Today Northern Rock, Tomorrow Citigroup and Merrill Lynch
There are a lot of hare-brained schemes around town to bailout the banks and other financial institutions that are reeling under the burden of hundreds of billions of dollars of bad mortgage debt. Many push these schemes as plan to help homeowners.
Let's be clear, giving hundreds of billions of taxpayer dollars to the banks is a government handout to the banks. It is like welfare, except the checks are much bigger, and they are going to the banks' top executives and shareholders, not poor single mothers.
The government can keep the financial system functioning as the big banks go under without writing huge welfare checks to the super-rich. We just nationalize failing banks as Gordon Brown did with the Northern Rock bank in the United Kingdom. We replace the top management with competent people and then sell the bank back to the private sector as soon as its books are back in order. It's fun, simple, easy, and cheap. And, if we want to help low income people who are losing their homes, we offer them the own to rent option.
Happy Presidents Day!
No need to nationalize them or sell them back. Then can be simply liquidated. I say simply in the statutory-legal sense. It would be somewhat tedious in a clerical-legal sense.
This country does not have a shortage of large or small financial institutions. And, the larger, more improvident, ones are not efficient or innovative (in a technical, as disctinct from improvident or larcenous, sense).
The problem with liquidation is that it would uncover layers of improvident "money management" in pension funds and other endowments but also just plain, old political graft. The two parties, after all, compete for the favor of a few rich people, not actually for popular support. They have little popular support and run much more scared of the people than of each other.
February 18, 2008 11:01 AM | Reply | Permalink
Is there any (recent) precedent in the U.S. for nationalizing a bank in trouble?
February 18, 2008 11:20 AM | Reply | Permalink
None; in resolving the S&L crisis the RTC liquidated many of the failed institutions (cost to taxpayers = $150 billion, approx.) and transferred the assets and liabilities of others to sound banks and S&Ls.
February 18, 2008 12:31 PM | Reply | Permalink
I agree on both points, Dean. But what happens to me as a small shareholder or a mutual fund shareholder of Citigroup if the government takes it over?
February 18, 2008 11:34 AM | Reply | Permalink
You, destor23, along with the rest of your fellow bloodsucking investors, get nothing! :-)
February 18, 2008 12:25 PM | Reply | Permalink
Shoot. Well, that's what I get for all that blood sucking.
February 18, 2008 2:04 PM | Reply | Permalink
People, have a heart! Don't you know that the next generation of rich neer-do-well Neil Bush clones *need* to get bailed out?
For a fun read, here's Neil's heart-warming story, in case you'd forgotten: http://www.counterpunch.org/stclair04032004.html
February 18, 2008 12:41 PM | Reply | Permalink
Another of Dean's drive-by "run it up the flagpole and see if anyone salutes" suggestions. Please; one crisis at a time, Dean!
How much should we taxpayers pay for the monolines' book of "exotics" business, eh?
February 18, 2008 1:45 PM | Reply | Permalink
"It's fun, simple, easy, and cheap."
I presume you're being sarcastic here. The British Government is going to be in court for years dealing with this. For those that aren't aware, Northern Rock is listed with some big-time hedge fund investors who will not take chicken feed in exchange for nationalization (and the government can't offer them chicken feed either as that would amount to an admission that the Rock should not have been open for business as a bank).
I was shocked when Brits guaranteed the Rock's unsecured creditors. I can understand them extending the deposit insurance rules to stop the bank run, but it was criminal that they agreed to underwrite the whole shebang.
And Dean, you of all people, who has been out for vengeance on all those feckless greedheads who gave us the credit bubble, surely you aren't lauding this move by the Brits? Part of our Western market system is an acknowledgement that crappy businesses should fail. The Rock was crappy in spades. It's lenders should have gotten the shaft. Instead they've been given a second chance. It's shareholders will walk away with something, that too is crazy.
On a systemic level, I can't think of a worse outcome here. The government will be spending who knows how many billions buying (mkt cap today is circa $1bn) and then stabilizing this crappy second tier bank, part of which will mean foreclosing on busted mortgages ("Hi, I'm from the government and I'm here to kick you out your house.").
And all this achieves what? And for whom? And somehow you should believe this will be cheaper or easier than letting the bank fail and then mailing a decent compensatory check to the ex-employees?
February 18, 2008 2:06 PM | Reply | Permalink
Part of our Western market system is an acknowledgment that crappy businesses should fail.
Now, who was Chancellor of the Exchequer when Northern Rock, a regulated bank, went off the reservation? Hmm; Gordon? . . . Gordon? . . . ah,yes; now I remember -- Gordon Brown.
February 18, 2008 2:58 PM | Reply | Permalink
Sorry to interrupt the bank-bahsing Jacobinal joy-fest, but it's time for a word from Planet Reality.
Just what are these plans to give money directly to Wall Street banks?
I do not want to hear about how the 600$ we'll get from the stimulus bill might somehow, someday end up at Goldmann Sachs. Nor about how letting people with ARMs refinance at better rates might indirectly help Wall Street (since not a dime of taxpayer money is involved). Also, I would like to hear about something that has been seriously proposed-- as in a House or Senate bill number, please.
If no one can come up with anything I suggest pulling the plug on these threads since I can think of at least a dozen more important issues that could sorely use the enthusuiasm displayed here by the bank-bashing crowd. You know-- Iraq, global warming, universal healthcare, that sort of stuff.
All you folks are doing is tilting at windmills.
February 18, 2008 8:51 PM | Reply | Permalink
I'm not sure what prompts JonF311's reaction -- MEGO ("Mine Eyes Glaze Over") or a disquieting sense of impotence ("What can we do; none of us understands finance"). In the event his objection to our "Jacobin" -- Il faut écraser les bourgeois et les gentilshomme? -- reaction to this latest banking crisis "cleanup" deserves an answer.
Simply put, the incestuous relationship between the guardian of our money, the Federal Reserve Board, and the Wall Street banks, the financial facilities by and through which that "guardianship" is expressed, is, many of us believe, being hidden from the American people who seem to believe that the FRB's actions are no more understandable or subject to opposition (or even criticism) than are God's.
Let's not forget that it was the Fed's (and other government bureaucracies') incompetence and the careerist opportunism of its staff ("In two years I'm going to be making big bucks at Lehman") which got us into this pickle. The Fed is now in full defensive posture -- bailing out the banks in order that the Fed's defalcations will either not come to light or will be overlooked.
If many of us seeking transparency and the rule of law in the nation's dealings with its money are reduced to yawping loudly, we must be forgiven.
February 19, 2008 7:04 AM | Reply | Permalink
JonF311
here's the WSJ [http://online.wsj.com/article/SB120294935869166831.html?mod=hpp_us_whats_news]piece on topic. Hang on to your wallet.
February 18, 2008 10:03 PM | Reply | Permalink
US banks have been quietly borrowing massive amounts of money from the Federal Reserve . . . .
. . . giving the Fed the garbage collateral nobody else wants to take . . . . ft.com 02/18/08
The helicopters have taken off, and they won't be landing anytime soon.
February 18, 2008 10:30 PM | Reply | Permalink
Yep, the Fed should shut the TAF. We don't need secret borrowing from the Fed. WE didn't get into this problem because of excessive transparency. Secrecy just allows the insiders to scam the rest of us. There is no excuse for it.
February 19, 2008 5:38 AM | Reply | Permalink
Yes, the TAF should be shut down. We didn't get into this mess because of too much transparency. The secrecy just allows the insiders to scam the rest of us.
February 19, 2008 5:40 AM | Reply | Permalink
somehow you should believe this will be cheaper or easier than letting the bank fail and then mailing a decent compensatory check to the ex-employees?
Yes.
The task was not providing jobs for the boys. It was making sure the depositors were protected.
If Brown and Darling hadn't done that the UK financial system would have collapsed. Followed by ours. Nothing cheap or easy.
That left B&D with the longer term problem of how to deal with the bank so that the Government's can ultimately recoup the tax payer funds used for the bail out.
The FT has argued from the beginning for the course Darling is now taking. But obviously
it made sense to first see whether there was a private buyer. There wasn't
Personally I'm waiting for Martin Wolf to tell me what to think.
February 19, 2008 12:43 AM | Reply | Permalink
Enough with the ironies, already!
February 19, 2008 6:11 AM | Reply | Permalink
Most deposits (i.e. those up to 35,000) were already protected under the UK Financial Services Compensation Scheme. As I wrote yesterday, I can understand the government guaranteeing all deposits - and the cost of doing so would have been very small, the Rock only has about ~10bn of deposits and ~1mn depositors (i.e. average deposit account holds 10k, so fully protected without any govt guarantee).
So your argument that this was primarily about protecting depositors cannot hold. And the idea that the Rock posed a systemic risk to UK and global financial system is not credible to me. Whilst its failure would have caused disruption, I don't see how a minor regional bank with a small depositor base - its many mortgage holders are not exposed to any risk at all - would bring even the UK banking system to its knees. (Reputationally, Britain is already damaged by the run on the bank.)
The Bank of England, as lender of last resort, had extended a ~22bn emergency loan to the Rock. This is the senior credit facility, virtually all of it would have been repaid had the Rock been broken up and its 100bn of assets sold off. (Unsecured creditors and shareholders would have had to fight over the scraps.)
I can understand the government wanting to protect this exposure, but you have to ask yourself at what price this is being done?
First, there is cost of paying off existing shareholders. I reckon anything less than 500mn and this ends up in court. In fact, I think this ends up in court regardless, so add significant legal fees to the start-up cost of nationalizing the Rock.
The next big slug of legal and other advisory fees will be ensuring the Rock does not breach EU state subsidy rules. And here's the thing, there's a suggestion the Rock will be looking to increase their depositor base to ~16bn. If I'm at Barclays or RBS or Lloyds or any other UK bank, I'm calling bullshit on that. Deposits are the cheapest funding source for banks, so having the government take a larger slice of this pie will be deeply controversial. And it will land the government in court again.
In short, I don't see how the government plan to run the Rock can be lawful unless it involves a significant shrinkage of the business (which would have happened in private hands anyway). How this will make it an attractive asset – and large enough to recoup the cost of nationalization - in the concentrated UK banking sector when the government decides to sell it off is a little beyond my imagination.
And finally, the Rock has a staff of ~6,000. Shut the bank down, write them each a 15k check, economic cost of closure is
Yet I will admit nationalization was, in my view, the inevitable fate after the government guaranteed the Rock's unsecured creditors. That was the day they crossed the Rubicon.
The outcome is horrendous nonethess, particularly when you look at it through a classical liberal lens and consider the calamitous moral hazard that the British government is prepared to forebear. And what I find especially distasteful is the notion that the British taxpayers should be expecting a return from this investment. I do hope they get their money back - however I reckon they can only do so at the expense of other banks who have managed their businesses responsibly when the Rock's management did not.
Ps. Where relevant, #s are £ not $.
February 19, 2008 6:48 AM | Reply | Permalink
"economic cost of closure is less than 100mm".
Lesson for the future - use ">" and your post gets edited.
February 19, 2008 6:53 AM | Reply | Permalink
Re: here's the WSJ [http://online.wsj.com/article/SB120294935869166831.html?mod=hpp_us_whats_news]piece on topic. Hang on to your wallet.
I don't see a proposal here to give taxpayer money to Wall Street. I see a proposal to facilitate refinancings.
February 19, 2008 6:28 AM | Reply | Permalink
The danger to the British financial system was indeed that the depositors would lose their money.
Which would have started a run on all banks. Including ours.
To my knowledge that's what most of the government's guarantee was used for. And Darling/Brown were right to prevent that.
Our S&L bail out was a close precedent.
As to the details of the current rescue plan, we'll see. Certainly the FT has been advocating it since September and I defer to its specific knowledge. Off hand I don't see why it should be unable to operate with some level of profit like any other bank.
As to moral hazards.The theory is that if you don't punish risky behavior , there'll be more of it.
Guess what. There'll always be more of it. Whether or not it's punished. Perhaps inseparable from what Keynes called animal spirits: the courage and misjudgements that combine to cause entrepreneurs to gamble. And bankers to make loans. When successful they are all over the media and are often heard preaching the dangers of the Democrats and of regulation.
And if they fail , a new lot comes along.
I wonder whether the argument for letting losers
suffer is in fact an economic one. I suspect its a unacknowledged moral stricture: they did wrong and they should suffer.
As to Ellen's comment that Northern Rock's debacle stems from Brown's failure to regulate:
I think that technically the UK Treasury didn't have that resposibiility. It was split between the Bank and a Financial Orgazniation whose initials escape me. More generally I think she's right that Brown subscribed to New Labour's credo that the UK was an over regulated nanny state.
Similar to our ending Glass Seagal.
February 19, 2008 9:29 AM | Reply | Permalink
"To my knowledge that's what most of the government's guarantee was used for."
Well, the guarantee eventually extended to the whole business:
http://uk.biz.yahoo.com/18122007/323/uk-government-extends-northern-rock-deposit-guarantees-update.html
I'm okay with guaranteeing depositors. What I'd like to hear is a good argument why the same guarantees were extended to all creditors.
"I don't see why it should be unable to operate with some level of profit like any other bank."
Let's say you were a shareholder in another UK bank. A bank that has been responsibly run and ought now to be able to operate with one less competitor for its core businesses. How would you feel about the idea that the Rock should still be allowed to function as a profitable business?
Here's an FT article to show that my argument is far from hypothetical:
http://www.ft.com/cms/s/ea8005ba-ddff-11dc-9de3-0000779fd2ac.html
February 19, 2008 10:26 AM | Reply | Permalink
. . . animal spirits: the courage and misjudgments that combine to cause . . . bankers to make loans.
Until August 2007 -- and then, only because suddenly, they couldn't off-load the trash -- Wall Street banks hadn't made a loan in five years!
February 19, 2008 10:51 AM | Reply | Permalink
Re Nr shareholders. They'll get nothing.That should take care of the moral hazard argument.
Re: creditors. If NR went into administration they'd have gotten some payment . As would the army of attorneys involved. I assume they'll now be paid in full. Without litigation. That seems OK to me.
Re:UK taxpayers, in exchange for their loan they'll own an asset with some propect of their funds ultimately being returned.
Re: NR's competitors.Probably Chrysler's competitors were unhappy when we bailed it out.
"Life isn't fair". JFK.
If one's position is that whatever Labour does is wrong all your points are perfectly reasonable. If not, not.
Thanks for the link to the FT. I'm about to buy my own. With which I may or may not agree. I'm sure however that it will do a good job of honestly reporting the facts irrerspective of the editorial page view. I wish we had a similar resource.
February 19, 2008 11:31 AM | Reply | Permalink