Nationalization of Banks        25 Feb 09

I've listen to the debate over the nationalization of banks over the last couple days and decided to expand / clarify the article I wrote on 22 Feb 09.

This first paragraph talks about stock.  Stock price is important mostly for a psychological reasons.  However, there is some danger of the banks failing if their stocks go to a penny stock status.  The other thing about is it offers a great opportunity for the government to actually end up making money in the end.  The main problem I see with much of the debate over the last couple days is it wastes so much of the governments money.  It makes no sense to me to convert the 45 billion dollars of preferred stock into a 40% stake in common stock when for about 3 billion additional dollars you could buy a 40% stake and still have the 45 billion in preferred stock. My first choice in a proposed course of action (COA) would be for the government to do it's "stress test" on the bank and determine the bargain price for share of stock.  The government would then put a standing bid to buy all shares of the banks stock that comes to market for that bargain price or less.  This would establish a floor for that stock price.  At the same time they would establish a standing sell price for instance $9 a share. Take Citibank as an example.  Suppose that bargain price were $1.50 a share.  If the government were to buy all of Citibank's available stock it would only cost the government about 8 Billion dollars.  I doubt the government would have to buy more than 2 billion shares ($3 billion).  This seems to make much better sense than to dilute the existing stock by converting the preferred stock.  Besides wasting the 45 billion, converting would lead to lowering the price of the stock even more than it is today.  (It would even be better for Citibank to be able to use part of that $45 Billion it got for preferred stock to buy its own stock and get it off the market.) Part of this plan involves congress setting rules for how the banks will operate depending on how much of the common stocks the government owns.  They may give the management all the freedoms of an independent bank until the government owns 15%.   If it gets to 35% ownership some extra government desires can be mandated.  If the government becomes the majority stake holder then the congress should have significant management strategies they need to follow. 

Eventually, the public will realize the banking problems are basically caused by a stupid (government required) accounting practice and they will go back to buying the bank's stock.  Once the stock gets to $9 a share the government will sell it back and make a 6 fold profit.

Have you read my 12 Feb 09 article?  I recommend you read it now.  It should be read so you can see how the government bank will help free up the lending stranglehold.  It is found below.  

Nationalization of Banks  1 Mar 09

Only the government would pay 25 billion for something that could be gotten for 4 billion.  That is what the treasury did last week when it convert 25 billion dollars for approximately 36% of Citibank.  You can read my article of the same name from 25 Feb 09. But if you look at the outstanding common shares % billion)  and the share price ($1.95) you see that 36% of the common shares could be gotten for about 3.5 billion dollars. This is especially troublesome because using the method they've chosen to use neither the taxpayer, the government nor the stockholder benefits.  The taxpayer is out 18 billion dollars as well as the lost interest on the preferred stock.  The government really doesn't get any more control then they had since almost every bank had government overseers sitting within the companies before anyway.  And the stockholders just had their share diluted, this will further discourage people from holding stock in other banks.  

One really has to wonder what these guys real objective is and where the money is actually going.  Bureaucrats can waste some money but spending 25 billion in order to get 3.6 billion dollars worth of stuff is over achieving even for the government.

Nationalization of  Banks

                                                                                        22 Feb 09

There has been some discussing this past week about the government having to nationalize the banking system.  If this is to be done I would like to see it accomplished by the government figuring out some way to purchase a majority of the the banks stock and keeping them publicly traded.  I'm thinking once a banks stock becomes affordable the government should buy the stock.  Once they become the majority owner they can manage the bank as if it were a nationalization bank. Managers can be limited to salaries of $500,000 a year.  Lending policies can be set.  The government can set the policy for renegotiating mortgages.  After the bank becomes more stable they can disinvest.  This proposition does have it's tricky items.  The government has to decide what is the affordable price.  But you know once the managers of the banks know what price the government will start buying they will do things to protect their personal interests.  I imagine they will do things like undertake more debt or try to sell off the assets or issue more stock, etc.  So when the government sets up the buy system they need to anticipate the reaction of both the bank managers, traders and  investors and set up the system so it is possible for the government to make the bank profitable and selling the stocks back once they are profitable. 

On the scale of the recent "bailouts" this shouldn't cost the government all that much.  Take Citigroup.  Today it looks like the stock is selling for $1.95 a share and there are about 5 billion outstanding stocks.  If the government should decide the affordable price is  $1.50 then if the current investors want to get out of the company the government would get 50.0% interest (2.5 billion shares) for about 3.8 billion dollars.  The tricky part is to determine what the government price will be and then making sure the foundations for setting that price do not change for the worse because of company management or market manipulation. 

How the Financial Institution fix should have been conceived

I know I hinted at this a couple months ago but now I believe it more than ever so I will expand.  The problem was some banks made bad loans so all banks got scared and therefore they were not lending money.  The government should have stepped in and made the loans to those evaluated as good risks.  In other words the government should have established a bank funded it with the $800 billion dollars and made the loans to those companies and individuals that were reasonably safe loans.  If the government was in business and siphoning away all the good credit risks loans from the established banks the banks would soon realize they need to either compete for the good loans or else the only people left to do business with will be marginal credit risk entities.  It is hard to predict which of these the banks would chose but either way it is a win, win situation for the consumer, the banking industry, the government and the country.

Suppose they chose to compete for the good credit risk loans, this would free up the $800 billion so the government can work the margins.  Suppose they chose not to compete then they either chose not to make any loans or they start to make loans to the margins.  If they chose not to make any loans they don’t do any business and don’t make any money.  In this case the government makes money on the good credit risks and then has money to work the margins.  If they chose to make loans to the marginal credit risks then the marginal credit risk market is served.  It is obvious the public is served with this approach because the credit market is served.  The government benefits because at least initially they are lending to the best credit risk and thus likely to make a profit.  The banking industry is helped because the banks that are likely to survive after the process runs its course are those that practiced sound banking principles the past 10 years and will cull those that have not implemented sound banking principles.  After the badly managed banks have left the market the government can sell or privatize this financial rescue bank.

This method offers many solution to the problems we see caused by the poorly conceived and implemented TARP.  With the TARP we took the stress of possible failure away from an industry that has put the country at horrible financial risk.  This allows them to bunker down to ride out the storm while the rest of country flounders trying to make up for the service they are no longer providing.  With the method I propose here they have to get in the game to survive.  Not only that they would have to do it efficiently and at a competitive cost.  From what I understand the banks have traditionally calculated mortgages at 1.85% above a rate based on the sales prices of long term government bonds.  In order to keep their previous revenue they have recently begun adding a 3% premium above this rate instead.  This allows them to suck the money away from their best customer base and restrict access to the mid risk customer and still maintain their own standard of living.  So the only people that aren’t penalized are the banks.  If the congress created competition in the market place that was forced to loan with a premium of 2% above the standard for highly qualified borrowers then the other banks would compete for the best customers and we would see offers of cost + 1.85 traditional rate.  Now the banks will either be forced to control costs such as executive pay / bonuses, corporate jets and staff parties or they will have to pick the best mid level risk borrowers to make loans to in order to make that additional profit.

I’m going to add a little commentary here.  Whenever, I see the congress grilling the CEO’s of the major banks about the excesses  force them to commit to a salary cap and mock them for planning corporate get a ways I actually feel sorry for the CEO and other employees at Wells Fargo.  I can’t be sure but from all accounts Wells Fargo was and always has been in pretty good shape and appears to have followed good banking procedures when the rest of the banking world had gone a muck.  Yes they ended up getting forced to take some money in the original bail out.  But they pretty much did it at the barrel of a gun.  Now the CEO has to bite his tongue and Congressmen and Senators take pot shots at him.  The employees of a perfectly healthy bank had to cancel a traditional get away even though they as a team had the disciple to do things right while the employees at other firms were raking in money through unsavory practices.  What is worse yet when the government decided to save the other companies they took away the competitive advantage the well managed bank had and significantly weakened the ability the positive aspect of good banking strategy would have had on future banking practices.

Stated more simply if the government would establish my plan a well managed bank such as Wells Fargo would survive and become the dominant bank post financial crisis establishing the model for future banking practice.  With the current plan the banks that were able to become the biggest players during a period with no scruples get to keep their gains and will undoubtedly fall back into the only practice they know once no one is looking.

Oh, one last thought.  I know a lot of people are saying “That wouldn’t have worked because it would have taken to long to create this federal bank”.  This of course is wrong because if the government had let Washington Mutual or Citibank etc. fold and go into federal receivership there would have been a ready made bank infrastructure of buildings, employees and relationships to conduct banking business.  All that would have been left to do was fund the $800 billion and define the rules at which the loans would be made.  Whalah a federal bank.

NOTE:  I decided to post this without making sure all sentences were written to clarity.  I thought the subject to important not to get the discussion underway and will rely on your ability to understand more then my ability to convey until I have time to edit for clarity.