Nationalization by autumn, bank on it

By J Saft
February 13, 2009

– James Saft is a Reuters columnist. The opinions expressed are his own –

jimsaftcolumnLike it or not the United States will be forced to nationalize large swathes of its banking system by the time the leaves fall from the trees in Washington.

The tragedy is that we will have to wait that long and that the costs will mount.

The plan to rescue the banks, or, er, the people, as enunciated by Treasury Secretary Geithner, is no plan, only an apparent set of contradictory principles: an ideological one not to nationalize and a political one not to subsidize too obviously.

The plan will fail unless the administration comes out in favor of either subsidy or seizure of failing banks. Either the United States will be forced to nationalize when that becomes apparent or perhaps it is waiting until that failure makes nationalization more politically palatable.

In either event, it is a terrible mistake and the cost will only grow, both in direct terms for taxpayers and more broadly for the growing number of people with too little income to pay tax.

Geithner laid out a plan to apply stress tests to large banks and require those that do not pass either to raise capital (from whom exactly, I hear you ask) or to accept an injection of convertible securities from the government on terms that have not been defined. Banks that take government coin will have limits placed on their compensation and other actions.

There is $500 billion to $1 trillion to fund an aggregator bank which will “partner” with private capital and set prices for distressed bank assets, presumably with some sort of insurance wrapper to limit private capital’s downside. There are also measures intended to generate lending directly to consumers, house buyers and businesses.

All in all, it’s a bit like watching a man trying to eat a steak without using his teeth.

“The financial system needs at least $1 trillion in tangible common equity to be sufficiently capitalized — the capital holes on financial balance sheets are just too large to be plugged with convertible securities with vague terms,” Paul Miller, an analyst at FBR Capital Markets who has been very prescient, wrote in a note to clients.

“Another concern … is that it does not adequately address the toxic assets on bank balance sheets. It does include a variation of a public/private aggregator bank, but private investors will want to buy assets at distressed prices and the banks will only sell assets at above-market prices.”

Those two points form the crux of the issue; for the banking system to work without widespread failure and nationalization we either have to hand out huge subsidies to banks directly, in the form of cheap capital, or indirectly, by giving a subsidy to investors who will pass on part of it to banks as a condition of getting their share. The first is unfair, the second unfair and inefficient.

PLAYING THE LONG GAME IN A SHORT LIFE
Of course, it could have been worse. We seem to have escaped calls to magic solvency up by suspending mark-to-market accounting, which would have worked as well as making “six” the new “zero.”

And in fairness we don’t know how the stress tests will work or if it is possible to fail one. But President Obama did tell ABC News that nationalization “wouldn’t make sense” because of the scale and complexity of the U.S. economy and capital markets would make it too tough to manage and oversee. He’s right and government will do a terrible job of managing banks, but it will be forced to and may as well get on with it. They seem now to be hoping that the economy turns and bails them and the banks out of their pickle, but that is a dangerous bet.

By the time we figure out that it’s not working, when whatever capital we have injected is swamped by falls in asset prices — and remember deleveraging and asset price falls go hand in hand — things will be that much bleaker and the United States will have less room to maneuver.

But ironically, maybe the most hopeful sign yesterday was the negative way in which the stock market and shares in banks reacted. Bank investors clearly thought that this raises the chances of them having their equity extinguished or at the very least their share of future profits diminished.

And Obama is not FDR coming in after a depression was already entrenched, he is leading a country which is only beginning to wake up and to suffer. It is just possible, though not likely, that the administration realizes it will have to take more drastic steps but needs more time to prepare the ground and make that politically possible.

One factor which may come into play is international pressure not to nationalise. What is just about possible in the United States would be far harder in economies such as Britain’s with larger banking systems relative to their size and borrowing power.

109 comments

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if the banks are nationalise as you are suggesting, what happens to the share price of these institutions? i own 2000 shs of bac..tks for youe time

I think you are wrong. What you miss is that the market in distressed or toxic assets will come to life and the values will start to rise. This happens if and when the number of foreclosures can be reduced and credit becomes available for those who wish to buy property. Once the real estate market hits bottom, distressed asset values rise, balance sheets firm up and the economy improves rapidly. By the end of this year, what we now call toxic or distressed assets may actually become desirable again and banks that own it attractive.

Mr. Saft have not seen a gleam of hope for months. I respect his comments, but do not believe they are balanced and fair

Posted by Marco | Report as abusive

Bogaarts is right, with a caveat: toxic assets won’t revitalize unless credit and cashflow get moving over the next six months. Obama’s plan is a last-ditch effort. Once TARP started (a very bad idea of BushCo’s), we’re stuck with it, hoping that enough good money thrown after bad will stop slide. It might, but it’s a dodgy situation.

Posted by Mike | Report as abusive

Isn’t it ironic, that because of THEIR unmitigated greed, we’re all gonna be stuck with a communism that NOBODY wants ! Wonder who’s laughing more, Marx or Lenin ?

Posted by Gregg&Brian | Report as abusive

The author is absolutely right. All of the banks who plunged headlong into the overheated real estate market are insolvent and must be intervened, cleaned up and resold to either healthy institutions or investor groups who will run the “new” institution in a safe and sound manner. The market for distressed or toxic assets has a LONG way to reach bottom. Residential real estate in the overheated markets is still overpriced by 50% when measured against the median income of qualified buyers in those areas. This is exacerbated by rising unemployment in those same areas. Commercial real estate is collapsing. Don’t believe me? Just take a ride on Federal Highway in Fort Lauderdale from downtown north to Commercial Blvd. and count the vacant buildings.

Posted by William Schneider | Report as abusive

Balanced and fair??? Enough with the political correctness. It’s not news, it’s an opinion and as far as I’m concerned the writing is on the wall. USA no more. Welcome to the USFRB (United Subjects of the Federal Reserve Board) In addition to banks we are nationalizing a huge portion of the real estate in this country with the so-called bailout.

Posted by Steve Tutt | Report as abusive

nationalize the bank and you effectively kill the stock market.
Might as well turn to communism, you think ?

Posted by oberst | Report as abusive

Nationalization of the banks will not happen. Just take a look at how many mutual funds, and other institutions own their stock. Nationalizing a bank would not only punish the bank but it would drag down significantly a lot of other institutions and people. This could create a domino effect worldwide. As the US goes so goes the free world.

Posted by MJJP | Report as abusive

Watching the hand wringing in these comments is slightly amusing. Capitalism is just a secular religion promising salvation to its adherents through never ending growth and increasing consumption and luxury. Well, that religion is proving itself to be just about as real as all the rest. Sorry. Keep hope alive! The True Believers will be foisted up to the heavens like so many helium balloons and all live in 10,000 sqr ft McMansions!

As soon as there will be any hint of a recovery, oil prices will go up, and prevent it from happening. Far too little is done to get us off oil. Hence, there will be no recovery. Nationalization of banks is likely, but will not nearly be enough to turn the tide.

Posted by Peter | Report as abusive

Over $500 billion of Obama’s so-called “stimulus” plan provides taxpayer paid health care for the poor plus other benefits that primarily help “his” people. First, the rich cheat the middle class, then Obama cheats the middle class….where does it say that MedicAid healthcare for the poor will stimulate the economy? It’s all a socialism boondoggle, as just a small fraction of the stimulus dollars will being spent outside the public sector. As the eTrade baby says, “it’s bullshlt.”

Posted by richard | Report as abusive

It’s hard to know whether to laugh or cry about this financial meltdown. For several decades, almost everybody who was anybody was secure in the belief that a laissez-faire world economy was going to make us all rich. Meanwhile, we sailed into a new Golden Age of Pirates with wannabe Blackbeards roving unregulated financial seas. Now, with massive government interventions and more looming on the horizon, we are already hearing the cries of “socialism!” The nastiest word in the economic lexicon.
It just goes to show that – no matter what happens – we have once again belatedly discovered that there is no such thing as a free lunch. Well, except for those that are being served up to the pirates by millions of average Joes.

Posted by Ray | Report as abusive

The author makes the point (but not very strongly) that taking over insolvent banks puts the cost of maleficence exactly where it belongs–on bank officials and stockholders.

Obama’s comment that this would be too much difficult work seems to me to be motivated by a “not invented here” mentality. There are plenty of insolvent banks out there–”nationalize” one of them and run a test case–but do it NOW.

I’m holding out hope that all the blather from Geithner is just cover to allow them to get the bank reviews done without spooking everyone. If they didn’t insist that receivership is off the table, and instead admitted that banks which failed the inspection would be taken over by the FDIC, everyone would rush for the exits before they even got started. Hopefully this is just some misdirection to buy a little time. I’m probably wrong, but it is one way to look at it that is not quite as depressing.

Posted by Tom | Report as abusive

Mr. Safts observations have been prescient, perhaps one should listen ……as for me and mine; Mr. Saft, thank you..

Wacobipe……….10……………..

Mr Saft, you disappoint me — I’m in nearly complete agreement with your analysis, and one *hates* that ;)

I think, though, that your point as to the possibility that the Obama administration likely realizes the inevitability of effective nationalization but also feels that the public wouldn’t accept it at this point is likely the case. Agreed, it would be far better to move now, but I think that’s simply politically and socially impossible at this point. There is still a great deal of denial at large as to the dimension of the problem, coupled with the earnest hope that the magic of markets will resurrect the corpses in Lazarus-like fashion.

A particularly lively column, and well argued in my opinion — my thanks.

Posted by AtomiWeasel | Report as abusive

Better than loaning large amounts to financial institutions which have not so far, and likely will not, improve loan availability – let the government offer loans directly to the public… It will cost less than what we might loan the banks (cut out the middleman) and will give the banks a mandate to compete or go under…

IF they cannot compete then it is time for them to go and let the government (us) become the banking system…

dr. o

The banks will be nationalized.

Unemployment will increase throughout 2009.
The unemployed will not be able to make their credit card payments.

This will trigger the penalty rates.

The debtors will stop paying anything.
(I personally know people who already have stopped making any payments.)

The banks will then have less capital (their debt-based securities will be devalued)
and less income.

Banks then begin to fail. Chase Citi, and BOA come to mind.

The FDIC does not have anywhere close to sufficient funds to insure current deposits.

The Federal govt. will not have the financial or political capital to bail out the banks. So nothing effective happens.

People begin to pull what assets they have out of banks.
More banks fail.

Which leads us to March 1932, when almost all of our states had absolutely no functioning banks. People lacked the cash to buy food.

The government has to do something, and FDIC is no longer working.

Ergo, nationalization.

Posted by John Bannick | Report as abusive

I’m not happy to writing this, but it would be right to expose and strongly reprimand (at least, if not more) those who bear responsibility for this dramatic situation in the banking-financial system, with no mercy; instead of allowing them to cashing zillions in bonuses for (intended) poor management, in neverending greed!

Posted by Valeriu | Report as abusive

At the heart of the credit issue are these things cryptically referred to as “toxic assets.” Most people think they know what that means, but, in truth, they do not. If only we could price them and get them off the banks’ balance sheets, we hear people say. It is akin to physicists calling that mysterious stuff permeating the universe “dark energy.” They give it a name, but do they understand what it is? Of course not. Same with “toxic assets.” It is a shame that this term has stuck. A better term would be to call them “rotten assets.” Think of a vast field of potatoes that someone has invested a million dollars in. One day a soaking rain storm ruins the field. The potatoes rot in the ground. They are inedible and unsaleable. The million dollars is lost. But, the investors can’t accept that reality and demand that the rotten potatoes get repriced and off their books. But who in their right mind would buy a field of rotten potatoes? It can’t be done. They are worthless. The same with all of those subprime mortgages. In many cases the houses are gone, gutted, ruined, unlivable. Those that are still in habitable shape cannot be sold at anything approximating their original sale price. Or just as bad, they are located in areas without any more good paying jobs. So, lets stop playing semantic games about the banking system and get on with it. The banks are hoping they’ll find a buyer for their rotten potatoes and get them off their books. It’s not going to happen. It’s up to the federal government to step in and pay them for nothing. Money for nothing, as the old song goes. Until that happens the US economy will stagnate and spiral downward. If the GDP goes down another 5% this quarter we’ll officially be in a depression. Hang on, it hasn’t even gotten half interesting yet.

Posted by Robert L. Foster | Report as abusive

What is wrong with you Americans? Can’t you see what is really happening? The US government has bailed out the big boys and has left the rest behind. Small business amounts to 80% of the jobs. Why are you not helping small business? Why rush to help banks who will only keep the money for their own greedy interests. It is not the banks that need to be nationalized… it is your government. You fellows have to take it back from the corrupt. After all, is that not what your founding fathers had to do? Nothing is going to change until you take back your country from the few who use it for their own pleasure.

Posted by Randy Roussie | Report as abusive

Let the banks crash out in bankruptcy without any more bail-out funds as they do not actually represent behaviorally the interest of the very share-holders who hold their life-line, the tax-payers and lay customers and they don’t seem to be doing the right things to stay in business. In fact, they remind one of fallen dinosaurs in the ice-age. They just don’t have the survival instincts and methodologies to ge around in the new scheme of things.

They should fall, one by one.

Then, at dirt cheap equity, the Federal Government should step in and nationalize them. That would be in the best interest of the Amercian people at large. The American Eagle should be a waiting bird and then swoop down at the precise moment. No more ham-handedness.

Posted by Mohandas Warrier | Report as abusive

This is the first astute analysis I’ve seen in a while. Whether it is right thing to do or not is up for debate but I do believe this is where we’re headed.

I’m not sure I understand the argument here. Merely saying that you think bank nationalization will happen eventually so it might as well happen now does not make it true or wise. There is no evidence here to suggest that it will happen eventually, only speculation and suggestion.

The problems are based on banks giving more credit to people than they should have, or to people who couldn’t pay off the debt they were given. The problems are based on adjustible rate mortgages and interest only mortgages. The problems are based on a real estate bubble that had housing values in many markets way overinflated. The problems are based on the excessive tinkering of interest rates by the Federal Reserve System. The problems are based on the suburbanization of America, and the excessive costs of the infrastructure to create and maintain a large spread out population. The problems are based on zoning that requires developers to build excessively bigger houses than in the past to be able to turn a profit. The problems are based on external pressure on banks to give money to people to afford these oversized houses in overpriced markets. Bank nationalization will solve none of these issues, so the financial problems will continue.

Posted by Chris | Report as abusive

I loved the rotten potato analogy for toxic assets in a comment by Robert L. Foster. thats true its so humanly that if we use a word that often the word loses its real meaning in minds of people

Posted by Kailash | Report as abusive

I am just so deeply troubled that we live in a time and place where and when it is ok for Republican Senators and talking heads to question the approach taken by our new President when they just wrapped up 8 years oversight of a $2 Trillion war in Iraq (oops…Osama’s not there!), the fall of our banking system, the demise of Wall Street and the running up of a titanic deficit. I am stunned and amazed that anyone – CNN, MSNBC, BBC, or the Idaho Statesman for that matter – would give them even a minute of airtime. The irony is overwhelming and should be cause for a gag-order of sorts; “Until you have something intelligent and productive to say, you get to say nothing at all”

I am absolutely in awe!

Posted by Patrick | Report as abusive

Well, wouldn’t that a bit late? It’s not like we can all wait 8 months or so for this to happen. Or maybe we can, since we are all going to be without jobs and have nothing else to do but wait. If it just weren’t for the survival thing. You need a job to live, without job no food no live.
Got that?

Posted by Robynne | Report as abusive

Recession is a lot about public psychology.
Scaring people does not help.

I understand why Obama makes analogy with Great Depression.It has some short term purpose for him. it can be double-edged sward

Posted by Marconi | Report as abusive

I am so deeply troubled, that someone would suggest that we should put “a gag-order of sorts” on anyone. Isn’t free speech a cornerstone of what America stands for? It’s in our bill of rights. Just because you don’t agree with what someone has to say doesn’t mean they don’t have the right to say it.

Posted by Concerned American | Report as abusive

This article actually adds to the debate in an articulate and thoughtful manner. Congratulations. If nationalization does take place, the government may need to call it by another name, much like FDR’s “bank holiday” served as a useful bit of tripe back in the day. We Americans are used to “V” shaped bottoms in our market and economic downturns. This one feels more like a “U” shaped curve with a long bottom edge. Let’s hope we’re both wrong.

Posted by New Negotiator | Report as abusive

My question when I look at this financial crisis is:
Who dug the holes?
And why will filing them by sending tax dollars to the ones that dug them in the first place going to fix the problem?
A very wise one once said; “No man would put piece of a new garment upon the old; if otherwise, then both the new makes a rent, and the piece that was taken out of the new does not agree with the old.”
In other words, once a culture of corruption is in place within an institution adding something new such as money, truth or whatever will not fix the problem within the corrupt institution. The corrupt forces within will just destroy the new.
We may spend many trillions of dollars to save these institutions but it will be lost if we can’t change the culture of corruption within the institution. I am sure that we can only fix the banking system by starting fresh, with brand-new corporations founded on sound economic principles with new capable leadership and a new stock and bond offering to fund them. Any other solution is doomed to failure at the very beginning.

Posted by Craig Coal | Report as abusive

Nice piece by Saft. I also like the ‘rotten potatoes’ analogy. I suppose we might assign a trivial value to the potatoes as hog feed or mulch or a source for algae growth . . . but the analogy is far more apt than the customary ‘toxic assets’ — then, again, come to think of it, the ‘toxic’ part captures the notion of fatality — and they are proving fatal.

Posted by Not Silent Not Bob | Report as abusive

How about starting new banks and using govt money to do the initial capitalization. These banks would have to adhere to strict guidelines regarding leverage ratios, inability to participate in the CDS market and strict compensation guidelines. Clean books and low leverage ratios, I would definitely park some money in these banks.

Posted by Waubay | Report as abusive

geithner should start seeding a diversity of solutions now. particularly, the support and growth of the “biggest of the smaller” modestly leveraged banks who’s exposure to the toxic gambling was minimized.
The analogy is: “I have a 10 yr old car that served me well but after a failed transmission, crash related steering noises, and now the mechanic tells me I have a blown head gasket at 200k miles, should I fix it? I can buy a very suitable used car with 30k miles and only 4 yrs old for the same repair cost.
we hear that scenario often and know the answer already.

Posted by jk | Report as abusive

I believe, unfortunately, that the author is pretty much on target. The party is over and now it’s time to pay for it. But apparently no one banking or investment industry thought the bill would come due. Sorry, it due and devil wants it paid in full. I’m beginning to have serious doubts about fully unfettered (unregulated) capitalism.

Posted by Mike | Report as abusive

What does one call an “L” shaped recession?

If we hear less from these so called “Harvard Suits,” things will improve overnight. What is killing the economy is the doom and gloom being spread by these so called “experts.” Read this:

http://money.cnn.com/news/newsfeeds/arti cles/reuters/MTFH11029_2009-02-11_19-31- 05_N11380795.htm

Every time I read the paper or listen to the news, I get mad. Really mad. In the last 30 days, the New York Times published the following headlines:

“Plunging Housing Markets . . . Down Again”

“Home Prices Suffer Record Monthly Drop”

“Bank Closures at All Time High in 2008”
“Credit Crisis Waves Roll On”

“Growing Market in Foreclosures”

“Foreclosure Rates Show No Sign of Slowing”

“States Unemployment Funds Run Low”

And the bad news goes on and on, causing panic and fear until we become our own worst self-fulfilling prophecy. Here’s my beef. It’s media hype. No it’s worse than media hype. It’s a vast media distortion, used to sensationalize and sell the news. It’s not the first time the media has done this, but now it has hit close to home. Close to your home, close to your client’s home and your livelihood. The result is that the American homebuyer is naively buying the lie and hesitating to buy that home they need.

Another beef I have is that perhaps even a few of you Realtors reading this artilce have been sitting in your own family rooms reading and watching those headlines, and you’ve believed the hype yourselves.

Why? Because, like me and everyone else who reads the papers, watches it on the TV and hears it on the radio, we think that just because the mainstream media says it, then, by golly, it’s gotta be true. Pundits know that if they repeat anything long enough, people believe it.

Well I’ve got a few surprising facts here that were shared in a speech given by my good friend Utah Lieutenant Governor Gary Herbert. He and I worked together years ago to establish the Utah Chapter of the Council of Residential Specialists. OK, here’s what he shared with us:

“Bank Closures at an All Time High in 2008”. Hogwash!
In 1989 there were 1,004 bank closures.
In 2008 there were 30 bank closures
On average there are 94 bank closures per year
“Foreclosure Rates Show No Sign of Slowing”. Baloney!
During the Great Depression Foreclosure Rates were 50%
Nationally today our Foreclosure Rates are 3% (1.4% in Utah)
“States Unemployment Funds Run Low”. Ridiculous!
During the Great Depression Unemployment ran at 25%
Nationally today our Unemployment is 7.2%
As Realtors, I challenge you to join me in confronting the main stream media in your own locations. Spread this information on your blogs, and in all your social networking. It’s the real truth. It’s not hype.

I say let’s fight back and take back the one industry that is at the heart of the American Dream — the Real Estate Industry — and bring this whole mess, this nation and the world back from chaos. The one best weapon that you have at your disposal is the truth!

Are times right now bad? Yes. Do we have a shaky market? Yes. But FDR’s famous statement applies: “The only thing we need to fear is fear itself.” It’s time to start looking at our glass as 93% full rather than 7% empty. We need to look at putting 15-20% down payment and say what’s wrong with that? That’s been a standard in real estate for years – a safe standard. We need to look at qualifying procedures and make sure that we are selling homes to people who can afford them.

We are the grass roots of the economy, and we can make a difference. We can take it back. All we need to do is to tell our buyers and sellers the truth about what is going on and stop the panic. If there is insanity going on it is in the pundits that look for all the bad news to make sensationalism sell their message.

Posted by Jockey | Report as abusive

Sure, nationalization probably is a good idea. But it would have to be TEMPORARY to work. Does anyone honestly think we can trust this administration and congress to re-patriate the banks back into the private sector after the cleanup and re-capitalization? No way. They will nationalize them permanently, and run them as part of the nanny state, staff them like they staff every other bloated inefficient do-nothing Federal agency. Every loan or mortgage we take in the future, will be with the Federal government. It would mean the end of the concept of private savings in the USA – this is one of the tenets of socialism, to strip the “common man” of the ability to gain and accumulate personal savings and wealth.

Posted by newyorker | Report as abusive

James..

Nice article on the inevitable nationization of our banking system. Totally agree……but why sooo filtered in your perspectives?

Not only will the current decisions of our government result in the nationalization of most of the major banking institutions…..but calscalade into multiple other areas….

Think about it. The major banks will be under the direction of Barney Frank et al…..

There will be major flight of talent in this system
(but that will be late in the process).

As the government becomes the owner of first response, more and more investors will experience an increased level of uncertainty. These investors will continue to restrict much of their investments. These characteristics will be mimiced by the majority of consumers who will continue to cut back on purchases of any kind. Any necesseties will gravitate to Private Label products and/or those that offer the best value for the price.

This conversion results in an initial margin growth for those companies producing these products. Note the direction Jim. As this economy deteriorates….more and more folks will choose to downscale. Connect the dots. Soon, there will be competing companies making private label products in an attempt to capture sales…. That doesn’t speak much for those major manufacturers that haven’t chosen to make private label themselves.

These are “basics” for the folks living today Jim. Banking is going to fail….soon. You’ve got the venue to speak to the masses. You’ve got to provide the vision of the future. You’ve got to provide the vision of what happens on a step by step basis going forward. You’ve got to connect the dots…..

John

Posted by John Van | Report as abusive

This is a great commentary! It is difficult to speak of the financial sectors since so much is involved and things are not as clear as we might think. The Stock Market, for example, is heavily manipulated, and those institutions that have toxic loans or negative assets simply are not allowed to disappear perhaps they should. But it is not just black and white or red ink, either. Where are are the nobel prize economists, or is this a matter for politicians to solve?

Posted by Terik Ororke | Report as abusive

I have been saying for a while we are going over the cliff. I haven’t change my opinion.

Had McCain been elected his policies may have, may have helped the country turn a very difficult corner. At least McCain would have put the future of the country first.

Obama won’t. He is still the agenda driven community rabble rouser but with a much bigger bag of money to spread around.

Worse, there is little actual stimulus in his supposed stimulus package. Most of it funds bigger government, social programs like ACORN or basic pork.

Had the stimulus bill actually done just that, jobs, jobs, jobs and more jobs, we might have a chance to work our way out of this mess. But the situation would have still been dicey.

Coming shortly is a $700 Bn bank bailout bill, “Son of TARP.” Soon a budget will have to be worked out. Heaven only knows what will follow those.

Who will buy the bonds? The financial world overseas is struggling too. I am sure many are thinking save ourselves or save the Americans? There is an easy answer.

Not being a economist I think the whole financial system will continue to collapse on itself until it arrives on its own to a stable point. The market place and societies will sort it all out. The situation is beyond what governments can remedy.

Posted by ichabod crane | Report as abusive

A friend of mine who took a very big hit on his retirement plan cashed in all he could and had the idea of buying houses and condo apts. to rent out. He only looked at bank owned properties and was paying all cash so as to speed up the process and rent them out ASAP.

He said that for every 10 places he looked at only one was in any sort of decent shape. The banks were selling them for as little as 1/3 of the previous sale price but it was easy to see how inflated the previous sale price was even when the props. were in the best shape! He has only bought a few props. & has concluded that this kind of investment was only good for contractors. My point here is much like the rotten potato analogy. I don’t think that the banks are having much luck with this crap & much the same with their other garbage. I think that the old way of doing business in the USA is dead & it’s time to stop feeding the corpse. Let’s get on with nationalization. We’ve got to get rid of the model that has the top 1% of us standing on the backs of the other 99%.

Posted by Jay Jay | Report as abusive

Yes, nationalize the banks. I’ve been saying this all along. Not that I’m really for nationalization, but at least it is better than whatever is being done now. But alas, Obama is not someone to take bold actions, contrary to his own words. To the poster above who said McCain would do better… haha, McCain isn’t any better.

Posted by ron_paulite | Report as abusive

Congress has proven, once again, to be incapable of learning from previous mistakes and following President Obama’s rhetoric of “change we can believe in”. Instead, they have resorted to loading the bill with pork and special interest favors while largely ignoring the President’s requests for investments in infrastructure.

http://www.beyondthemargin.net/2009/02/p roductivity-vs-pork.html

Politicians will do what is politically expedient. Political culture everywhere is the same “you scratch my back,I scratch your back”. They could not not see the problem developing,they have not correctly diagnosed the problem then how on earth will they solve it.
We know that for the Banks already baled out the Tax payer has been short changed as Government could not get the same favourable terms that Buffet worked out for himself. Second round financing is unlikely to be better. It is the duty of Government to protect the interests of citizens not shareholders. It is ridiculous that Banks asking for Fed assistance should give Dividend payouts from these Funds to share holders. Is there anything in the covenants to stop these Banks from taking these Funds and making bigger bets in the speculative Derivative Markets? Is anyone asking these questions?
How have the rating agencies got away with wanton deception that cost the citizens and country dear? And the fools who were insuring against default,were they relying solely on God’s Blessings and third rate Econometric models? Looks like a nice game played by highly Networked suited booted individuals. I earn Bonus,you earn too! Why not enact a Disgorgement Law so the State can go after these Guys,slit their bellies and get back the moolah?
Why is the Public being misled that it was default in Housing Mortgages that caused the problem.It was the Mountains of exotic Derivative structures built out of these underlying Mortgages whose collapse made the Banks insolvent. With $ 1 exposure gamble with $ 500. A mere 3% default means you lose Dollars 15(3% of 500),effectively losing 15 Times your Capital. We do know that average Americans are very poor in Maths,but should we not expect obscenely overpaid Bankers to know better.
Sincerely if Bankers cannot calculate Risk they have no Business to act as Financial intermediaries between the Sources of Funds and the Users of Funds. Better that Companies that need access to Funds go directly to Savers and raise them.

A bunch of Idiots,all of them !!

Posted by F.Daruwala | Report as abusive

Unfortunately, nationalization is preferable in the short and long. In the short because it is already de facto from a capital standpoint; from a management perspective, deleving means derisk culturing ie seperating the brokers from the bankers because they are entirely different species. For that reason, any talk of retention compensation for brokers is moronic. If Wall Street is to rebuild itself they are on their own and rightly so. In the long run, the only way investors are going back to the financials is if their condition is crystal clear and based on fiscal conservatism not hocus pocus asset pricing speculation. You can’t delever by relevering through a few more layers of intervention, inefficiency and worthless paper.

Posted by Chris | Report as abusive

Nationalization of our banks, or any part of our system will be the end of the United States as we know it. Obama and his sociallistic followers,(Mrs. O, Emanuell,Geithner,Pelosi and the rest of the fools) want socialism. We can then be good friends with Hugo Chavez and the like. Yes, we have major problems. WE created these problems. WE should be able to fix them. The first thing to do is get the above socialists out of our country Kick the incapable Larry Summers out and let a man who has proven he save our banking system, Mr. P. Volker take over. And of course put the James Diamonds etal in jail

It is funny how a nation deeply rooted and bred in capitalism and for whom socialism is so abhorrent, is talking about nationalisation. Goes to show that no ideology is sacrosanct and conversely none can be shunned. Chinese are the top capitalists now and Americans, the socialists. That apart, it is very important to ensure two things. First is that no institution or sector which is crucial to the economic well-being of the country should be allowed to fail. Second and maybe more important is that no institution should be allowed to grow so big that if it fails, it will suck the entire economy or large sections of it, down with it.

Posted by Ramani | Report as abusive

So let me get this straight…the banks can’t manage their businesses. I get a mortgage from a bank, wheich costs me tons to pay back to them… they then get tons of cash from bailout that I don’t get any of. I continue to pay them back despite the fact I like everyone else is living in this recession, and then me and future generations get to pay it all back as well in taxes? And why is this a democracy? And where was my vote on this decision? And where has the Land of the Free and Right of Free Speech gone?

Posted by despairingforamerica | Report as abusive

You have hit the nail on the head. All the bankrupt banks should have been allowed to fail ages ago. Now look at the mess we`re in. Fire Bernanke, Geithner and anybody else who wants to save the sinking ship. First Iceland, then Ireland and Spain. Do I need to say more? Stop the intervention now.

Posted by Neil Sharpe | Report as abusive

When nobody on the planet will buy your assets, what are they worth. More than likely nothing. That is where our banking (and auto) industries stand right now. We need to take over the banks, get new management and move forward.

Posted by Stan | Report as abusive

The real problem is whether planet earth has resources to fulfill the needs of 6500 million people, and all derivatives like buildings, cars, factories, machines, etc… from water, to energy, oil etc…, If resources exist no problem , otherwise we will be living the crisis we are living today. everything else are mere details from
loss of jobs. to fall in wall street, to nationalization of banks, etc… this without mentioning the supposed climate change.

Posted by DOOMSDAY CLOCK | Report as abusive

The high street banks do not print their own money. If they are considered to have lent too much, who gave them permission to overstep what should have been a limit? If I have £1000 in an account but need £1001 to purchase something, then I need permission from my bank to overdraw. Who gave the high street banks permission to overdraw?

Posted by Malcolm Reynolds | Report as abusive

I agree. The US has to nationalize their banks for the short term. Remove the toxic assets to a bad bank and hire experts in real estate, derivatives etc to price the assets and sell them over the long term. After this they can then recapitalize the major banks.

The alternative to not nationalizing their banks is they will end up with zombie banks and zombie companies like GM, Chrysler etc. They will be following the same path as Japan with a decade of no growth, stagnation, high unemployment and shrinking GDP. I see the United States in worst shape than japan as they had a high savings rate and weren’t involved in costly wars.

If the US doesn’t get their act together I would invest in GOLD and OIL as you will see within six months a severe devaluation of the US dollar and Gold at $1,500 dollars per ounce or more.

Posted by mark jamison | Report as abusive

It is interesting that Warren Buffet warned of this Derivative bubble back in 2002. He called it a weapon of mass destruction. How right he was. To get an idea how big this disaster is that’s devastating the world economies.

Back in 2002 when Buffet warned of this danger. The derivative bubble was about 100 trillion in size–within five years up to 2007 it grew to 516 trillion dollars in size. To grasp the enormity of this bubble:

1. World’s GDP for all nations is approximately $50 trillion.
2. U.S. Annual GDP is approximately 15 trillion.

Now a lot of these derivatives were sold overseas so the damage you are seeing to banks globally is based on that 516 trillion dollar size bubble. It is no wonder that the Banks in the United States are probably insolvent. If the American public were to know the truth you would probably see a run on the banks.

Therefore it’s imperative that the United States get their act together, face up to the enormity of problem and nationalize their banks, the sooner the better.

Posted by mark jamison | Report as abusive

If they nationalize, I hope all stock, bonds, derivatives and other obligations of the banks are abolished or frozen, until we see whether they’re worth anything. Printing money and throwing it down a black hole is just as bad if done under the supervision of the government as it is if done privately.

Posted by Pete Cann | Report as abusive

It is all to clear what they government cannot announce. The plan of last resort, which has been on the shelf for years, is now in effect and is designed to liquidate the US debt via inflationary forces, just like the Weimar Republic liquidated its WWI Reparations debt. The majority of US debt is now foolishly being held by non-US parties and they will feel the blunt of the blow. While the US and its citizenship will feel the immense pain of hyper or semi-hyper inflation, most Americans are in debt and have little savings to be wittered away with inflation. In fact, ownership debt of homes will be greatly eased should the value of the us dollar plummet. Paying off a $200,000 mortgage with a worthless currency is not a bad deal. If the cards are played correctly, the US can emerge stronger than the rest of the world in 10 to 15 years. What is needed, is massive spending by the US government and new printing presses to keep up the pace. It really doesn’t matter what it is spend on, just quickly. Hopefully the US is not planning on a 2010 recovery, but a laying the groundwork to survive for the next ten years and re-emerge as a world power once again in 2018, while the rest of the world is still trying to figure out how to value worthless US treasuries. With events of the past few years, it is impossible for the US to pay down its debt at its current or near current value, nor should it pretend to try. The US must strike first on this devaluation process before foreign banks are able to break first. Should the foreign banks start the rapid devaluation process first, the process will be out of US political control, chaos many ensue and potential benefits of domestic spending will be lost to premature inflation. Any US recovery will surely be greatly delayed. I can only go by what I see, and I see the US government spending as fast as they can.

Posted by Roy Morscher, Esq. BA Economics | Report as abusive

Banks are not casinos.

Posted by Bill | Report as abusive

While I strongly (with respect) disagree with the ‘anti-socialist’ perspective offered below, I share, despite my differences, that commentators’ observation that Larry Summers’ influence inspires less-than-zero confidence — at least on my part. The man is reasonably bright, but his delight in this limited intelligence has led him down innumerable ill-considered paths, with very poor outcomes, and I see no improvement. Press reports indicate that Summers has had far more influence on the approach taken to date than Volcker.

I would prefer Summers take his endless delight in himself to another venue — perhaps the hall of mirrors at Versailles — and that the approach of Volcker take the lead. Volcker has proven himself genuinely intelligent, capable, and determined. One might do worse than follow his lead, particularly as the present approach will likely prove only very minimally effective.

Yes, nationalize, temporarily, write down and write off the assets, recapitalize, re-regulate, and move on.

Posted by Not Silent Not Bob | Report as abusive

Good article James, I think we are headed for nationalisation of the banking industry if the banks can’t get it right and at this point I don’t think they can. I watched the entire coverage of the senate hearings with the top eight CEO’s of our largest banks that have accepted TARP funds and I was pretty amused by their answers and how they responded to this financial mess they have all gotten us into. It amazes me to think some of them think we are still blind and will just accept their BS that spews from their mouth. There were a few there that have their heads on their shoulders, I wont call them out but I will say the majority of them deserved to be ridiculed and they had better figure out a way to turn this financial debacle around or they will be nationalised. Any time a question came up that addressed them as a whole, or if they were asked a question indirectly for anyone to respond, hardly anyone of them would answer unless they were directly questioned. Says something to me right there.

I also watched the coverage with Geithner testifying on his new “detailed” stimulus proposal, which wasn’t that detailed at all and I get a good sense that either everything our Government is doing now is based on guesswork or they have not really figured out what the root problem is; if you don’t know what the main underlying problem is, then the amount of money we have injected and continue to inject into these banks will not turn our economy around unless our banks start acting like banks again and loaning to the right people: small business, developers, stop cutting or limiting credit lines, stop raising people’s credit card interest rates from 6.5% to 24% who still have good credit and have never missed a payment. The house values across the nation need to be stabilized, the foreclosures stopped and loan modifications done across the board in order to reboot the housing industry. 20% has been a standard for a long time, I think 10% down should be a minimum down payment for home purchases, the stated loans I believe are already gone and the negative am interest only loans should be stopped also, at least for the folks who have no idea what to do with that loan, which unfortunately is probably 90% of the public.

And for those of you who have said the “psychological” aspect from negative media portraying a much more bleak picture is not what we need, I agree, everyone needs to stay optimistic even though we are not in the best situation right now, it will work out eventually, the sooner the better I hope. At the same time, the public does need to know what is “really” going on but if everyone really knew, I think there would be a run on all of the major banks in this nation. The other thing I am interested in is the so called “stress” test Geithner is developing for the large banks going forward…unless they skew something, I don’t think any of them will pass except a few. I understand it is a very delicate matter when you consider letting a bank or banks fail, especially the large ones, and the ties to all the global markets, stock markets, investors, mutual funds, businesses and the economy as a whole but if they continue to do it the wrong way then it may be time to just start from scratch and do it right this time. Just maybe though, these banks, bankers and jokers on Wall Street will realize who works for who and will stop trying to cheat all of us, because we know what is going on.

Posted by Damian Palmares | Report as abusive

If you have any money left, spend some of it on Krugerands, gold sovereigns or Aunt Mildred’s 14 K earrings and bury them in the back yard at midnight. You will feel much better. The banks aren’t paying any interest, they are hoarding their (your) capital and the entire credit system is constipated. Geithner is an expendavle stalking horse for Wall Street and the financials. He’ll be gone by summer. Bet on inflation. It is coming. It is eternal

Posted by Robespierre XIV | Report as abusive

Excellent article!

Politicians of all stripes have verbally painted themselves into a hundred different corners, and seem deathly afraid of using their power of reason and new information to change what they think.

This is unlike the rest of us, who slowly grasp that our idealistic youthful thoughts were only that, and are at some point subject to change.

It’s unfortunate things will have to get so bad before they have the courage to walk across the newly painted floor and embrace a new way of doing things.

Posted by Robert Pratt | Report as abusive

[...] Nationalization by autumn, bank on it (Reuters/Saft) [...]

Instead of calling it Nationalization naming it reorganization through bankruptcy is more what will happen. Most banks now with unknown value toxic assets are quetionably insolvent. The nationalization should have a sunset clause to allow the public to invest after a given number of years.

Banks at present are caught between the drive to be greedy so to speak, while as fiduciaries protective of the stakeholders. Eventually these have brought and will bring about the long term insolvency ccycles as we see today and have seen in 1933.

Posted by norman zelvin | Report as abusive

Mr Saft nationalisation will not happen. At the end of the day it is your ill informed opinion.

Posted by Victor L | Report as abusive

“But ironically, maybe the most hopeful sign yesterday was the negative way in which the stock market and shares in banks reacted.”

I’ve been watching the stock market carefully for the last nine months and it doesn’t follow the news. Newscasters continue to say things like “the market closed down on news x” even when the top nine news items were positive. Something else is driving the market, not the news. Newscasters and analysts should plot the overall tone of the news against the market swings rather than finding some bit of news to match the market swings. Then they need to do the investigation to find out what is really driving the market.

Posted by Glenn Olson | Report as abusive

This proposal is an irresponsible nonsense. Its impact will be the same as that of a default of the Nation. After been wiped out, for decades, no investor domestic or abroad small or large would commit a penny to an American company and the crisis will become irreversible. The zombie banks will endure the crisis and return profitable soon (I suspect that in Italy 80% of the cap is made by zombie companies).BTW there is a trivial solution to the housing market: open it to the world (now a foreigner cannot buy a house) and the prices will skyrocket in a few weeks.
Paolo d’Alessandro

Posted by Paolo d'Alessandro | Report as abusive

‘What is just about possible in the United States would be far harder in economies such as Britain’s with larger banking systems relative to their size and borrowing power.’

I think Britain’problem is nothing of the kind or sort.If we pour water into our earthenware jar,the water of jar runs over. Treasury Secretary Geithner is right.
In the end of this year US’s econmy raises up gradually.
May God Bless You & the States.

Posted by Jinil,Hur | Report as abusive

What ever happened to the fundamental rule that a bank in an Institution to keep safe the savings of a person or business? Perhaps it is time for the regulators to protect the savings of hard working people who have seen their assets fall in value, interest rates plummet and bank employees be paid insane amounts of money to generate profits which were of questionable value!
The banking system has been brought to its knees by greed, poor accounting policies and by bankers who care more for their own pockets than those of their customers.
Capitalism works consumerism does not! It is time to get back to basics!

A Ponzi funnels money from new investors to older investors and works perfectly if new investors are continuously joining the scheme. However the moment the new investors dry up it falls over.

The current market model requires constant growth to function if the growth stops recessions follow if the growth stalls for to long the system falls over.

It is only the injection of government money that keeps the system going. Eventually the Government will reach a brick wall and the system will fall over.

The old saying “throwing good money after bad” comes to mind.

Posted by AJ | Report as abusive

The economy is in a nosedive and nobody has any idea when (if ever) it will recover. For example,
(if my memory serves me), Dr. Rubini (who also is on the nationalization bandwagon) has data which indicates that it would take 2 trillion dollars to resurrect the banks that will need to be nationalized, and not 1 trillion as stated in this article. My personal opinion is that even this is a very conservative estimate.

I’m sure Geithner knows (at least, more or less) how much money it would take to straighten out the mess, but he doesn’t want you to know. He’s against nationalization–in essence, he is saying .

Today, people are fearful and susceptible to motivation by false hope. For example, there’s really no logical reason for most people to buy stocks these days, but every time that there was a glimmer of false hope (usually news containing the words “stimulus” and/or “bailout”), there was a “sucker’s rally”. The reason? Nostalgia. Remember those good old coupon-clipping days. Oh what fun it was to review the evening stock market results and calculate the increase in your personal wealth. But investors have recently been burned so often by political mumble jumble that today the sucker rallies are little more a whimper rather than an explosion.

I think the same healthy skepticism that applies to sucker rallies is now going to be applied to “bailout” and “stimulus” legislation. For example, Hank Paulson said “Trust me and give me hundreds of billions of dollars or the world will come to an end.”, and they (the public and the congress) trusted him and gave him the money. There was no oversight, no transparency, and there has been NO PROGRESS!–the current situation is now much more dangerous than it was when we were told the the world would come to end if we didn’t give Hank his billions.

My personal view is that few congressional persons are optimistic about the eventual success (what ever that means) of Obama’s stimulus plan, but they were under tremendous political to support it.

My opinion is that Obama’s “plan” (Obama doesn’t really have a “plan”–he just has a list of largely unrelated action items) will not have any long term beneficial direct effect on this very dangerous economic situation in which our country now finds itself, nor does it in any way address what are the basic problems facing the economy.

What does Obama’s plan lack? It lacks a detailed and precise definition of the problem; it lacks measures of effectiveness; it lacks well defined objectives, and it lacks a detailed cost analysis. For example, the plan recognizes unemployment as a problem, and proposes infrastructure jobs to address this problem. The current government unemployment figure (including partially employed and long term unemployed workers) is 13.7%, and Obama’s job projects will have little or no effect on employment for a year or two. Current economic trends are all downward and accelerating. So my best guess is that the unemployment rate could well exceed 20% before the Obama plan has any effect, and the ongoing future increase in unemployment could well swamp out any gains as a result of his plan. In other words, we will still crash into the wall–it will just take us a little longer to get there.

The other thing that I don’t like about Obama’s plan is that it is a straight line extrapolation into the future. It is not a contingency plan, and so I say that it assumes that the future will be like the present, and of course it will not. For example, Gerald Celente*** states that as result of company bankruptcies and store closings, there will soon be a commercial real estate crisis that will be bigger and more serious that the housing crisis. When this happens (and Mr. Celente is seldom wrong), what do we do according to the plan? I guess that we muddle through with our eyes open and hope for the best.

(*** http://www.youtube.com/watch?v=9nJ7LM3iy Ng)

The basic problem when talking about nationalization of banks and other corporations is, of course, widespread insolvency. But in a real sense, this insolvency can be looked at as a symptom of a much more basic, widespread, and severe problem. To my way of thinking, the principle and most basic cause of our current problem set is financial irresponsibility, and the biggest offender by far has been the US government. A long series of presidents, congresses, and Fed officials have without exception proved themselves to be utterly incapable of wielding the power to borrow and print money in a logical and trustworthy manner. To date, the king of incompetence and unprincipled conduct has been George Bush, but to me it looks Obama is going to leave old George in the dust as a bungling and clumsy interloper into the presidency.

I think that the only hope for the country is a constitutional convention in which the states take over the control of federal government spending.

President Obama, you promised in the campaign to get our troops out of Iraq post haste, but now you’re talking about 16 months. I wonder what you will be talking about a year from now.

As a parting shot, I agree with Gerald Celente, who says that Obama’s recent treasury department appointments are has-been “strike-out artists”, and the only thing they know is how to keep their fingernails clean.

The economy is in a nosedive and nobody has any idea when (if ever) it will recover. For example, (if my memory serves me), Dr. Rubini (who also is on the nationalization bandwagon) has data which indicates that it would take 2 trillion dollars to resurrect the banks that will need to be nationalized, and not 1 trillion as stated in this article. My personal opinion is that even this is a very conservative estimate.

I’m sure Geithner knows (at least, more or less) how much money it would take to straighten out the mess, but he doesn’t want you to know. He’s against nationalization–in essence, he is saying .

Today, people are fearful and susceptible to motivation by false hope. For example, there’s really no logical reason for most people to buy stocks these days, but every time that there was a glimmer of false hope (usually news containing the words “stimulus” and/or “bailout”), there was a “sucker’s rally”. The reason? Nostalgia. Remember those good old coupon-clipping days. Oh what fun it was to review the evening stock market results and calculate the increase in your personal wealth. But investors have recently been burned so often by political mumble jumble that today the sucker rallies are little more a whimper rather than an explosion.

I think the same healthy skepticism that applies to sucker rallies is now going to be applied to “bailout” and “stimulus” egislation. For example, Hank Paulson said “Trust me and give me hundreds of billions of dollars or the world will come to an end.”, and they (the public and the congress) trusted him and gave him the money. There was no oversight, no transparency, and there has been NO PROGRESS!–the current situation is now much more dangerous than it was when we were told the the world would come to end if we didn’t give Hank his billions.

My personal view is that few congressional persons are optimistic about the eventual success (what ever that means) of Obama’s stimulus plan, but they were under tremendous political to support it.

My opinion is that Obama’s “plan” (Obama doesn’t really have a “plan”–he just has a list of largely unrelated action items) will not have any long term beneficial direct effect on this very dangerous economic situation in which our country now finds itself, nor does it in any way address what are the basic problems facing the economy.

What does Obama’s plan lack? It lacks a detailed and precise definition of the problem; it lacks measures of effectiveness; it lacks well defined objectives, and it lacks a detailed cost analysis. For example, the plan recognizes unemployment as a problem, and proposes infrastructure jobs to address this problem. The current government unemployment figure (including partially employed and long term unemployed workers) is 13.7%, and Obama’s job projects will have little or no effect on employment for a year or two. Current economic trends are all downward and accelerating. So my best guess is that the unemployment rate could well exceed 20% before the Obama plan has any effect, and the ongoing future increase in unemployment could well swamp out any gains as a result of his plan. In other words, we will still crash into the wall–it will just take us a little longer to get there.

The other thing that I don’t like about Obama’s plan is that it is a straight line extrapolation into the future. It is not a contingency plan, and so I say that it assumes that the future will be like the present, and of course it will not. For example, Gerald Celente*** states that as result of company bankruptcies and store closings, there will soon be a commercial real estate crisis that will be bigger and more serious that the housing crisis. When this happens (and Mr. Celente is seldom wrong), what do we do according to the plan? I guess that we muddle through with our eyes open and hope for the best.

(*** http://www.youtube.com/watch?v=9nJ7LM3iy Ng)

The basic problem when talking about nationalization of banks and other corporations is, of course, widespread insolvency. But in a real sense, this insolvency can be looked at as a symptom of a much more basic, widespread, and severe problem. To my way of thinking, the principle and most basic cause of our current problem set is financial irresponsibility, and the biggest offender by far has been the US government. A long series of presidents, congresses, and Fed officials have without exception proved themselves to be utterly incapable of wielding the power to borrow and print money in a logical and trustworthy manner. To date, the king of incompetence and unprincipled conduct has been George Bush, but to me it looks Obama is going to leave old George in the dust as a bungling and clumsy interloper into the presidency.

I think that the only hope for the country is a constitutional convention in which the states take over the control of federal government spending.

President Obama, you promised in the campaign to get our troops out of Iraq post haste, but now you’re talking about 16 months. I wonder what you will be talking about a year from now.

As a parting shot, I agree with Gerald Celente, who says that Obama’s recent treasury department appointments are has-been “strike-out artists”, and the only thing they know is how to keep their fingernails clean.

Nationalize banks?… trillion dollar bailouts?… imminent economic depression?… and yet, there is little brutally honest talk about the root cause of this mess. Understand it first, then fix it.

The root cause of this economic crisis is the unsustainable rise of US homes over the last 30 years at a pace which exceeded inflation and wages. This unsustainable rise in home prices was, first and foremost, driven by homeowner greed. Banks and Wall Street joined the action later when it became apparent that big money could be made by providing exotic loans to people who were being locked out of homeownership by traditional financing. Long-time homeowners are in denial about their greed, and their guilt, in this matter. This is the absolute crux of the problem.

Oh yes, homeowners will dishonestly claim that there is nothing wrong at all with allowing an enormous non-taxable profit to be made on the sale of a home. And, they will even more dishonestly claim that there is nothing wrong with limiting property taxes on their homes as was done in California with Proposition-13 and copied by other states. But, these sorts of policies and laws are precisely what caused a bubble in US home prices followed by an inevitable, spectacular collapse. Yet, US homeowners are mightily offended when the finger of blame is pointed directly at them. Denial, denial, denial!!! Ah yes, long-time US homeowners are like O.J. Simpson. How? Of course homewowners are not guilty, but they will dedicate their lives from now on to find and blame the real culprit in this economic mess: Alan Greenspan, Wall Street, the banks, anything and anyone except their own greedy mentality.

So, I agree with you Mr. Saft, there will likely be a nationalization of many big banks by autumn. But, who should finance this bank-nationalization, as well as a likely nationalization of the auto industry, as well as other big bailouts? Ideally, the financial burden should fall heavily on long-time US homeowners, the ones who bought a home in 1975 at $50,000 and who are now sitting on a home worth ten or twenty times that thanks to their own real-estate racketeering and the frenzy of bubble economics. So, not only should the federal government nationalize banks at some point, it should also nationalize the residential property tax system, and eliminate all limitations on property taxes at the state level. Futhermore, the federal government should tax the profit on the sale of any home at a 90 per cent rate with absolutely no exceptions. The extra money flowing into the US Treasury over a span of 30 years could easily finance the current bailouts and nationalizations without resorting to the dishonest dumping of it all upon our children and grandchildren. These two tax measures would ensure that a bubble in housing prices could not recur once the US and world economies start to function normally again.

Posted by Darth Baghead | Report as abusive

It sure is easy to knock the current plan. Much easier than coming up with something better. I would rather have them trying than listen to all the nay-sayers and Chicken Littles who say the sky is falling. I’m beginning to be a contrarian: if everyone says the economic system is in a death spiral, it must be the first inklings of a recovery. Hopefully those who have put it in motion will get some credit down the road. Unlikely given the orgy of negativity that seems to get most public posters off.

Posted by A Man A Plan | Report as abusive

No doubt you were also forecasting Dow 16000 just a few years ago.

Posted by Dan | Report as abusive

It does not take an advanced degree in economics to see that the Fed or this country for that matter does not have
cash to assist all of the troubled money center banks that
are out there.
It will be just a matter of time before this government is
FORCED TO ACT on taking out some of the worst cases and do
supervised liquidations….this “stress test” is merely the
first step in this inevitable process.
Anyone who cannot see the inevitability of “nationalization” or what ever else you want to call it,
is either ignorant or arguing from an entirely idealistic
position regarding “sacred capitalism”.
I find it interesting to no end that there are several
REPUBLICAN lawmakers who are arguing FOR nationalization
of the ailing mega banks.
Wonders never cease….

Posted by darlene | Report as abusive

Everyone seems to be blaming Mr. Bush Junior, but the Clinton administration was far more culpabale – wasn’t it at that time that US lost most of industrial jobs and capacity and significant part of the remaining industry, like auto, lost competitiveness. It was in the Clinton era that the US moved to recklessly capitalize on its unique position as the issuer of reserve currency (“strong dollar” policy), which the subsequent Bush administration only abused a little bit by its wars. What that means is that most of the American “wealth” was one big bubble now deflating, meaning that there is a lot of pain ahead – the finacial system has to downsize to more normal level (not 30% of the economy), personal incomes should fall, just because they were inflated (why should incomes in still very competitive Europe be lower by third than those in the US?)and many other things should happen. The first thing the Obama administration should do is to stop pretending it can manage the world. A simple question: Why the US need say Guantanamo Bay base? Retreating will certainly kill many of the benefits, on which the US thrived over the past 15 years,but waht is the alternative? Actually there is one – reflating the economy by printing money and effectively devaluing Dollar by 30 to 40%. This will certainly be painfull for the US, but at least in a number of years, when the debt is depreciated to managable levels, it could start anew.

Posted by dv | Report as abusive

Common you guys give the man a break, this article is the best thing I’d read in the last few weeks. It goes to the point of the current affairs regarding the bailout scenarios. I think it pretty much sumarizes the available options. It’s not pretty but who says life is fair. Clearly the days when US could manage global issues without help is over. Concerted effort and timing is the key in any kind of remedy, but I’m affraid that’s probably the only thing the federal bankers can agree on. The blame game is still on. But it’s about time the rest of the world admitted their part in making the bubble inflate. Yes it did burst in the US but the impact over here (Europe) is pretty much the same. (Some form of) Nationalizing the major banks is the lesser of the two evils, fewer unknowns there. There are worse things that could happen. Just make sure that are rules attached and an exit strategy. Polititians would love to do the PR on that. And don’t worry about the markets they will find their way. The sooner we all start ajusting to the new realities the better.

Posted by Franz Kafka | Report as abusive

US govt may nationalize the the troubled banks. Return them when it is pink. The Govt must start its own banks. Let there be private banks, foreign banks and Govt banks in the field to serve the people. The banking system in INDIA functioning very well with this combination. It is not shame or crime Govt starting its own banks

Posted by K.Srinivasan | Report as abusive

Love the article please keep writing nonsense like this, then I’ll be able to buy so called distressed assets at a real bargain basement price, do you think that Paulson decided not to purchase assets because he could not price them or because his buddies at Goldman whispered in his ear = no way we want to buy them when the price is right, if Washington and the media stopped saying it was the end of the world the economy would recover pretty quick, funny there was no mention of how bad it was until the shorts went after Goldman and Morgan Stanley amazing

Posted by J Hedge Fund | Report as abusive

In India, more than 90% of funds in the banking system are in the hands of Government controlled banks, which is perhaps one of the reasons why the Indian banking system has so far been immune to the global carnage.

Similarly, in the Insurance sector, IRDA exercises tight control over the investment portfolio of both public sector and private sector insurers.

These measures have indeed protected the Indian economy and highlights the fact that either extremes capitalism (in the US) nor Socialism (erstwhile USSR) can be successful. A good mixture of both appears to be working pretty well!!

The amount of cash required to shore up the US banks balance sheets is more than the total cash on hand of $647billion held by the S&P industrials.( Reuters: Cash is King)

It is obvious from this that the US Government is the only institution that can save its failing banks. The question is why would they want to commit more cash than is held by the S&P industrials to a sector that is in a death spiral?

In my view, two things are possible.
1. The US government- financial sector complex are left and right hands of the same body with each hand trying to do its part to save itself
2. The government deemed that the collapse of the banks, AIG and the other “too big to fail” institutions” be put into slow motion to prevent widespread damage throughout the entire global economy.

The distinction is important as it is the determining factor that underpins the strategic planning of US state intervention in the financial sector.
If option 1 is correct then it means come hell and high water the government will do whatever necessary to save banks from collapse including “quantitative easing” (changing the amount of cash balances available in the financial computer networks which gives a new meaning to the term “instant cash”).

If option 2. is correct then I agree with James that more banks will be absorbed into government administration fairly soon.

It is ridiculous to say that “governments are not as effcient at managing the banking system as the private sector” as private sector management has resulted in the worst crisis in the financial sector since 1929. I believe that corruption free government banks (if there could be such a thing) would be far more effective than private sector banking as it cuts out a lot of fat from the “intermediary commissions” that private banks earn above the interest rates set by the central banks (which are also privately owned).

A government run banking system would displace the “interest rate” way of “earning” money and restore the real economy as the domain and measure of real economic success/ reward.

Posted by Gregory | Report as abusive

It seems that complexity has been mentioned numerous times as being a part of the problem. People didn’t fully understand what they were selling or buying, both in many cases. What I haven’t heard is any prescription for cutting down unnecessary complexity. I suspect that unnecessary complexity creates a lot of jobs, but at what long-term cost? I suspect that we could live without a lot of it.

Posted by Winchester73 | Report as abusive

The scale of the hole in US bank’s balance sheets is probably bigger than Mr. Rubbini said. I’ve heard estimates of up to 8 trillion. For instance UK Bank has liabilities of 4.4 trillion Dollars, whereas UK GDP is only 2.1 trillion.

Posted by dv | Report as abusive

Thank you Mr. Saft, at least there is one voice of reason out there. The sad part is that everyone involved probably knows all of this, and is just playing their cards instead of putting peoples’ best interests first. I personally disagree with some of the other posts that this is a complex problem. When currency strays from a bullion standard, and the amount of money in circulation is artificially inflated, it is inevitable that things will destabilize. The housing bubble in and of itself is just one major contributor, not the sole one. The Federal Reserve has printed approximately the same amount of money that the bailout packages entail, so not only are our tax dollars sitting in banker’s pockets while we all hope they might lend open up credit lines, but the total amount of money is ever increasing. This should cause devaluation of the currency in order for it to accurately represent the amount of goods and services which is much more static. The longer we manipulate the system to avoid this natural correction, the harder it will hit us when it finally does. This administration, and every administration since 1913 when the Federal Reserve Act was passed, has done nothing but perpetuate and exacerbate the problem. We can either bite the bullet now, or eat it when there’s no longer a choice.

Posted by Mathias | Report as abusive

The Times website reports that Lloyds Banking Group shares “rebounded” today but no sooner than the article is posted the shares are down further.

Lloyds TSB traded around £4.60 in March 2008 and today Lloyds Banking Group is trading around £0.57 and looking to be joining the penny stock league with RBS soon.

It appears that the UK government is making every effort to avoid the obvious but given that the recession is in an L they will probably not be able to hold out.

So perhaps Lloyds will be one on the UK plc list that will join the US list of narionalised and fallen banks?

Posted by Greg | Report as abusive

Boy, am I losing respect for our system of Government!! This stuff going on now is DUMB, DUMB and DUMBER. How in the heck can you fix the effects of spending money our Govt. did NOT have by SPENDING MORE MONEY that it does not have! Maynard Keynes had real problems on what to do with his boy parts in his pants so why do we go along with how he used the money in his pants pockets. That was one confused Gay Guy, shame on him

Posted by ginsengjohn | Report as abusive

Lots of good and not so brilliant comments. The cause of the housing market cannot be placed on the people. If you ask anyone whether they can have a new home today, or wait thirty years, the majority will take the first. The government, the Fed’s, banks and lending institutions are to blame because they control the money and make the rules. If you allow people to buy homes with basically no investment or risk of their own, and the majority of risk on the lender (you and me), then your going to generate a lot of home ownership. This works as long as prices go up and people have jobs. This is what was created in the 90′s under Clinton, and Bush and Republicans didn’t do anything to change it. Raising concerns to Congress doesn’t count. Anyway you look at it we are F@&ked. Regardless of what we do to fix the situation, we will never be able to pay off the debt. We are going to struggle to just pay the interest. This means many generations to come will have diminished life styles because we have spent their future.

Posted by Oracle | Report as abusive

nationalization is the craziest most irreponsible idea.
I feel those who promote it, have a hidden agenda and most likey don’t have their savings or retirement in the financial sector. This talk appears designed to create panic.

There needs to be more consideration for investors and shareholders who were misled by the Investment Bankers and Analysts with the complicity of the so called regulators.

Government sanctioned the sale of bonds/shares (called bonds but actual shares) in Freddie and Fannie with implied or explicit government backing. If goverment wants to stimulate the economy and the financial sector, start paying attention to shareholder concerns, fine the well paid CEO;s who stole and REGULATE. Regulate may mean more than increasing the capital requirements or sticking to mark to market but uncovering the fraud.

There is no way the governement can do a better job than the private sector. But the goverment must follow the money give more power to the sharholders. If goverment does not consider the shareholders they will be gone and we will be no better of than some Banana Republics such as Chavez Venezuela or Argentina.

The Treaury should pay they dividends on Freddie and Fannie , it was a dumb move by Paulson. They are owned by retireess and in teh interest of fairness why not pay the bills that are implied (even by government). It would stimulate the economy as well as the financial sector. The goverment will eventually sell bonds ro preferreds in Fannie and Freddie but it will be explicit backing.

Posted by thomas oneill | Report as abusive

[...] (Click here to read the full article) [...]

GinsengJohn, your post seems needlessly abusive. Alan Turing, the computer scientist whose cracking of the German Enigma code was vital to winning World War II, was a gay man. In gratitude for his service, the British government forced him to undergo injections of female hormones. He grew breasts. Then he killed himself by eating an apple he’d soaked in cyanide. I’m not familiar with Keynes’ personal life, but nor do I find the characteristic you impute to him relevant.

Posted by Pete Cann | Report as abusive

It is invetable – this what a number of countries around the globe have gone through similar cycle and to have settled down in a mature state of nationalization of certain number of banks. If only a similar thing can be done for two other segments that squeeze the consumers – healthcare and insurance – the life of corporations would become much simpler and a fair footing for US companies to hire locals competitively.

Posted by Chandra Moturu | Report as abusive

Re: ginsengjohn’s homophobic rant:

Keynes had a stellar reputation with respect to his skills as a speculative trader. He consistently made money for himself and his friends in the Bloomsbury Circle. He had very real, very practical judgement as to markets, and he explicitly warned FDR and his people before their near-catastrophic pursuit of ‘balanced budget’ retrenchment in the late 1930s that it was ill-advised. In the estimation of most later economists and historians if he had he been heeded there would not likely have been the 1937 sharp turndown which undid much of the good accomplished to that point.

A minor correction re Turing, at least by my admittedly imperfect understanding: Turing was a formidable mathematician and he is rightly credited with much of the most critical work associated with Ultra, Collosus, and the breaking (and re-breaking as it was modified) of the Enigma codes, but the critical early work in breaking Enigma was principally the work of Polish mathematicians after the Polish secret service successfully intercepted an Enigma enroute to the Warsaw embassy, disassembled and photographed it, reassembled it and got it to its destination with the intercept undetected. Yes, though, Turing was gay, and yes he suffered unconscionably for it.

Perhaps John needs to up his intake of ginseng so that he might feel more secure and direct his insecurities and obsessions in more fruitful and less homophobic directions.

He might consider Keynes’ oft-quoted rebuke: ‘When the facts change, I, sir, change my opinions — what do you do?’

Posted by Silent Bob's Dog | Report as abusive

Might there not be a role to be played by a Third Band of the United States? There hasn’t been any, of course, since Jackson.

Not as a cure-all or takeover of function, but as part of the mix of banks as suggested by a preceding comment.

Perhaps, indeed, several of them. They would still have to compete with (renascent) privately capitalized banks, which would seem helpful.

Posted by spidertom | Report as abusive

I think because our economic climate is becoming as unpredictable as the natural weather climate … we need as flexible adaptable system as we can create .

some privatization methods are fatally flawed … the will to power and competition has become to corrupt and destructive … some free market areas the dynamics work well … it is all these narrow minded manipulators like in congress doing the damage … there needs to be a huge intenal re-education going on now … I notice a few old partisan bahh humbugs bagging any idea not on their side of the divide … get rid of them or it’s tragic ruin !!!!!

any economic bail out plans must have flexible provisions … if one path isn’t working to a positive transition .. re organize the capital to support a new direction … all this standover threats by banks, bail us out or it’s doom , is folly … the economy is overheated , those who did it must face the consequence and let us move on … no escape now … human enterprise can adapt to these troubled times .. but these unbending merciless power monopolies expecting us to pay for their mistakes won’t … let them fall and reorganize the game with brave new government moves .

time to clear out the brain rot of old thinking… early retirement for some … change or get out of the way !!!

Posted by Harry | Report as abusive

The US can look outwards to for a model to shake up its banking systems. The Indian banking system is in a much better shape even after world economic shocks, thanks largely to the big goverment run banks and financial institutions with a tight control of Indian Central Bank(RBI).

Profits are essential and private entreprenuers do a good job making it, because it is their single most objective. This will in most part translate into greed, which happened in the US and in the Europe now. Profits apart, “sustainability” should be the key to run an enterprise, not greed, which will result in a healthy sustianable society,which forms and orgnaisations customer base.

In countries like India, there are massive state run companies run by very talented public sector managers who are giving good returns to the goverment. This in large part helps a large number of people with employement and livelihood.

The US with it large number of talented goverment employees can become good managers of any enterprise and can turn them around if the US goverment can politically agree on state runs banks and institutions. This will help the people of US to regain jobs and reignite the economy to a sustainable level.

Posted by sheen john | Report as abusive

“nationalization is the craziest most irreponsible idea.
I feel those who promote it, have a hidden agenda and most likey don’t have their savings or retirement in the financial sector. This talk appears designed to create panic.

There needs to be more consideration for investors and shareholders who were misled by the Investment Bankers and Analysts with the complicity of the so called regulators.”

Here’s the thing Thomas, and why I don’t necessarily agree with you. If you were led to a poisoned pond and offered a drink of water because you were dying of thirst and someone told you that the water was good, it was healthy and vibrant and would cure you of your undying thirst. Would you drink and bathe in the poisoned water just because someone told you it wasn’t poison and they had been drinking the same water with no adverse side effects? And yes it could have been someone you thought you trusted, brokers, analysts, regulators, the FED, our Government leaders, Fannie Mae and Freddie Mac also said it was good; it turns out that the water is poisoned and everyone who drank from that water is now tainted, although they may have been misled….whose fault is that honestly for believing them? Yes they may have been wrong to mislead you but you were also wrong to believe what they said.

In a true capitalist market, the banks should fail if they are insolvent. I would be willing to bet a large sum of money that when Geithner measures the banks with his “stress test”, many of our largest financial institutions will fail to pass the test or will be very close to failing, with the exception of a few. If the figures are not skewed. They may have been able to pass before acquiring some of these broken financial powerhouses, and yes there are quite a few of them(Countrywide, World Savings, Merril, Bear, AIG) to name a few, however it really depends on how Geithner decides to measure the financial institutions solvency status.

On one hand, I feel bad that the shareholders will lose out if they are taken over by the Government for a short period of time, while a new CEO and upper level management can be replaced and a plan set in motion that will force the banks to act like banks when we need it the most, not just sit on capital and lend to large corporations that want to buy other failed corporations instead of lending to the public, to the small business sector and start addressing the foreclosure issue. But on the other hand I have this to say. When you were receiving nice gains and dividends when the market was good and billions and billions of dollars were being made, why weren’t you saying anything then about regulation or criticizing Wall Street CEO’s that were raking in hundreds of billions. Why weren’t you complaining then? Because you were making money and now you are not and you are afraid you might lose a nice chunk of it. Well, this is the real world…this is how the game is played. Suck it up and do your homework next time or don’t complain. Wall Street in itself is just the blind leading the blind, although there are some very smart people in the financial industry, a lot of it is based on the fact that someone “smart” makes a decision and everyone else follows without questioning why or what drove him to make that move.

Posted by DamianPalmares | Report as abusive

This from the market oracle(The Pragmatic Capitalist) says it best in my opinion.

“The beauty of capitalism is that the system lets the weak perish and the strong thrive. This is the main reason why the system has worked so well since its inception. Wall Street is a cutthroat place – one of the few places in the civilized world where human beings allow pure unadulterated Darwinism to work. But how can a capitalist system function properly if we are propping up insolvent banks and rewarding those who made the wrong decisions? Many people like to associate nationalization with socialism, but I see it differently. Nationalizing banks is just controlled Darwinism. It’s a way of exterminating the dead banks in the least harmful way.”

“The lack of leadership in this critical time has been somewhat embarrassing to say the least. Someone with thick skin needs to pick up Paulson’s bazooka and start firing it right into the heart of the zombie banks. This crisis is too big and the times are too dire. This reaction of rewarding those who made bad decisions needs to end. Systematic and aggressive triage needs to take place. Equity holders in these bad banks need to be wiped out. You don’t negotiate with a dead man just as you don’t negotiate with an insolvent institution. We need to eliminate some of these banks from the system and back the strong banks.

Until we do that there will be this underlying uncertainty in the system. If it results in some short-term pain in the markets, so be it. The patient has suffered a massive heart attack and we’re trying to perform 5 mediocre operations rather than one superb operation. I say we bite the bullet and perform the superb operation and then get on with the long and inevitable recuperation. We know the problems at hand and we know the cure, but no one has the guts to make the tough decisions. The Swedish Riksbank made the tough decision. Bill Seidman made the tough decision with the RTC. Paulson’s bazooka is lying on the ground, but I’m not sure if Barack Obama is strong enough to pick it up and pull the trigger.”

Posted by DamianPalmares | Report as abusive

This proposal is an irresponsible nonsense. Its impact will be the same as that of a default of the Nation. After been wiped out, for decades, no investor domestic or abroad small or large would commit a penny to an American company and the crisis will become irreversible. The zombie banks will endure the crisis and return profitable soon (I suspect that in Italy 80% of the capitalization is made by zombie companies).BTW there is a trivial solution to the housing market: open it to the world (now a foreigner in practice cannot buy a house) and the prices will skyrocket in a few weeks

Posted by Paolo d'Alessandro | Report as abusive

Continued:

“Some sort of Swedish approach would be the best approach ( http://pragcap.com/whats-wrong-with-a-sw edish-model ). Sweden essentially performed triage on the largest banks in Sweden. If the bank needed government assistance they were nationalized & the equity was wiped out. Sweden did this with minimal moral hazard because they did not attempt to negotiate asset prices as the U.S. government plans to do. If you needed government funding to survive there was no price negotiation. In addition, they made sure that a nationalized bank did not become a government-run bank. A separate authority managed the nationalized banks. Within a few years Sweden’s GDP was growing at a steady 3%+ clip and their market rebounded swiftly:”

Posted by DamianPalmares | Report as abusive

Rather then capitalize failed banks the government should give those funds to solvent banks on condition that they are immediately offered as loans to the public.
The loans need to be well researched only the ones which have the chance to be paid back should be awarded.

Posted by P | Report as abusive

I should add the idea of nationalization is usually of barbaric Nazi socialist type control … keeping the populous uninformed and uneducated … which is what elitists privatization tried to do , snow jobs as long as you feed their monster .. a double sided hypocrisy .

there is a great mind base struggling out of all this now , at the moment a little to much information … but a potentially great US leader able to communicate our way thru … trust , also confirm and verify the steps .

a new form of nationalization could be , rather than black or white … to be more like government caretaker acquisition … subsidized support for proven reformers .. like auto companies intelligently restructuring and retraining employees for alternate technology … eg . for updating the huge auto stockpile for later use .

incentive for financial entities and corporations to change method and direction … once stable and dynamic again .. a new place in the free market , but with $ obligations of repaying government support.

flexible , but controlled and regulated .

if the rot is to bad desolve the entities and fill the vacuum with co-operatives of better potential.

free market survival is the ideal to work towards but with view of supporting the social holistics … rewarded by the government in tax incentives.

find the right models it would spread globally into developing countries too.

the way corporate CEO’s have behaved it’s like child psychology …. show responsibility they get the fun and reward … but now they have their allowance cut off and grounded.

Posted by Harry | Report as abusive

if you have a choice – let a bank collapse or nationalize it, what would you do. Paulson let one bank collapse and that alone triggerred a global recession. No imagine what happens if say Citi collapses? US and UK have already lost a substantial part of its global financial power. Looks like if need financing, you will now have to look to Asian banks. The European banks, except for a few of them, are no longer safe either. A question arises how can you sustain Dollars as the world’s reserve currency, if have no financial system with a global reach to support it.

Posted by dv | Report as abusive

The most important lessons from the crisis are:

Financial markets absolutely have to be transparent. Complex derivatives have to be permanently banned, all financial tools have to be easy to understand with well understood risk.

Consolidation is very dangerous, the more firms the healthier the economy and the lower the chances of a systemic failure.

Posted by Int | Report as abusive

With respect to the fellow contributors, sorry I disagree, please ‘Get your facts right’ – it’s nonsence to think that fall of Lehmann caused this current crisis. Two things caused the LB demise. Both epitomised in their CEO Mr. Fuld. The guy was so arrogant that not only did he spent billions at the top of the market (over-leveraged deal came near the peak of the property cycle), later still stubborn he was unwilling to accept debt-for-equity proposals offered to him to stave off disaster for LB. Now that’s inexcusable for a wall street veteran. That’s not expedient management shareholders expect. His head just got too big yet he had at least 12months to fix it..Sorry I have no sympathy for those like him. The problem is that there have been many similar investments made by others accross the globe that had absolutely no clue about the business they were doing.

Posted by Franz Kafka | Report as abusive

When you say you have no sympathy for “those like him”, you’re pretty much referring to the entire Wall street. Nobody will believe that Mr. Fuld and Lehman Brothers was the only evil who “deserved” to fail. LB was just a small link in the whole system and didn’t deserve any more than other banks who also had plenty of toxic assets in their books. Only that Paulson stepped in just the right time to save everyone except LB. Yes, Mr. Fuld was known for making enemies and it is deeply troubling that an entire company failed for his arrogance. Because his personal wealth didn’t go anywhere. It’s only the investors and employees of LB who lost everything.

Unfortunately, I think this Mr. Saft is right, there will have to be some kind of nationalisation by the fall. At the same time, there will be greater scrutiny on the actions of Wall Street and the banks. Part of what has caused the financial mess is the fact that loans were being created that the bankers knew could not be repaid.

Posted by Brian Bigelow | Report as abusive

a quote from the past:

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and mechanical products, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism”

Karl Marx, Das Kapital, 1867

Posted by Chris Ryser | Report as abusive

In the old days when all of a bank’s loans were directly on its books, a sampling and analysis of creditworthiness would give an accurate statistical estimation of default risk of its credit exposure. With the advent of securitization of loans into synthetic investment vehicles, it became virtually impossible to estimate risk. This is because the connections between the security and the loans underlying it, had become so obfuscated and complex due to the synthesis techniques used to create the securities that risk became practically indeterminable.

Sub-prime mortgages were the first class of credit vehicles to encounter problems. We are only beginning to see the effect of a larger class of vehicles – Alt-A and Option ARM mortgages – that are beginning to reset with expected double digit default rates. Then there is credit card debt, student loans and commercial real estate, all of which have been synthesized into investment vehicles and all of which are facing increasing default rates.

The point is, we ain’t see nothin’ yet. So any attempt to create a market for “toxic assets” will be a market of fools, and most of these have been wiped out by now.

It was as if the credit crisis traveled across the Atlantic as a tsunami, triggering the crisis in Europe. The next shoe to fall will be the European banks. That will create a reverse tsunami that will bring about Mr. Saft’s prediction if it hasn’t already occurred at that point.

We are a year and a half into this crisis and we still get a new “Black Swan” event almost every week – this with all the remedial action taken by governments globally, to date. I think Mr. Saft is being gentle in his call so as not to frighten the populace.

Posted by Ian Nunn | Report as abusive

I don’t know how many public leaders have to say it before bloggers, pundits and prophets of doom get the message, but let me spell it out: U.S. banks will not be nationalized.
Ben Bernanke just made it clear in Senate testimony today, saying that in a worst case scenario the federal government will merely buy preferred stock in an over-stressed bank and that the stock could be converted to common stock later, depending on the needs of that bank. That, my friends, is not nationalization in any meaningful sense of the word. It would simply make the federal government a partner with other stockholders which may or may not have a negative impact on the price of common stock, depending on how the markets price it.
Please, bloggers, move on to another topic.

Posted by Ron | Report as abusive

[...] company. Both parties in the US participated in bailouts, so no votes for deregulation will fly.  Many predict nationalization of banks is inevitable.  To me, the amount of socialism scare is still leftover McCarthyism, but without massive changes [...]