just another example of exactly what it means to be too big to fail: ordinary people can’t figure out the financials.
The bankrupt Chicago Tribune Company owns a bunch of newspapers and media businesses, and it owns the hallowed Chicago Cubs. These businesses are somewhat related, but it would be fairly easy to sell off the discrete business units. Money businesses aren’t like that: we have no idea of the interrelationships of these entities and the intertwining of their securities. So just ask yourself: what would happen if we jerked Citibank out of Citigroup?
Nationalization starts to make a lot of sense, doesn’t it? We take Citibank from Citigroup by getting voting control over it, appoint a public board of directors, replace management, and then start the unraveling process. Publicly.
We get our team monitoring things, instead of the current crop of failures. Them we fire. Publicly.
83 Comments
A little 20 year old history:
http://query.nytimes.com/gst/f…..A96F948260
I didn’t get “is having a real problem doing it.” from the NYT article but the example of Terrible Herbst bothers the hell out of me.
The woman who paid $4K for the house across the street reminded me of what went on with the RTC re the SandL failure.
The problem with FDIC receivership is that it is based on a Catch-22. They can’t handle the volume of assets because they can’t find the buyers because the economy is so bad. But this precisely the point. If the economy were better and could soak up these assets then there wouldn’t so many banks going bad to produce them.
There is plenty of money out there, but the cowardly “entrepreneurs” of giant money want returns without risk, and think they can get it one more time, at the expense of taxpayers.
masaccio;
The longer ‘we’ wait to begin this process of nationalization (which seems, inevitably, to be the only real ’solution’) the less flexibility and fewer ‘options’ we shall have.
What ‘window of opportunity’ do you think we actually have, in terms of the best possible ‘outcomes’ (and assuming that all necessary ‘cooperation’ would be forthcoming)?
Is it months or merely weeks?
Given that, as you say, ‘they’ want to ‘do it’ “one more time”, and there is little reason to imagine that ‘they’ won’t get to do as ‘they’ wish, how soon will it, realistically, be possible to begin the ‘process’?
That’s a good question. Greenspan thinks we need to do it quickly, but I think we have enough time to create the public will to make this enormous change. I’m thinking 3-4 months.
The political will to do the necessary things is not there right now and I’m not sure the President could get enough Dems to support it to make it feasible.
One more of those report cards from Elizabeth Warren might do the trick.
Now this is a trickier question, masaccio;
Assuming the three to four month ‘window’ you postulate, what condition do you imagine that the real-life economy, that is the reality of everyday, actual human beings, will be in?
In short, how desperate might things be by that point?
If I am at all representative of the public will (at least a portion thereof), then what I’m experiencing in all of this is whiplash. I can just barely get my head around all of it with respect to personal, national, and/or global implications. And as I keep saying, that’s not because I’m stupid. But I surely am in over my head in this economy. Thank you for this piece. It does not comfort me, but it certainly advances my meager knowledge about what’s happening.
When is Warren’s next report card due?
Reports are due every 30 days. I don’t think the next one will be quite as ugly, since there hasn’t been any real new action, but the one after that could be interesting.
Greenspan concedes that nationalization is the “least bad” way to deal with the banking system. But we don’t need to re-regulate right now, as the “market”, whatever the hell that is, is imposing strict discipline. H/T Naked Capitalism.
Well, we should all certainly listen to Greenspan, considering just how astute his ‘grasp’ of ‘conditions’ has been over the last few years, shouldn’t we?
I would vote ‘not’, but I imagine that both the Political Cla$$ and America’s Own Ari$tocracy would (and will) agree with Greenspan.
what are the implications for all the other insolvent banking institutions? does this one action trigger global runs on other financial institutions?
what about the depositors?
Depositors are protected, with limits, in the FDIC takeovers. In the case of nationalization, the depositors are not affected. They have the same rights they did before. Depositors with balances in excess of FDIC limits may have some concerns, but I’m not sure that they aren’t already pretty concerned, and there are things they can do to protect themselves.
I’m pretty sure we have to do all the insolvent banks at once, to protect against runs on solvent banks.
Re depositors, most or all are covered under FDIC. But that’s an excellent point about the international community. I think we should let other countries know what we are going to do so they can make their own decisions what they want to do. In fact, that we are talking about nationalization now should give them some notice. We can increase that to informal notification in that we are considering nationalization. And then we can give them formal notification shortly before we do it. The best time for such action is probably over a weekend since the banks are closed and by the time they open the following Monday they are under government control.
I think selise is asking the questions that scare the bejesus out of Geithner, based on what I saw of the Frontline report last night.
Furthermore, if we nationalize, it will have to be done all at once with a “bank holiday.” If we tried to do it one at a time, there would be a run on the other at-risk banks.
The strategy here must be carefully thought through, and then acted on swiftly.
Thanks for your explanation of the difference between nationalization and the FDIC route. I needed that.
Bob in HI
I still don’t understand the exact functional difference between “nationalization” and “receivership.” Rubini seems to think they are the same: “call it nationalization or “receivership” if you don’t like the dirty N-word” But Naill Ferguson thinks they are vastly different: “First, banks that are de facto insolvent need to be restructured, not nationalized.(The last thing the U.S. needs is to have all of its banks run like Amtrak or, worse, the IRS.)”
It seems to me that if the the government takes over a bank and fires its officers and wipes out stockholders’ equity, it’s the same thing regardless of what it’s called. And, it’s only a question of how long the government holds onto it.
In a receivership, the regulatory authority determines that the institution has failed or is failing, and closes it. The FDIC is appointed receiver, and liquidates.
In the case of IndyMac, the regulatory authority determined that it would be better to use a conservatorship. This gave the FDIC the authority to operate the business and clean it up. FDIC operated for 6 months or so, and made several important changes, as noted above. In the end, it has several exit strategies, including receivership and sale.
If we nationalize, we take voting control of the company and operate. There is no clear exit strategy, and no ability to force creditors to accept less than they are owed.
I think the better strategy is nationalization, because it doesn’t have the ring of finality that the other FDIC strategies do. If the real problem with Citi or any other major bank is that the fair value of their portfolios cannot be realized in the very near term, a waiting strategy is best.
Thanks. That helps a lot.
masaccio and hugh – thanks for the responses. one of the issues that has been on my mind re the globalization and deregulation of the financial industry (and capital markets in general) is that, for example, citi does business in i think something like 100 countries. when via the imf we pushed countries to open their banking industry many local banks were taken over by the multinationals. i have no idea the magnitude of this, but i don’t think it has been small.
so when i ask about depositors, i don’t mean depositors here so much because we have the fdic. i mean people in other countries who have deposits with financial institutions that are based here. for example, when bcci was shut down my understanding is that depositors not covered by fdic were SOL and that one of the investigators on that case has said that was his biggest regret – that so many innocent and ordinary people lost their savings. can we expect something like that would happen if citi, for example, was nationalized?
in addition to the human cost of this, isn’t this another point of risk for further instability – both in terms of individual depositors and speculative global capital? and if so, the social instability that could provoked putting further stress on political leaders who we need to act sanely?
masaccio – i agree we have to do all the insolvent banks at the same time. but i think that may be a global requirement, not a national one. because if we nationalize only our insolvent banks without coordinating it as much as possible, couldn’t it still trigger runs even on solvent banks if it triggers a global runs?
hugh – won’t it take more than a weekend if we do them all at the same time? maybe a week or two long bank holiday? personally i’d like to see more than international notification – more like some kind of coordination because if any other country(ies) were to attempt it earlier that could, i think, put global capital markets into turmoil worse than what we’ve seen so far and make effective action just that much more difficult. the other benefit of a bank holiday longer than a weekend is that it might give other countries (those that aren’t among the ones we are coordinating with – as rumors could prematurely trigger runs, it would have to be held pretty closely – yes, that is me arguing for a lack of transparency here *g*) a chance to participate.
…..
anyway, this is only a small part of what’s been on my mind wrt international issues, but it was brought home to me this morning that i need to start being more explicit. there seems to me to be lots of potential land mines that i don’t know how to think through on my own, that i don’t see being discussed by the PTB and that i don’t think we can ignore.
thanks again.
These are the kind of issues that could be thrashed out. For the biggest banks going in over the weekend would be the best way. They have the most convoluted structures and need the most oversight. Because of insufficient manpower with smaller banks you could issue notifications and rules about what to do and then work your way down to them, and put your less experienced staff initially with them.
As for international coordination, this would good but as the most recent G-7 meeting showed each country is still committed to going its own way.
do we have anything close to the manpower to do the biggest over a weekend? my understanding (woefully lacking as it is) is the multinational ex-investment banks are a different matter all together from anything that has been done or even planned for. if it could be done over a weekend great – it’s just that from everything i’ve read i just don’t see how. maybe i’m reading the wrong stuff?
re international coordination at last weekend’s g7. i didn’t see so much a commitment to go it alone as just no one having a fracking clue what to do (and that includes the usa). some leadership from the obama administration might be welcome if it was cooperative. that may be as unlikely as anything else we’ve advocated, but i’m just trying to comprehend the basic outlines of the various approaches that might be attempted.
Selise wrote,
This is a really important question. If we nationalize a bunch of huge banks, its going to take a large staff to sort things out, and it can’t be done just over a weekend. There will have to be some kind of “Bank Holiday” to prevent a run and system meltdown.
Any such nationalization will take a carefully drawn field operations plan on the scale of a WW-II military campaign, upgraded with requisite IT squadrons.
Bob in HI
It will take a large staff to sort things out but the bank could stay in operation. There would not be any need to let go all of the tellers and their supervisors etc.. Regulators could have time to ascertain what is going on. A “Bank Holiday’ would be a disaster.
it’s not about tellers and supervisors.
apparently we don’t even have the resources to do a semi-reasonable examination (if william black is to be believed).
i have no doubt a bank holiday would be a disaster. but would it be a lesser disaster?
Did you listen to Greenspan’s speech? I thought he said that there were regulators permanently situated at the major banks and they still didn’t know what was going on. I may have misunderstood, but I thought that’s what he said.
no, but thanks i’ll try to.
bernhard says maybe greenspan is protecting his clients at pimco (bond holders)?
oops my 64 was supposed to be in reply to you.
Actually, that is the real advantage of nationalization. The Bank issues new stock to the Treasury, we elect a new board of directors, we do an internal review and fire management as appropriate, restructure, and then, we can figure out how to exit from ownership and return to private hands. If we do the announcement properly, this will work smoothly.
what about bond holders?
We deal with them on the way out. Remember, we don’t know what the credit default situation is with Citi. The gross number outstanding is $56.3bn, with a netted number of $4.1bn, with 5500 contracts outstanding in early January. We need to understand how that will work if we default on the bonds before we do it.
I too thought that we need to watch PIMCO. They are clearly lobbying for something….
thanks. that doesn’t seem too bad. but any ideas on what that would do to the bond market more generally? and do you know who are the bond holders?
Ownership.
FDIC only provides a limited backstop and doesn’t prevent the buttheads that got us into this mess from continuing to make it worse.
Nationalization means we own their butts. And we don’t own just the bad stuff they don’t want after screwing it up.
And after last February’s op-ed by Elliott Spitzer and this last week’s 60 Minutes feature on World Savings, we don’t just fire people publicly.
We prosecute them.
I’ve always liked the idea of prosecution, and I’m willing to bet that there will be numerous felonies uncovered before this is all over. Nor do I think that any individuals found guilty of such crimes should be treated any differently than the average criminal. In other words, no “prison resort”. Maximum security, hard time, general population, no exceptions. I’m guessing that would get the attention of anyone stupid enough to contemplate such idiocies in the future and (perhaps) make them reconsider.
No, I’m not being facetious.
And I agree entirely. I think that part of the entire problem with today’s financial system is that its participants have relied on the support of government to aid and abet their criminality, like the White House invoking rare and obscure banking law to thwart states’ attorneys general who wanted to investigate predatory lending.
Even if they did get caught, they’d never have to do a perp walk; they’d get less than what Martha Stewart went through because she was an evil liberal woman, and they are the fabric of this fine economy.
Nope, they need to serve with everyday people.
And I think the entire system is riddled with fraud, like Swiss cheese. I’ll bet that nearly all subprime loans were fraudulent in some way, for starters.
calAmity Shlaes checks in with the latest revisionist economic history.
Let the stinkin’ banks that are badly run just fail and have the Federal government seize their assets to help pay off people with savings. The stinkin’ banks can swallow their own debt and the workers get laid off like normal. The big shots can rot. The Government can found a US Federal banking system to replace the worthless banks and their crummy managers.
It is impossible to assume anymore any level of competency anywhere but any banks and central banks that aren’t assessing the effects of a potential American bank nationalization and how they would react to it are simply not doing their jobs.
exactly! and if any action we are to undertake relies, for its success here, on how other banks and govs will react, then i think we need to be planning for that too.
It seems most peculiar that the people will have all the say in what happens next. By action or inaction. The meatbags of politics are waiting to hear from us, but they won’t tell you so. They know the banking system is corrupt, as that is where their feedbag is attached.
The bailouts are criminal activity. They may be perceived by the authors as preventative measures to anarchy. They believe anything because they are “bankers”. They will write anything because their world is pretense. Some brilliant mind will create a new “instrument” that will take all the problems out of fraud.
If we allow the criminals to continue operating, we are criminals too. This country needs a national bank. Very few of the management in the current banking industry would qualify to work in the new. They would expect what they know to be sufficient for such a position. That would not be the case. We would need people with math skills.
So, tell the meatbags what you want and don’t back down. This time they can’t help but listen to save their dirty little jobs. Look at the idiots gop’ers that have told their own people to go eat dirt, and voted against the stimulus when we are in the worst depression the world of money has ever seen. Think they will be reelected?
they do.
I was in OK during the banking problems of the 80s. It was not a pretty picture. (the number of banks closed was in the hundreds). Regulators and US marshalls would show up with shotguns and drawn guns. Bank officers were sometimes literally thrown out the door. FDIC personnel turnovers were so high due to the brutality. Their liquidation techniques were devasting to the economy. Many of the tactics were in violation of banking laws. Suicides became epidemic.
In the 80’s, during the farm crisis, I was involved in a number of bank closures. In each case the receivership method was used. Each time the ultimate buyers got too sweet of a deal, but taking everything into consideration this system worked about as well as you could have reasonably expected. The banks were for the most part smallish.
I can’t see how a receivership would work with something as big and complex as Citibank. If it is tried there is going to be one hell of a lot of money made by the vultures.
Jeebus. The international repercussions of taking Citibank are enough to boggle the mind.
The Feds could send the criminal bankers to Gitmo and seize all their assets under RICO..just a thought. The crime oriented banks actions have threatened our economy and national security.
I keep thinking of that Churchill comment about American ultimately doing the right thing after they have exhausted every other option. Roubini and Matthews came out with another update today in the WSJ calling again for nationalization.
The total trading account totals stated in the piece are just the tip of the iceberg. These are all only on balance sheet transactions. Alll of the major banks have off balance sheet transactions known as Over The Counter Derivatives and this is the real unspoken reason that has not been discussed
in the media. JP Morgan alone has over 700 trillion of these toxic assets and this is the reason that both gold and silver are rising as they are. They are warning that bank stress as well as inflation will eat us alive.
Nationalization couldn’t happen soon enough. At least the chorus is getting louder and it was quite surprising that even Mr. McGoo ( Greenspan ) stated the same today.
I forget the exact numbers but some 90% of JPMorgan’s derivatives are in things like currency swaps. I don’t know much about these but they are supposed to be fairly uncontroversial. But even so if say just 8% were in CDSs, that’s still $56 trillion, an insane number.
How about JP Morgans 100 trillion in off balance sheet gold derivatives? There hasn’t been that much gold mined since mankind came into existence. This is how the majors manipulate the markets and it’s every segment from mining to insurance to the FOREX markets.
Is the nationalization just the BASIC banking function without all the trading operations… sort of getting back to a basic bank with out all the added on financial deals that banks have gotten into?
This would like the other parts of CitiGroup with all the garbage… no? Or would the mortgages be taken over in the nationalization?
I say leave the shareholders with all the BS, trading desks, CDSs CDOs derivatives and so forth.
Taking over the banks is relatively easy. Unraveling the mess they are in could take up to a year and disposing of all the assets and could take years.
Again none of this will be terribly secret. Half the people in Treasury it seems used to work for Goldman so there is no way a nationalization could be kept quiet. The main threat I see is less a run by customers but last minute shenanigans by executives.
I should also say that I don’t think either Summers or Geithner are up to doing a nationalization. If they are heading such a nationalization, it is a guarantee for a screw up.
Not quite accurate Hugh. If you caught the Frontline piece last evening, when Bear Sterns went belly up, lawyers and accounts went through their books in one evening and knew what the group had on and off their books and then Geithner as head of the NY Fed decided to pull the plug. These people can move on a dime if their motivated to as was well pointed out in the Frontline piece. They did the same with Merrill.
For a quick run through, yes. Especially because it was so obvious that Bear Stearns was deep under water.
But to actually a more detailed idea would take a lot longer. In the link selise cites, several of these points are made. The government doesn’t have that many experienced auditors who can unravel or even understand what the banks were doing, especially with derivatives. A lot of crucial information, the loan records for mortgages may no longer even exist. How do you value something if you are not even sure who legally owns it?
Really Hugh? Geithner was in the middle of it and knows where all the bodies are buried. You don’t run the NY Fed and not know. In fact, most in high places in government know exactly what the truth is but they have been reluctant to expose this to the public for fear of a run on the banks. It’s always the way of the government. Spoon feed the masses. Just a month ago nationalization wasn’t even on the radar. Now its on just about every front page of the papers.
are there any historic examples i could read about (other than bcci) of a big investment bank take over? maybe that would help me fill in the gaps. thanks.
Watch the Frontline piece that was on PBS last evening.
The Frontline on the meltdown was OK but hardly definitive and glossed over many issues.
New post by Emptywheel—>
Geez, Margot, that was yesterday’s news! You caused my heart to go pitty-pat for a moment there. *g*
Still, though, if anyone hasn’t responded to EW’s post yesterday, there’s still time…
Bob in HI
Sorry, Bob!
Well, the fin co exec hearings seemed to have accomplised something. JPM and GS are investigating ways to return TARP money.
oh fer crying out loud. hugh has been advocating nationalization in these threads for months.
i’m still just trying to think it through.
That may be, but I doubt everyone in the country is reading this blog.
They want to return money to avoid any investigation into their activities or curb on their exec salaries.
Righto.
crooks.
more from william black (post from naked capitalism, we discussed it yesterday in one of jane’s threads but for anyone who hasn’t read it yet, i can’t recommend it more highly, a must read imo):
my bold.
Yes, that was an excellent article. It gets to the fact that these are less banks than fraudulent enterprises so all of the common sense notions of what should be there and how reliable anything is simply don’t apply. And then there are all of the less than obvious interconnections that have to be gone through and instruments that few or no one understands. The unwinding of these banks’ positions will be a long hard slog and we may never get to the bottom of it all.
I still maintain the actual takeover could be done by fax. And this would have very little impact on the more reputable parts of the banks but those that deal with investment and financial instruments probably need to be locked down and guarded by US Marshalls.
probably a failure of imagination on my part.
in case it’s not clear – i’m not arguing against nationalization. you’ve convinced me. now i’m just trying to think it through a little bit… especially what the landmines etc might be.
I think the biggest landmines are in any of their investment and real estate divisions. Their credit divisions stink too but that has more to do with how they are handling those accounts.
i’m thinking global capital markets – based on my impression is that there have been big changes since 1997 (which could of course be incorrect)
I think you give Geithner a lot more credit than he deserves. He was at the NY Fed since 2003 and yet still seemed to miss or get practically everything wrong about the housing crisis, the meltdown, or ways to address these.
I don’t know if you listened to any of the 3 1/2 hours of testimony Jane liveblogged but it was painful and it would take away any notion you might have that Geithner is a secret Master of the Universe.
I don’t trust him farther than I can throw him.
But what would Geithner’s testimony have looked like if he knew there was going to be a very, VERY big move to take one or more banks quickly, and absolute silence about the process was essential to the success of the process?
I ask after getting a tip that federal agencies are checking deep into corporate investments, places I didn’t expect.
My hunch tells me they are trying to get an idea how big this is before they flip the switch/es.
I think this is exactly right, and fits in with what we saw of the behind the scenes (and often late night) work of Geithner and others in Treasury and at the Fed in the Frontline piece last night.
Bob in HI
new post from christy at the mothership: Kaptur and Baker Talk TARP: There Has To be Some Justice for Main Street
New post: “There Has To be Some Justice For Main Street.”
I’ve said it on other threads and I’ll say it again, we need to get private industry out of the business of printing our money, that is simply bizarre.
fyi from the telegraph: Germany may rescue debt-laden EU members
El Tigre Del Agua is up at the mother ship.
We don’t know who owns the bonds, that information is not public; but Treasury should be able to get a pretty good idea of the biggest holders if we really need to know.
i think we need to know – if the bond holders are politicly powerful and especially if they are not usa based.
The Frontline piece made it clear that the Midnight Inspections of Bear Stearns, Lehman Brothers, AIG, etc opened the books to Treasury and the Fed, enabling them to see who the players were. I wonder if that knowledge played a role in their assessment of what would work, and what wouldn’t, as well as who was who.
On another front, I’m wondering, shouldn’t Sen. Dodd be holding hearings on all of the stuff we’ve been talking about, especially nationalization vs. FDIC take-over, so as to prepare the public for what needs to be done? Right now, “nationalization” is a big fear word on Wall Street, and Republicans would yell and scream that this was proof that the Democrats were really Socialists in disguise. But Senate hearings would help raise public understanding of these issues and, as we used to say in the 1980s, “create a space” for nationalization to happen.
Bob in HI
Yes, exactly. The piece we have not seen — and I know is there, based on my past experience working for a Fortune 100 company — is the exposures of non-banking corporations in these banks. I wanted to call them “investment exposures,” but they are in many cases not investments but “risk management vehicles,” to use their nifty euphemism.
Some of the risks of the biggest corporations were not insured, but bundled up and pooled in credit default swaps, and the bundling is the part that is sketchy to me. Until they figure out all the exposures, it’s very tricky to pull the switch.
I suspect this challenge also explains why some of the banks aren’t loaning TARP money; they have these other threatening liabilities that make new loans look really unappetizing.
i haven’t watched it, so maybe there’s something i’m missing – but i don’t buy it. it was pretty clear they had no fucking clue what would happen re lehman.
did you listen to dodd’s hearing with geithner last week? dodd was worse than useless. i believe my analysis of his role was something along the lines of “dodd can bite me” – and i say this as someone who supported dodd last year (until he caved on his promise to filibuster telco immunity re fisa).
it doesn’t help that obama has spoken of nationalization as though it is anti-american and involves only running banks instead of also restructuring them.
actually, i’m beginning to think that different people mean different things by “nationalization” and that is confusing the discussion further.
I think the language to use, and procedure if it’s unique, is the language people are used to hearing when a bank becomes insolvent. That’s “receivership”.
“Nationalization” implies that the government would hold and run a bank. I don’t think any of us wants that or that the admin. wants it.
masaccio – was thinking of examples of this:
1) you wrote “We take Citibank from Citigroup” – what parts of the business exactly are you saying we do and don’t nationalize? i was thinking it would be more comprehensive.
2) i’m wondering if my idea of nationalization is to force debt to be written off and taken at least in part by share holders, bond holders, etc. while greenspan’s idea of nationalization is that the debt would be nationalized (the taxpayer would be on the hook for it) and bondholders would be protected.
….. and then just read naked capitalism: