Wednesday, February 18, 2009

Wherein I May Eat Crow

The Issue on nationalizing the banks is once again on the front page as Greenespan (of all people) is backing limited nationalization:

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

I originally came out against nationalization. I wrote about the problems in detail in this article. However, here is the central thrust of my concerns:

In addition, we now have the same problem involved with all processes involving politicians -- undue influence. Within five years I am betting all of the following will happen:

1.) A person in government (elected or not) leans on a bank to make a sweetheart loan to someone/an entity/a group not qualified to take out the loan

2.) A major campaign contributor gets a sweetheart "consulting" contract to service a financial institution.

3.) A major campaign contributor gets a special loan package

4.) The issue of patronage enters the picture: campaign workers/politically connected people who are unqualified to work in the financial field or are minimally qualified get jobs in the financial field

5.) A bank that shouldn't have qualified for government assistance gets government assistance. Actually - that's already happened:

Troubled OneUnited Bank in Boston didn't look much like a candidate for aid from the Treasury Department's bank bailout fund last fall.

The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate.

Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use.

Nonetheless, in December OneUnited got a $12 million injection from the Treasury's Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.

Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging thatOneUnited be considered for a cash injection.


On Dec. 3, Rep. Spencer Bachus (R., Ala.) forwarded a Dec. 2 letter from Alabama bank regulators complaining about the complexities of applying for federal funds. Alabama banks later received billions in funds.

6.) Less than 50% of the banks return to profitability.

7.) Of the remaining 50%, none of them achieve better than 80% of the previous institutional high of ROE. In other words -- the previous management made more money for shareholders

8.) Lending does not increase to pre-meltdown levels -- or to acceptable levels.

In short, my concerns were primarily that we would trade one form of stupidity, ignorance and gross incompetence for another form of stupidity, ignorance and gross incompetence.

However, I am left with a dilemma: what in the hell are we going to do to solve the problem? Simply put, I cannot find any answer that I like to any of these questions. Which leaves nationalization on the table. That does not mean I like the idea. In addition, I am still deeply concerned about the possibility of all the above scenarios happening in some way. And -- I should add -- I am not saying we need to nationalize (largely because I am an incredibly stubborn pain about such things). But I am also thinking it's back on the table if for no other option then there aren't many other options out there.