Experts: Nationalization Is Only Way Out
Many of the nation's largest banks are too sick to cure and the only way to clean up their balance sheets, saddled with as much as $10 trillion in toxic assets, is through nationalization, a growing number of economists said.
This drastic step, so far being resisted by the Obama administration, could wipe out shareholders and cause pain in the short run but spark the quickest rebound, the economists said.
"Paradoxically, nationalization may be a more market-friendly solution," said Nouriel Roubini, aka "Dr, Doom," chairman of RGE Monitor and an NYU economics professor. "It provides a fair upside to the taxpayer . . . by allowing the government to sell the assets to private investors after a cleanup of the bank."
Treasury Secretary Tim Geithner is still hoping for a private solution to the bank crisis - outlining a vague plan to draw out private capital to invest in the banks' toxic paper - but the problem may be too big to fix through asset purchases.
"It's clear there are divisions in the administration about where the financial bailout should be targeted as well as how much authority the government should gain over financial institutions," said Princeton professor Julian Zelizer.
Under the Geithner plan, a "stress test" would be administered to the ailing banks' balance sheets. The results, experts predict, will show a tremendous need to bolster Tier-1 Capital - most likely through common-stock purchases.
But the billions in additional capital injections will all but wipe out current common and preferred stockholders.
Geithner's alternative idea, of enticing private equity and hedge funds into purchasing the toxic paper through government loans, seems equally fraught with peril. Under this plan, Treasury would be empowering two totally unregulated entities - one of which recently brought us Bernie Madoff - to help bail out the banking industry.
If Washington were forced to nationalize several large banks, it would be best to take them over all at once to avoid a run on the weaker rivals, said Roubini.
Under such a plan, there would be no change for any bank customers and no deposits would be lost.
Some expecting at least a partial bank nationalization plan to emerge feel Geithner is not up to the task of solving the problem.
Quantum Fund co-founder Jim Rogers said Geithner, who was president of the New York Federal Reserve Bank, "has been dead wrong about everything for 15 years in a row," as was President Obama's economic advisor Lawrence Summers, who acted as Treasury Secretary under Pres. Clinton. "It is mind-boggling to me," Rogers said on CNBC.
"These guys have been wrong year after year after year consistently, and here they are making the same mistakes again."
Geithner is stuck with nationalization as a likely scenario because the US can't afford to fund a plan that will keep banks private - namely, buying up about $3 trillion more in toxic assets than they have spent so far.
Investors last week, showing little faith in Geithner's plan, drove down banking stocks deeper than the 4,9 percent drop in the S&P 500 Index over the last four trading days.
Citigroup fell 11.6 percent since Geithner announced his plan, Bank of America fell 19.2 percent, Wells Fargo dropped 17.3 percent, JPMorgan Chase declined 9.5 percent and American Express dipped 11.3 percent.
"The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable," said Richard Bernstein, strategist, Bank of America. "The latest Treasury program is simply another attempt to stymie the consolidation process," Bernstein added.