Wednesday, April 29, 2009

Backdoor Bank Nationalizations

It's much, much worse than I thought. Under the cover of the "stress test" results, it appears that the U.S. government is about to nationalize a significant number of the largest banks in the country.

Bloomberg reports:

At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said.

Here's where the nationalization comes in. Bloomberg continues:

While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.
What's most instructive about this government push toward forcing banks to convert to common stock (that will be held by the government) is that there appears to be no sound financial reason for such a conversion. Commentators across the political spectrum seem to have all reached this conclusion.

Here's Paul Krugman:

OK, I don’t get the latest bank-rescue idea: converting TARP preferred shares to common equity. It really does seem to fall into the shuffling-the-deck-chairs category.
Here's James Kwak: makes no sense. That is, there’s nothing fundamentally wrong with converting preferred for common, but it doesn’t create anything of value out of thin air...There is a minor benefit to the bank because now it doesn’t have to pay dividends on the preferred. But otherwise you’ve just shuffled together the claims of the last two groups of claimants - the preferred and the common shareholders..

Here's Tyler Cowen:

If you don’t give a bank any more money, it doesn’t have any more money.
Bob Murphy comes up with the only reason that makes any sense as to why the government wants conversion:

...pretend for a moment that the politicians and bureaucrats in DC care about power
What appears to be going on here is another BIG LIE from the government. This time it is about the reason for the conversion. Make no mistake, it is about control and power. The politically favored, e.g., Goldman Sachs, will be allowed to run free and wild, while the banks where the government will now have significant ownership positions will have more restraints on them than an enemy combatant undergoing a waterboarding.

In a very short time, the government will have control ownership positions in some of the largest banks in the country and in the auto industry companies, Chrysler and General Motors.

This is not your grandfather's free market economy.


  1. The Bloomberg article says "six banks", but only lists five of them. Who is the sixth??

    -- Jack Krupansky

  2. Good question, Jack.

    I don't have a clue. Since the inherent structure of banks in the current system is that none of them would survive a bank run, it could be any of them.

    However, by understanding the political/power play this is, one would have to assume that Goldman Sachs is protected :)