Federal Government Might Partially Nationalize Banking System

This headline should scare the crap out of you.

Bush administration weighs plan for government to take temporary ownership stakes in banks

Yes, it is what it looks like.

Sen. Chuck Schumer, chairman of the Joint Economic Committee, said an administration proposal to inject federal money directly into certain banks, in effect partially nationalizing the banking system, “is gaining steam.”

1. Christ, Obama hasn’t even been elected, much less inaugurated yet and already we are starting to nationalize things.

   WE are SO screwed!

   Posted by on October 12, 2008 at 2127 hrs




2. I’ve got 50 bucks that says the Democrats will want a stake in GM, Chrysler, and Ford in exchange for a bail-out.

   Any takers?

   Posted by on October 12, 2008 at 2136 hrs




3. This is a better idea. This is the idea that Jim Paulson with Wells Capital advocated in the early days of this.  This is the idea that John McCain should have advocated right away three weeks ago, but I don’t think he’s smart enough to understand it. 

   Owen, here are the positives of this versus buying the bad loans:

   a) Here the Feds don’t need to create a huge government enterprise to buy troubled loans, hold them, manage them and maybe some day sell them.

   Under this plan, the banks keep their bad loans. They manage them.  And they have the most incentive to do a good job since they are still on the bank’s books.  Do you really want to create a massive new 10-year bureaucracy staffed by ex Lehman workers, paid for with government salaries?  Managed by the government?

   b) This plan means the government doesn’t have to try and value for purchase mortgages which people can’t value right now. Let the banks make the decisions on foreclosure and how to maximize their asset positions. 

   c) If these banks “make it”, the US government get’s a profit.  Or at least interest on the investment.  With the other plan, it’s a guaranteed loss in my opinion.  They have to buy high for the plan to do any good in helping the banks capital position.

   d) Banks are able to leverage equity capital to up to a 12 to 1 ratio.  This means for every billion the government buys in stock, the bank can theoretically use that capital to loan out $12 billion.  Under the old plan, we just take the bad loans out and may not do much to improve the banks capital position to help them lend.  This idea gets more lending ability into the banks right away. 

   Apparently Paulson was approached with this idea three weeks ago, but brushed it aside.  Now he realizes this makes a heck of a lot more sense. 

   With this concept, the banks have to do work to make things right, with some help from the government.  The other plan was just corporate welfare for bad management.

   Posted by on October 12, 2008 at 2248 hrs




4. It may be a matter of semantics, but the way I read the article is that this cash will be used to purchase stock in the banks.  As long as the government doesn’t hold 51%, or even the largest block of outstanding stock, it is hardly ‘nationalizing’ the banking industry.  It is actually very similar to the Chrysler stock buy, which worked out well, the stock (and the option warrants) ended up being worth more than the bailout.

   I AM scared that this is being touted as a ‘partial nationalization’ if only because it makes a true nationalization easier to sell somewhere down the road.  Let’s call it what it is, a stock purchase. The worst that happens is that the bank ends up going bankrupt anyway, in which case the investment is lost, but is that any different than what can happen with buying up mortgages directly? The upside is that we as tax payers reap a reward when the economy recovers.

   This next portion may be a bit misplaced, but it is on my mind as I write this. IF the government does end up buying mortgages directly and revaluing them downwards, it should be with the stipulation that any subsequent sale (by the current or following owner) CANNOT realize a capital gain, until the government is reimbursed the amount that the original mortgage was written for. (e.g. If a 500k mortgage is rewritten at 300K and the owner sells for 400K, the 100K goes to the government, in addition if the NEW owner then sells for 550K, he would realize only 50K) There may or may not be a provision for a modest amount of interest to be applied to this, say 2%.  This will do a couple of things. First, it will protect the taxpayer against losing anything in the long run, and second, it will slow down the supply side of the housing market since people will be more likely to hold onto the homes in question until they are of sufficient value to realize a capital gain over and above what will go to the government.

   Posted by on October 13, 2008 at 0130 hrs




5. It worked when Britain did this last week.

   Posted by on October 13, 2008 at 0852 hrs