The Many Faces of Bank Nationalization


by Dr. Jack Rasmus
Global Research, May 5, 2009


Calls for nationalizing the banking industry have been bubbling since at least last September 2008, when the current Banking Panic began in the wake of the Lehman Brothers bank collapse, the initial AIG bailout, and the quick absorption of Merrill Lynch-Wachovia-Washington Mutual banks by their larger competitors, Bank of America, Wells Fargo, and JP Morgan Chase.

One of the first to raise the idea of the possible need for bank nationalization last fall were the editorialists from the Wall St. Journal, as well as ex-Federal Reserve chairman, Alan Greenspan. Of course, what the Journal’s editorialists and Greenspan meant by their idea of nationalization was the government should assume responsibility for cleaning up a bank’s bad assets at taxpayer expense, followed by the government quickly selling off the best of the bank’s remaining assets at firesale prices to new investors. The ‘nationalized’ bank would subsequently and promptly reopen for business in short order once again as a completely private institution, its ‘bills’ (bad assets) having been paid for by the taxpayer in the interim.

Nationalization is thus merely a kind of ad hoc bankruptcy proceeding declared and set in motion by the US government. The banks would not be ‘taken over’ in anything but a legal, formal sense. A quick transfer of bad assets follows, after which the institution is ‘spun off’ again and sold to private investors. Nationalization in this sense functions merely a tactical move for removing bad assets and resurrecting a zombie bank from the dead.

Something quite similar to this was in fact what occurred with the failure of the mid-sized regional bank, IndyMac, in late summer 2008. It was taken over by the U.S. government agency, the Federal Deposit Insurance Corporation, or FDIC. Today IndyMac has reopened expunged of its bad debts, which are now debts of the government and taxpayer. In fact, the same group of investors who once owned IndyMac have rebought it once again, at firesale prices, from the FDIC. They are the owners once again. The investors were ‘rescued’. Nationalization is thus a form of ‘investor rescue’, a kind of ‘temporary trusteeship’ in a formal, legal sense pending reprivatization.

What the Journal and Greenspan meant by bank nationalization is simply let’s ‘do and IndyMac’ for other, even bigger banks. There’s no idea implied that a bank might be more permanently taken over and operated on a day to day basis, not for the interests of private investors but for the broader public interest of the nation and all its inhabitants.

Since last fall 2008, when the bankers essentially went on strike in terms of refusing to lend to businesses and consumers except at all but the most usurous rates, debate has raged in ruling class circles as to what to do with the trillions of ‘bad assets’ on banks’ balance sheets. These ‘bad assets’ in the form of both ‘bad loans’ and ‘bad securities’ now amount to somewhere between $4 and $6 trillion, according to various sources such as Fortune Magazine, the Journal, reputable independent sources, such as NY University Professor, Nouriel Roubini, and even Treasury Secretary Geithner prior to his appointment in that official role. The central argument is that until the ‘bad assets’ are somehow relieved from the banks’ balance sheets, banks will continue to refuse to lend and the accelerating current decline in the real economy in the U.S. will continue to worsen.

The Journal-Greenspan notion of bank nationalization must be viewed as part of that ongoing capitalist class debate. Nationalization is merely a tactic for addressing bad asset removal and subsequent quick reprivatization, nothing more.

Other tactical proposals have contended since last fall with the idea of bank nationalization as ‘temporary trusteeship’ and means to remove bad assets. They include proposals such as creating an ‘Aggregator Bad Bank’, into which the government would deposit the banks’ bad assets’ after somehow purchasing them. But ‘purchasing’ has proved difficult since banks have actually refused to sell the bad assets. Banks have been ‘on strike’ since last fall, in other words, not only in terms of ‘refusing to lend’ but in terms of ‘refusing to sell’ bad assets as well.

Bad assets on banks’ books take two forms. One is ‘bad loans’ assets. Another is ‘bad securitized’ assets. According to legal accounting rules, banks can hold ‘bad loans’ on their books at their initial purchased values. Hence, they have little incentive to sell them at lower values and have to write-down the loss. But who wants to buy the loans at top dollar when it is clear they are worth far less than the banks are willing to sell them? Thus, no other investors have wanted to purchase the bad loans way above their market value since last September. And should the government do so it would mean a clear subsidization of the banks at taxpayer expense. So the ‘bad loans’ have not moved off the banks’ books. Something similar has been the case with the ‘bad securitized’ assets since last fall. These are the subprime mortgages, auto loans, credit cards, student loans and various other asset backed securities that have been
‘securitized’, or bundled, into new financial instruments for sale since 2002. Unlike ‘bad loans’, securitized bad assets must be valued at their true, virtually worthless, prices today. That means close to zero. While banks would like to sell these assets (to investors or government), they want to sell them only above their true ‘mark to market’ values. Investors, in turn, want only to buy them at their true, virtually worthless price—if at all. Some are considered so worthless, no one has stepped up to buy them. So, once again, the ‘bad assets’ in this form are not sold and remain ‘toxic’ on banks’ balance sheets, worsening with the passage of each day.

What is described in the preceding paragraph is the ‘grand dilemma’ faced by the financial system today. The US government, Treasury and Federal Reserve, have been trying various ways to expunge and rid the banks of the bad assets, without success to date. The banks in the meantime remain on strike and refuse to lend (or to sell the assets).

The aforementioned ‘Aggregator Bank’ is one idea for trying to rid the banks of their bad assets. Something like it was tried in Sweden in the early 1990s with success. However, that was one small country. The problem is many times more immense in the US (and globally) today. The Swedish government could successfully ‘buy up’ the bad assets and place them in the ‘Aggregator’ bank. The amounts to be ‘bought up’ today, however, are likely greater than any one government can finance, including the U.S. It has sometimes been said that the Swedish government ‘nationalized’ its banks in the process of setting up its ‘Bad Bank Aggregator’. But, once again, that idea of nationalization is simply a variation on the theme proposed by the Wall St. Journal and Greenspan.

Other variations on the theme that have also been confused with ‘nationalization’ have been efforts by the US Treasury and Federal Reserve to buy stock in the failing banks—whether in the form of preferred stock purchases, common stock, or some convertible arrangements combining both common and preferred. Instead of buying up the balance of the bad assets altogether (e.g. Aggregator bank), the idea here is to offset the bad assets on the banks’ books with the hope that, once the assets are neutralized, the banks will begin to lend again. Stock ownership, partial or even majority, is thus also identified with the idea of nationalization.

Thus last fall the Fed and Treasury bought 80% of the stock of AIG and therefore somehow effectively ‘nationalized’ it. But formal stock ownership is in no way equivalent to nationalization. To recall, AIG simply went on to act as it always had, throwing billion dollar parties for its managers and doling out huge sums of TARP money in bonuses. If there is any example of the limits of legal ownership definitions of nationalization, one need look no further than the experience of AIG.

The TARP program introduced last October was an attempt to generalize the AIG action. But at $700 billion it was soon apparent TARP was a drop in the bucket needed the $4-$6 trillion hole in bank balance sheets. Amazingly, what the TARP experiment shows is that the US government had no idea of the magnitude of the banks’ losses and how effectively the banks had hid that magnitude from the public and government itself. The TARP program quickly ran into the aforementioned problem of banks’ refusing to sell at anything but inflated, above-market prices for their bad assets. Then Secretary of Treasury Paulson panicked Congress and the public to give him the $700 billion, only to find it was a grossly insufficient amount and that, in any event, the banks refused to sell their bad assets unless massively subsidized by the government to do so.

When Citigroup and Bank of America collapsed in November 2008 the Treasury and Fed threw much of what remained of TARP funds at them (and more for AIG as well), and came up with hundreds of billions more in guarantees against their losses ($300 billion alone for Citigroup) from the Fed as stopgap measures. But Citigroup and Bank of America fell still further into a hole in January-February 2009, requiring still more bailout. By February it was becoming increasingly clear that that cumulative balance sheet hole in the big 19 banks continued to grow daily. At $4 to $6 trillion it was becoming increasingly unlikely even the US government could afford to buy all the bad assets on banks’ balance sheets on its own.

This re-ignited once again the discussion and debate on bank nationalization this past February. If the US government itself can’t afford to buy all the bad assets, why throw any taxpayer money at all down ‘the black hole’ some began to argue? Perhaps the banks were not ‘too big to fail’. Perhaps they should be allowed to go under. Or …perhaps the government should nationalize them. But if nationalization defined as bad asset clean up was not possible, what would nationalization now mean?

By early February the call for some kind of nationalization began to emerge from various directions. The AFL-CIO raised it, but provided no definition of what it should mean. Noted economists like nobel laureate, Joseph Stiglitz, called for it, as it NYU professor, Nouriel Roubini, whose predictions of the evolution of the crisis had proved correct for the past two years. James Baker, the main policymaker during the Reagan administration, came out for it. Greenspan reiterated that nationalization was necessary for an ‘orderly restructuring’ of the system. Key figures in the Republican party, such as Lindsey Graham, declared on public tv “if nationalization is what works, then we should do itâ€