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Chinese check: one reason Geithner may be holding back on nationalization
Some advocates of bank nationalization make it sound quick and
easy -- get in, clean up, get out. As for wiped out shareholders and
nearly wiped-out bondholders - tant pis, taxpayers come first.
FinanciaWeek's editor Ron Fink today offers a credible glimpse at one major complicating factor. Certain bondholders may command a strong measure of consideration:
Nouriel Roubini, one advocate of nationalization who doesn't mince the difficulties, has suggested that the time won't be ripe for another six-odd months, when it's clear which banks are insolvent and nationalization of the largest insolvent banks can be done "at one fell swoop." The China hypothesis suggests another powerful motive to make haste slowly on this front:
FinanciaWeek's editor Ron Fink today offers a credible glimpse at one major complicating factor. Certain bondholders may command a strong measure of consideration:
The Chinese continue to buy U.S. debt, Fink notes, in large part because it's in their interest to support the dollar and so maintain the value of their export income. At the same time, Beijing is "shifting its capital investment priorities from exports to domestic infrastructure." A loss of what could be in excess of $150 billion on U.S. bank debt, triggered by nationalization, might prompt a more sudden Chinese turn away from Treasury bond purchases.
Although it is impossible to prove their contention based on publicly available data, [some] analysts suspect that China's holdings of the debt of banks such as Citigroup and Bank of America are one reason the Obama Administration is hesitating to take over those banks and restructure them with taxpayer assistance.
Although an increasing number of experts contend temporary nationalization followed by a spin-off of the banks' good assets to private investors would be the most effective way to resolve their financial woes, that would wipe out the value of current shareholders' holdings. What's more, nationalization would force bondholders to take a substantial hit.
The U.S. government, these analysts say, is simply unwilling to subject Chinese financial institutions to such losses, particularly at a time when Uncle Sam needs these overseas lenders to finance America's growing deficits through Treasury bond purchases. While China needs these purchases to hedge its exposure to the dollar as a result of its reliance on exports, Beijing has been shifting its capital investment priorities from exports to domestic infrastructure--not surprising given U.S. imports have fallen during the recession.
Nouriel Roubini, one advocate of nationalization who doesn't mince the difficulties, has suggested that the time won't be ripe for another six-odd months, when it's clear which banks are insolvent and nationalization of the largest insolvent banks can be done "at one fell swoop." The China hypothesis suggests another powerful motive to make haste slowly on this front:
Geithner may have got off on the wrong foot but he's no fool. It's neither ideology nor timidity that's holding back a bank cleanup. It's likely a matter of timing, damage control, first doing no harm, and minimizing unintended consequences. Drugs and exercise before radical surgery.
...Mr. [Brad] Setser noted that.... he wouldn't be surprised if China were trying to reduce its exposure to the debt of Citi and B of A. "Post Lehman, post [Fannie and Freddie], it seems like China is shifting back into Treasuries quite quickly," he wrote.
So if the scenario that played out at Fannie and Freddie scenario is any indication, the Obama administration may be waiting for China to reduce its exposure to the debt of the latest U.S. financial institutions found lying near death's door before it nationalizes them.
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Can someone tell me why, when I try to post here, there is never a "submit" button? Hitting "preview" usually seems to publish a post, after a delay, but not always. Does the system not work well with Firefox or something? Thanks for any info.
February 27, 2009 11:07 PM | Reply | Permalink
The 'save' button submits your posts. I use Firefox.
February 28, 2009 9:10 AM | Reply | Permalink
How do you return to the blog writing portion and/or publish it if you preview a blog first? I haven't found a way yet and because of all my typos feel like I must preview.
February 28, 2009 4:03 PM | Reply | Permalink
The first time you "preview" a separate window does not open up, so you need to just click to go back one page on the screen. After the first "preview" a new window opens up and then it's easier to move between windows. Once you've published your blog, you can always go back and revise it via "blog now" and "manage" "entries."
Hope that helps!
February 28, 2009 4:30 PM | Reply | Permalink
Thanks, TheraP. I think I've tried that, though, and when I go back, what I had already written is gone unless it has been saved automatically. And if I save before I preview it that publishes it,right?
As long as we're at it, how do you insert a picture or You Tube item.
Xpost, please forgive me for highjacking your excellent and important blog.
February 28, 2009 5:01 PM | Reply | Permalink
I just learned how to do the youtube thing...on your entry page switch from rich text to html (the "A" buttons) paste the embed code from the youtube clip into the entry, then switch back to rich text to finish up. It's much easier to do in IE than in Firefox, so although I usually browse in firefox, if I want to embed anything, I do it in IE.
February 28, 2009 6:18 PM | Reply | Permalink
thanks for this post. it's important to point out these intricacies. geithner is dealing with such a complex problem and he has to be shrewd in his actions and words. less is more sometimes.
i think geithner would love to have roubini as one of his undersecretaries, but making that type of pick would scare the crap out of a skittish (and let's face it, irrational/stupid) market.
February 28, 2009 12:12 PM | Reply | Permalink
Thanks for this Xpost. An important post. I read last year that some of the first phone calls made during the crisis were to China. Because the Chinese had been walked, handheld, persuaded, into investing in various housing-related investments - persuaded by top-level discussions with politicians and such. Not just by "looking at the market opportunities" and "going in like any other investor." And if there's going to be multi-year trillion dollar deficits run, they're going to want top-level assurances that these investments are going to be safe - not just wiped out in a moment.
Good post, highly Rec'd.
February 28, 2009 1:22 PM | Reply | Permalink
Quinn, somewhat off-topic,
you might be interested in taking a gander at this guest op-ed in the NYTimes today: The Great Solvent North, by Theresa Tedesco.
February 28, 2009 4:31 PM | Reply | Permalink
Oh don't encourage him. He's just going to get all superior on us with his shit-hot financial system up there! ;0)
February 28, 2009 7:24 PM | Reply | Permalink
Excellent Post. I had suspected that our international relations were playing a part in our reluctance to just be done with it. Thank you for the research and the links.
February 28, 2009 3:15 PM | Reply | Permalink
Yes, thanks for this. I am relieved to hear a good reason for their actions so far, which have seemed inadequate and counter to what most economists recommend.
February 28, 2009 4:00 PM | Reply | Permalink
I, too, have wondered what the hold-up is in just nationalizing and getting it over with, but you may have hit on something...good job!
February 28, 2009 6:20 PM | Reply | Permalink
Excellent post, xpost. I suspect you're right.
But, if China's sovereign funds do have a great deal of bank debt we need to know what prices they bought at. If they bought at less than 50 cents on the dollar, nationalization might not wipe them out, particularly if we reward bond holders with equity in the reorganized banks.
February 28, 2009 6:39 PM | Reply | Permalink
Great post, and good catch!
A few worries though
1. I don't think a first premise - that they are 'holding off' nationalization - is true. They can't do the nationalization one institution at a time, because the markets will seize up and all will fall. sSo they have to do it in one fell sweep. Hence the stress test which is supposed to be finished in a few weeks.
2. The other premise - that bondholders will take a haircut - isn't quite so solid either. Geithner has asked for another 800 bn, which I was sorry to see, because it will give him enough to bail out bondholders. (which he shouldn't)
3. The Chinese are likely not holding a huge portion of the banks' debt - because you can't hide that in the market.
4. They could easily have offloaded it if they wanted to - and probably did - into the market with the Fed's corporate debt program putting a floor under prices, and banks buying back some of their debt with the issuance of FDIC guaranteed bonds.
5. The US administration had no qualms with wiping out CIC's investment along with Blackstone's, so doing so for other quasi-state investment vehicles shouldn't be a problem.
Not to deny that it's an issue, but I don't think it's a very big one...
February 28, 2009 7:18 PM | Reply | Permalink