A Look At Bank Nationalization

Here is a look at a recent NY Times article that discussed the various forms Bank Nationalization can take:

From The NY Times:

Few words conjure the specter of radicalism quite so well as nationalization . Seizing control of large industries - nationalizing them - is often among the first acts of a leftist government. Lenin did it, and so did Hugo Chávez . Even the comparatively tame François Mitterrand made the nationalization of some banks and heavy industry the centerpiece of his agenda when he became France’s president in 1981. He held it out as the alternative to the laissez-faire ideology of Ronald Reagan and Margaret Thatcher .

So it is a bit odd to watch Barack Obama , who aspires to finally end the era of Reaganomics, spend his early weeks in the White House swatting away calls for nationalization from decidedly nonleftist quarters. Lindsey Graham , a Republican senator from South Carolina, recently said that, given the depth of the credit crisis , he wouldn’t rule out nationalizing banks. Alan Greenspan went further a few days later. “I understand that once in a hundred years this is what you do,” Greenspan, an Ayn Rand disciple before he was a central banker, told The Financial Times.

There are really two different kinds of nationalization. The first draws on a belief that the government can run large enterprises more justly and efficiently than self-interested capitalists can. This is the nationalization of Lenin, Chávez and Mitterrand, and its record is pretty dismal. France’s economy staggered through the 1980s, as government-run banks backed political pet projects that didn’t work out.

The second version of nationalization is the one that today’s advocates point to. It is a temporary takeover born out of crisis. Sweden pursued this kind of strategy in the early 1990s to clean up its banking system. Even the United States has nationalized banks on occasion, including IndyMac Bank last year.

In these cases and others, the government had none of the grand ambitions that Mitterrand-style nationalizers had. The same would clearly be the case with a nationalization of banks today. “Nobody in their right mind wants the government to be in the banking business any longer than it needs to be,” said Adam Posen, an economist in Washington and a prominent voice for nationalization. Instead, the federal government would declare a bank insolvent, wipe out its existing shareholders, fire its top executives and inject enough money to keep it functioning. The government could then siphon off the worst assets into a so-called bad bank - pooling them with toxic assets from other nationalized banks - and resell the bank’s healthy parts to private investors. Once the crisis lifts, some of the toxic assets may even have value.

The promise of nationalization is that it, and only it, can break a self-reinforcing cycle in which banks continue to make bad bets in an effort to dig themselves out of a hole. It’s frequently said that bankers, paralyzed with fear, have been unwilling to make any new investments. But Posen points out that this isn’t quite right. In the months before they collapsed, both Washington Mutual and Lehman Brothers made the financial equivalent of a Hail Mary pass: investments that had little chance of paying off but at least had the potential to put them back in the black.

For the record the idea of nationalization of a bank (or any business for that matter) makes me very uncomfortable, and in many ways it’s the usual American ideological opposition to nationalization as it feels like an unwanted expansion of government powers. But let’s say it’s done to protect the economy and we don’t experience an increase of government control, we don’t lose any freedoms, etc, and instead benefit financially via the government saving a key part of our economic infrastructure. I still feel uncomfortable as I’m 100% positive that the government will use the businesses it nationalizes to serve political gains first, business goals second.

After all, just look at what happened with the Mortgage GSEs.

Still I have no problems admitting that while distasteful nationalization is sometimes the best solution, and there is no point in sugar-coating things and/or pretending that nationalization hasn’t already happened in many respects within the financials sector .

I just remain concerned as to whether or not our government understands the problems at hand, and will be able to separate political goals from what’s best for the business. IF Nationalization can in fact save a company that’s vital to our economy so be it, I just worry that the people involved won’t be able to get the job done in an expedient manner.

With all that being said I think we need to think in terms of the best solution to the problem at hand, as opposed to the combination of the best solution and the solution that best fits our own ideologies. Because there is no point in wasting time and energy pretending certain banks aren’t nationalized, avoiding it, etc. Instead it’s time to develop an understanding of the problem from the ground up and then deploy the best solution for it.

You can read more here.

Source:

The NY Times: “More Than One Way to Take Over a Bank” — David Leonhardt, February 25, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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