Bailout Blues: Why Bank Nationalization Makes Sense

In one of the many historic excerpts from the forthcoming 100th
anniversary issue of The Progressive magazine, Socialist Norman Thomas
scoffs at Republican accusations that FDR is a "socialist." No
socialist, Thomas explains, would stage a short-term government
takeover of the banks, only to return them once they were solvent to
the same Wall Street millionaires who broke them in the first place.

The passage struck me, because I had just been listening to an
economist friend with liberal, free-market views, who manages a mutual
fund prescribe exactly that unsocialist cure for the current banking
crisis. The government should take over all of the failing financial
institutions, clean them up, and turn them back over to private
management after letting the shareholders eat their losses, he
suggested. The Obama/Geithner alternative: feeding the shareholders
with taxpayer money, is an outrageous waste.

Nationalization is sounding less radical by the day and may, in
fact, be right around the corner for a whole bunch of major financial
institutions, my friend suggests.

Here is some good reading on the subject:

Yves Smith of Naked Capitalism
takes apart the "amazingly disingenuous piece" by Alan Binder in the
Sunday New York Times on nationalization. The main point: nationalizing
the banks is not, as heavy-breathers like Binder imply, expropriation
of private property by the state. It's just the opposite: "Instead of a
transfer of wealth from the private sector to the state, we have the
state (as in the taxpayer) propping up businesses and keeping
management demonstrated to be incompetent, perhaps corrupt (let us not
forget that overcompensation in phony good times is tantamount to
looting, and liberal accounting appears to be awfully common) in place."

Furthermore, the kind of bank nationalization FDR set up after the
catastrophic bank runs that kicked off the Depression is still commonly
used today. It's just not something the public is aware of: "When a
bank fails (technically, the relevant regulators, often state level,
deem it to be insolvent, and the FDIC rides in) the FDIC does 'own' it.
The assets and liabilities are in the hands of the FDIC, it determines
how to dispose of them. However, its preference is to seize the bank on
a Friday and have the deposits and branches in new hands by Monday. The
fact of FDIC ownership is thus not apparent to the public."

This is the kind of nationalization Norman Thomas sneered at. But it
is still a far cry from what the Obama Administration is doing. Instead
of wiping out shareholders, replacing top managers, and leaving the
banks on sound financial footing, the current bailout shovels money at
failing institutions, without extracting much more than weak promises
of good behavior from rapacious CEOs. Smith points to the particularly
egregious case of Citigroup, explained by John Kay in the Financial
Times:

"Vikram Pandit, Citigroup's chief executive, poses the issue in
stark terms. When the US government announced further support last
week, he was reported as telling analysts: 'We completely remain in
day-to-day charge of the company. We are going to run Citi for
shareholders.' But if I were a US taxpayer, I would ask why I had
provided $45 billion to a business that was going to be run for
shareholders, especially when the current value of outside equity is
barely 10 per cent of my own contribution."

Paying out bailout money to shareholders is about the most wasteful use imaginable for public funds.

As progressive economist Dean Baker puts it:
"Mr. Geithner wants to use taxpayer dollars to keep bankrupt banks in
business. In effect, he wants to tax teachers, fire fighters, and Joe
the Plumber to protect the wealth of the banks' shareholders and to pay
high salaries to their top executives."

This view is becoming mainstream. Check out Kansas City Fed President Thomas Hoenig's criticism of the bank bailout and prescription for across-the-board nationalization of failing banks.

Hoenig says, "We have been slow to face up to the fundamental
problems in our financial system and reluctant to take decisive action
with respect to failing institutions. ... We have been quick to provide
liquidity and public capital, but we have not defined a consistent plan
and not addressed the basic shortcomings and, in some cases, the
insolvent position of these institutions."

His solution: "If institutions -- no matter what their size -- have
lost market confidence and can't survive on their own, we must be
willing to write down their losses, bring in capable management, sell
off and reorganize misaligned activities and businesses, and begin the
process of restoring them to private ownership."

After the government takes over a bank, restructures it, and
replaces the managers, "Shareholders would be forced to bear the full
risk of the positions they have taken and suffer the resulting losses."

Take that, Tim Geithner and Citigroup!

The tide is turning against free money for unscrupulous bankers and
their investors at the expense of regular folks, at about the same rate
the economy is going into the toilet. For emphasis, my friend the
economist includes this graph of bear markets, showing the current downturn racing the line representing the 1929 crash to the bottom of the chart.

And, finally, Rick Santelli and his colleagues at CNBC get the hilarious knock on the head they deserve from Jon Stewart.
In a classic Daily Show Segment, Stewart sends up the absurdity of Wall
Street complaints about a tiny portion of bailout money going to
homeowners, and then juxtaposes CNBC analysts' predictions with
business press clips a few days later: "Bear Stearns is fine" "You
can't compare Lehman Brothers to Bear Stearns," "No need to raise
capital at Merrill Lynch." These pearls of wisdom all came moments
before the banks in question tanked.

Stewart quips: "If I'd only followed CNBC's advice I'd have $1 million, if only I'd started with $100 million."

He concludes with a series of kiss-ass CNBC interviews with CEOs and
billionaire operator Sir Allen Stanford, the Texas financier accused of
"massive fraud" by the SEC, who recently tried unsuccessfully to flee
the United States, and when asked by CNBC's Carl Quintanilla, "Is it
fun being a billionaire?" Stanford chuckles, and Quintanella chuckles
along with him. "Yes, it is fun being a billionaire," Stanford replies.

"Fuck you," says John Stewart. "You know, between the two of them, I
can't decide which one of those guys I'd rather see in jail."

Maybe nationalization is not such an incendiary notion after all.