Taunter Media

I hope there are better arguments against nationalization.  Because saying that it was really difficult is pretty weak when your solution is:

The Obama administration should declare that nationalization of any major bank is off the table; that the government stands behind our entire banking system; and that our banks will continue to receive a nonvoting form of equity capital, such as convertible preferred stock, from the government to the extent needed.

That whole “stand[ing] behind our entire banking system” bit means putting taxpayer money at risk for private decisions.  Why wouldn’t we get all the benefits of control – the right to hire, fire, and restructure, the economic return of any appreciation – in exchange for taking a greater risk than any private investor is willing to take?  Anything else is providing a gift to the shareholders of the banks – the group who got us into this mess and precisely the people we should not be rewarding.

Krugman and Greenspan have both acknowledged the need to nationalize.  The serious analysis is not really in any doubt.  I wonder if the problem is not more cultural; the government has invested so much in proving it is not a bunch of arugala-eating Trotskyist academics that it has a hard time recognizing the circumstances.  As Dave Leonardt puts it:

[Obama's] top advisers, including Geithner and Lawrence Summers, have spent much of their careers trying to persuade other Democrats of the virtues of private enterprise. They have pushed the party to grasp the folly of Mitterrand and acknowledge the limits of government. As this crisis has made clear, the private sector has its limits, too. Will the people who have Obama’s ear be able to acknowledge those limits when the time comes?

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The next-generation TARP is online at the Treasury.  Some highlights:

Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th.

Wonder what the significance of February 9th might be…  Anniversary of the Treaty of Luneville?  Anniversary of the first flight of the Boeing 747?  Or – as wondered on Calculated Risk – the highest Citigroup share price in February?

CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer’s option (subject to the approval of their regulator)…The instrument is designed to give banks the incentive to replace USG-provided capital with private capital

Because another sucker is going to stand in the way of the massive asset write-downs to come for a 9% yield and the privilege of buying something for $3.56 – convertible at the other guy’s decision, mind you – that is trading for $2.79 when you announce the plan?  No, I think we’re on our own on this one.

As part of the application process, banks must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support.

This was a topic in the State of the Union as well as the various finance hearings, and it makes little sense.  On some level, the capital obviously preserves lending capacity – with no Federal capital whatsoever the bank would be insolvent.  But within the band of solvency, the bank should be making only such loans as are profitable on a risk-adjusted basis – and there are increasingly few such credits out there.

The giant banks have a giant overhang of lousy assets.  Until these are written down, nothing good is going to happen in the banking system.  Until we nationalize the banks, they won’t write anything down, because the sheer magnitude of the write-downs would put them under.  I’m not sure what Obama meant by holding banking executives accountable – Vikram Pandit sure can’t write a check to make Citigroup whole – and John Thain’s drapes are the least of BofA’s problems.  A government that cannot bring itself to accept the state of events is a much bigger threat.

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