Read Roubini Says Geithner Plan Won’t Prevent Bank Nationalizations
Showing posts with label nationalization. Show all posts
Showing posts with label nationalization. Show all posts
Friday, March 27, 2009
Roubini Says Geithner Plan Won’t Prevent Bank Nationalizations
Roubini Says Geithner Plan Won't Stop Nationalizations
Watch the Video version.
Read Roubini Says Geithner Plan Won’t Prevent Bank Nationalizations
Read Roubini Says Geithner Plan Won’t Prevent Bank Nationalizations
Saturday, March 21, 2009
Condition of Banks Continues to Deteriorate (Chart)
The Report of Condition and Income for All Insured U.S. Commercial Banks continues to deteriorate and is worrisome.
This really calls into question if the new bank bailout plan is going to work. The newest proposal is similar, if not the same, as the plan that was put into effect in September. However, if conditions continue to deteriorate it is likely that banks will need to be seized by the Federal government much like what happened during the Savings and Loan crisis.
Right now the hope remains that banks can earn their way out of the problem. This explains, in part, why the Federal Reserve is keeping interest rates artificially low and is buying Treasury securities. This strategy worked for the banks in the 1992-1993 period. It is not well known but many banks were "technically" insolvent at the time.
It appears that bank failures, a bank panic, and bank nationalizations are all still real possibilities.
We will continue to watch this situation at All American Investor.
Sidenote: Federal regulators Friday seized control of the two largest wholesale credit unions — U.S. Central Federal Credit Union and Western Corporate Federal Credit Union — which together had $57 billion in assets. This went virtually unnoticed.
Subscribe to All American Investor via Email
 Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments. |
Follow All American Investor on Twitter
Monday, March 09, 2009
Roubini Video on Insolvent, Zombie Banks
Nouriel Roubini,(aka Dr. Doom), proclaims that unless drastic action is taken soon, the world as we know it is about to come crashing down (Part One).
Subscribe to All American Investor via Email
Friday, February 27, 2009
The Case For and Against Bank Nationalization
These paragraphs were extracted from Nouriel Roubini's GlobalEconoMonitor. The article contains a discussion of insolvency and the Pros and Cons of nationalization. Must reading for the well informed.
Follow us on Twitter
More from All American Investor
As an example, consider the poster child for the “freebie” programs, the Temporary Liquidity Guarantee Program, started in late November of 2008. For a cost of 0.75%, it allows banks to issue bonds backed by the government, i.e., essentially risk free. The banks have accessed this market 97 times for $190 billion!
The biggest pig at the trough - Bank of America 11 times for $35.5 billion. But close behind, JP Morgan at $30 billion, GE Capital $27 billion, Citigroup $24 billion, Morgan Stanley $19 billion, Goldman Sachs $19 billion and Wells Fargo $6 billion. A not so surprising correlation with their respective writedowns (including merged entities), Bank of America $96 billion, JP Morgan $75 billion, Citigroup $88 billion, Morgan Stanley $22 billion, Goldman Sachs $7 billion and Wells Fargo $115 billion.
In terms of helping us move forward out of the financial crisis, this program has many problems. It charges the same amount for each institution, so it hardly separates the solvent from the insolvent institutions. It charges a fee which is grossly below what these institutions could issue in the marketplace given their current balance sheets, distorting the system. Wasn’t this the Fannie Mae and Freddie Mac problem? And it makes it less likely to cleanse the system of the toxic assets because these institutions can continue their way out-of-the-money option and hope that the prices of the toxic assets increase. In effect, the access to this capital allows them to continue to make the original bet.
Subscribe to All American Investor via Email
Follow us on Twitter
| Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , managed on Wall Street at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking writing assignments and syndication. |
More from All American Investor
- Ray Dalio on the current state of affairs in the market
- Homebuyer Credit Won’t Stabilize Market, Analysts Say
- Roubini Predicts U.S. Losses May Reach $3.6 Trillion
- Six Errors on the Path to the Financial Crisis
- Who Caused the Financial Crisis?
- Option ARM--The Toxic Mortgage
- Debt Binge--The Perfect Financial Storm
Monday, February 23, 2009
Bailout Nation: U.S. May Draw Citi Into Tighter Embrace
Bank nationalization is hanging over the market. But as far as taxpayers go the last thing we want is common stock. The reverse should be happening: common stock holders and existing debt holders should be getting crammed down in any reorganization that includes bailout funds, that is, taxpayer dollars. 
U.S. May Draw Citi Into Tighter Embrace
For the third time in four months, Citigroup is looking for government help to shore up its capital.
The question is whether more government involvement above and beyond the $45 billion the bank has already taken in two installments in October and November, not to mention the guarantee against losses on $300 billion of assets, would do anything to restore confidence.
Fears that Citigroup would succumb to the fate of American International Group and be outright nationalized sent its stock into a tailspin last week, ending Friday at a paltry $1.95. That gives Citi a market capitalization of just over $10 billion. One year ago, it had a market value of over $137 billion, and even that was considerably less than in Citi's glory days.
Though the deal believed to be under discussion would incur no additional costs to taxpayers, it would hammer common stockholders. News reports Sunday evening had the bank, either voluntarily or at the behest of the government, converting preferred shares held by the government into common shares, which would dilute existing stockholders. The government could end up holding 40% of the company's equity.
Citigroup wouldn't comment on the reports, except to reiterate a statement it made last week when the nationalization rumors were making the rounds. "Citi's capital base is very strong and our Tier 1 capital ratio as measured at the end of the fourth quarter was 11.9%, among the highest in the industry. We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," a spokesman said.
Citi, reeling from $18 billion in losses for 2008 and massive exposure to the consumer loan market, is already in the process of splitting itself in two. It's taking more than $800 billion of unwanted assets and businesses, like mortgage lending and consumer finance, and segregating them in a new business unit with its own management, who will spend their time selling the assets or otherwise disposing of them.
It also sold a majority of its crown jewel, Smith Barney, to a joint venture with Morgan Stanley.
The rest of Citi, which is returning to its pre-1998 name Citicorp, will continue on and presumably perform better without those money-losing assets and noncritical businesses. The remaining businesses will include corporate and retail banking, private banking and wholesale services around the world.
Announcing the plan in January, CEO Vikram Pandit explained, "This new structure will provide a wide range of options going forward to continue strengthening our core franchise."
But Citi faces a stress test by the government, and the results might not be pretty. Like many other banks, Citi faces mounting consumer loan losses, which are only being exacerbated by rising unemployment.
The stress testing, which is mandatory for the 15 biggest U.S. banks with more than $100 billion of assets, begins in the coming weeks. The Treasury Department, which is running the program, wants to find out whether the banks would have the capital they needed to continue to lend and absorb more losses if the economy were to weaken more than expected. Some think this stress testing, which is part of the Treasury's new Financial Stability Plan, means the government is imposing stricter capital standards on banks.
The fear is that any testing scenario will create a situation where there are clear winners (banks that don't have to take additional capital from the government but will likely be forced to anyway in a "voluntary" program to give the plan legitimacy), and clear losers (banks that will get capital injections that come with all sorts of additional restrictions on executive compensation, among other things).
Banks that go through a stress test will get access to a Treasury-provided "capital buffer" (an additional preferred equity stake) to bridge the time until the bank can raise the capital on the private markets. Given the restrictions that will likely accompany additional government injections, most see banks favoring raising capital in the private markets, if at all possible.
Citi has a number of wealthy constituents backing it, including Saudi Arabia's Prince Alwaleed bin Talal, whose fund has taken a major hit in the last few months. Other investors include the Abu Dhabi Investment Authority, the Government of Singapore Investment Corporation and the Kuwait Investment Authority. Some executives at Citi get stock awards that vest if the stock improves by a multiple of three in the next four years. Pandit, along with some other senior executives, didn't participate in the awards.
More from All American Investor
Fears that Citigroup would succumb to the fate of American International Group and be outright nationalized sent its stock into a tailspin last week, ending Friday at a paltry $1.95. That gives Citi a market capitalization of just over $10 billion. One year ago, it had a market value of over $137 billion, and even that was considerably less than in Citi's glory days.
Though the deal believed to be under discussion would incur no additional costs to taxpayers, it would hammer common stockholders. News reports Sunday evening had the bank, either voluntarily or at the behest of the government, converting preferred shares held by the government into common shares, which would dilute existing stockholders. The government could end up holding 40% of the company's equity.
Subscribe to All American Investor via Email
For the third time in four months, Citigroup is looking for government help to shore up its capital.
The question is whether more government involvement above and beyond the $45 billion the bank has already taken in two installments in October and November, not to mention the guarantee against losses on $300 billion of assets, would do anything to restore confidence.
Fears that Citigroup would succumb to the fate of American International Group and be outright nationalized sent its stock into a tailspin last week, ending Friday at a paltry $1.95. That gives Citi a market capitalization of just over $10 billion. One year ago, it had a market value of over $137 billion, and even that was considerably less than in Citi's glory days.
Though the deal believed to be under discussion would incur no additional costs to taxpayers, it would hammer common stockholders. News reports Sunday evening had the bank, either voluntarily or at the behest of the government, converting preferred shares held by the government into common shares, which would dilute existing stockholders. The government could end up holding 40% of the company's equity.
Citigroup wouldn't comment on the reports, except to reiterate a statement it made last week when the nationalization rumors were making the rounds. "Citi's capital base is very strong and our Tier 1 capital ratio as measured at the end of the fourth quarter was 11.9%, among the highest in the industry. We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," a spokesman said.
Citi, reeling from $18 billion in losses for 2008 and massive exposure to the consumer loan market, is already in the process of splitting itself in two. It's taking more than $800 billion of unwanted assets and businesses, like mortgage lending and consumer finance, and segregating them in a new business unit with its own management, who will spend their time selling the assets or otherwise disposing of them.
It also sold a majority of its crown jewel, Smith Barney, to a joint venture with Morgan Stanley.
The rest of Citi, which is returning to its pre-1998 name Citicorp, will continue on and presumably perform better without those money-losing assets and noncritical businesses. The remaining businesses will include corporate and retail banking, private banking and wholesale services around the world.
Announcing the plan in January, CEO Vikram Pandit explained, "This new structure will provide a wide range of options going forward to continue strengthening our core franchise."
But Citi faces a stress test by the government, and the results might not be pretty. Like many other banks, Citi faces mounting consumer loan losses, which are only being exacerbated by rising unemployment.
The stress testing, which is mandatory for the 15 biggest U.S. banks with more than $100 billion of assets, begins in the coming weeks. The Treasury Department, which is running the program, wants to find out whether the banks would have the capital they needed to continue to lend and absorb more losses if the economy were to weaken more than expected. Some think this stress testing, which is part of the Treasury's new Financial Stability Plan, means the government is imposing stricter capital standards on banks.
The fear is that any testing scenario will create a situation where there are clear winners (banks that don't have to take additional capital from the government but will likely be forced to anyway in a "voluntary" program to give the plan legitimacy), and clear losers (banks that will get capital injections that come with all sorts of additional restrictions on executive compensation, among other things).
Banks that go through a stress test will get access to a Treasury-provided "capital buffer" (an additional preferred equity stake) to bridge the time until the bank can raise the capital on the private markets. Given the restrictions that will likely accompany additional government injections, most see banks favoring raising capital in the private markets, if at all possible.
Citi has a number of wealthy constituents backing it, including Saudi Arabia's Prince Alwaleed bin Talal, whose fund has taken a major hit in the last few months. Other investors include the Abu Dhabi Investment Authority, the Government of Singapore Investment Corporation and the Kuwait Investment Authority. Some executives at Citi get stock awards that vest if the stock improves by a multiple of three in the next four years. Pandit, along with some other senior executives, didn't participate in the awards.
More from All American Investor
- Ray Dalio on the current state of affairs in the market
- Homebuyer Credit Won’t Stabilize Market, Analysts Say
- Roubini Predicts U.S. Losses May Reach $3.6 Trillion
- Six Errors on the Path to the Financial Crisis
- Who Caused the Financial Crisis?
- Option ARM--The Toxic Mortgage
- Debt Binge--The Perfect Financial Storm
Sunday, February 22, 2009
NOURIEL ROUBINI: The "N" Word
This interview and article is one of the best so far on Nouriel Roubini.
"Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system. De facto, the government is already controlling a good chunk of the banking system. The question is: Do you want to move to the de jure step."
There's another reason why the concept should appeal to (fiscal) conservatives, he explains. "The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks."
'Nationalize' the Banks'
Zombie Bank Defined and Discussed
A Zombie Bank refers to a bank with a net worth which is less than zero, but which continues to operate because of implicit or explicit government guarantee.
By PAUL KRUGMAN
Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.
But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.
To explain the issue, let me describe the position of a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.
Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don’t want a repeat performance, Gotham has to be kept functioning. But how can that be done?
Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price.
A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.
The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?
In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.
Now, maybe private buyers aren’t willing to pay what toxic waste is really worth: “We don’t have really any rational pricing right now for some of these asset categories,” Ms. Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make Gotham solvent again?
What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.
More from All American Investor
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.--Paul Krugman
In the continuing series on the lexicon of financial misfortune, Morning Edition introduces the term "zombie bank." A zombie bank keeps draining bailout capital from the government but doesn't respond with any meaningful lending that helps the economy recover. The prevalence of zombie banks made the long Japanese recession of the 1990s especially painful. --Zombie Banks Feed Off Bailout Money/NPR/Listen
The global recession manifests itself in big and small ways, most gloomy, some quirky and often reflecting the inventive human spirit. Here is a look at some signs of the times.--Zombie banks return
Subscribe to All American Investor via Email
Wall Street Voodoo
By PAUL KRUGMAN
Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.
But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.
To explain the issue, let me describe the position of a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.
Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don’t want a repeat performance, Gotham has to be kept functioning. But how can that be done?
Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price.
A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.
The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?
In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.
Now, maybe private buyers aren’t willing to pay what toxic waste is really worth: “We don’t have really any rational pricing right now for some of these asset categories,” Ms. Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make Gotham solvent again?
What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.
More from All American Investor
- Ray Dalio on the current state of affairs in the market
- Homebuyer Credit Won’t Stabilize Market, Analysts Say
- Roubini Predicts U.S. Losses May Reach $3.6 Trillion
- Six Errors on the Path to the Financial Crisis
- Who Caused the Financial Crisis?
- Option ARM--The Toxic Mortgage
- Debt Binge--The Perfect Financial Storm
Crafting a Bank Plan...No 'Lehman Weekends'
As I mentioned previously, Steve Liesman is one of my favorites. He has a good article up on the current government posture toward banks.
While markets appear to be waiting for the hammer of government to come crashing down on the nation’s two largest banks, several government officials in interviews with CNBC on Sunday described a process in the works that is far more deliberative.
Some details will be made available this week, but parts of the plan will take weeks, months and even more than a year to play out as the Obama administration puts together a program that they hope will return banks to long-term health.
What is clear is that they are specifically trying to avoid “Lehman Weekends,” referring to the furious efforts in September when Lehman Bros. went bankrupty and AIG was bailed out. Officials stressed that there were no separate meetings going on surrounding Bank of America or Citigroup specifically and that the two banks would be treated under the broad plan now in the works.
Neither bank has asked for increased government assistance and one official said such assistance is not needed at this time.
Officials would not rule out increased or even outright government ownership of large banks at the end of the process, but they say their intent is to avoid that outcome and that it is anything but certain. They say the government does not want to be running these companies.
If the banks end up in government hands, officials say, the intent would be to get them into private hands quickly and do so in a way that is not much different from how the Federal Deposit Insurance Corp. currently resolves bank insolvencies, which typically take place over the weekend. The extent of government ownership, they say, will depend on the size of the losses at the banks, the access of banks to private capital and how the recession plays out.
Said one high-level official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”
Several officials conceded that they have done a poor job in explaining the process to markets and that markets have, understandably, spun the darkest possible outcomes in the absence of information.
New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. This process will gauge bank capital levels under worst-case economic scenarios than are currently seen. Details on those scenarios are likely to be made public on Wednesday.
Officials say there will also be some information about the “capital-access program” that will explain how banks can obtain government capital in the event of worst-case economic scenarios. Separate details of the public-private partnership will also be made available soon, but the timing is less clear.
The key misunderstanding in markets, officials believe, is how the public-private partnership will work and the way that new government capital, in the form of mandatory convertible preferred shares will become common equity.
One official said the public-private partnership will be voluntary so there will not be no mandate that banks offload assets at a loss. The official added that additional government capital will go into the banks as mandatory convertible preferred. Those shares remain preferred until realized losses and capital needs trigger conversion to common. As a result, the official said, the government may end up with a large stake in a given bank over a period of time, but it wont’ happen overnight.
As Wall Street braced for the worst, Bank of America lost 32 percent last week, closing at $3.79, a more than 24-year low.
Citigroup tumbled 46 percent last week to end at $1.95, an 18-year low.
Slideshow: Bank Failures of 2008
© 2009 CNBC, Inc. All Rights Reserved
URL: http://www.cnbc.com/id/29332236/
More from All American Investor
New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. This process will gauge bank capital levels under worst-case economic scenarios than are currently seen. Details on those scenarios are likely to be made public on Wednesday.
Officials say there will also be some information about the “capital-access program” that will explain how banks can obtain government capital in the event of worst-case economic scenarios. Separate details of the public-private partnership will also be made available soon, but the timing is less clear.
Subscribe to All American Investor via Email
Crafting a Bank Plan...No 'Lehman Weekends'
While markets appear to be waiting for the hammer of government to come crashing down on the nation’s two largest banks, several government officials in interviews with CNBC on Sunday described a process in the works that is far more deliberative.
Some details will be made available this week, but parts of the plan will take weeks, months and even more than a year to play out as the Obama administration puts together a program that they hope will return banks to long-term health.
What is clear is that they are specifically trying to avoid “Lehman Weekends,” referring to the furious efforts in September when Lehman Bros. went bankrupty and AIG was bailed out. Officials stressed that there were no separate meetings going on surrounding Bank of America or Citigroup specifically and that the two banks would be treated under the broad plan now in the works.
Neither bank has asked for increased government assistance and one official said such assistance is not needed at this time.
Officials would not rule out increased or even outright government ownership of large banks at the end of the process, but they say their intent is to avoid that outcome and that it is anything but certain. They say the government does not want to be running these companies.
If the banks end up in government hands, officials say, the intent would be to get them into private hands quickly and do so in a way that is not much different from how the Federal Deposit Insurance Corp. currently resolves bank insolvencies, which typically take place over the weekend. The extent of government ownership, they say, will depend on the size of the losses at the banks, the access of banks to private capital and how the recession plays out.
Said one high-level official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”
Several officials conceded that they have done a poor job in explaining the process to markets and that markets have, understandably, spun the darkest possible outcomes in the absence of information.
New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. This process will gauge bank capital levels under worst-case economic scenarios than are currently seen. Details on those scenarios are likely to be made public on Wednesday.
Officials say there will also be some information about the “capital-access program” that will explain how banks can obtain government capital in the event of worst-case economic scenarios. Separate details of the public-private partnership will also be made available soon, but the timing is less clear.
The key misunderstanding in markets, officials believe, is how the public-private partnership will work and the way that new government capital, in the form of mandatory convertible preferred shares will become common equity.
One official said the public-private partnership will be voluntary so there will not be no mandate that banks offload assets at a loss. The official added that additional government capital will go into the banks as mandatory convertible preferred. Those shares remain preferred until realized losses and capital needs trigger conversion to common. As a result, the official said, the government may end up with a large stake in a given bank over a period of time, but it wont’ happen overnight.
As Wall Street braced for the worst, Bank of America lost 32 percent last week, closing at $3.79, a more than 24-year low.
Citigroup tumbled 46 percent last week to end at $1.95, an 18-year low.
Slideshow: Bank Failures of 2008
© 2009 CNBC, Inc. All Rights Reserved
URL: http://www.cnbc.com/id/29332236/
More from All American Investor
- Ray Dalio on the current state of affairs in the market
- Homebuyer Credit Won’t Stabilize Market, Analysts Say
- Roubini Predicts U.S. Losses May Reach $3.6 Trillion
- Six Errors on the Path to the Financial Crisis
- Who Caused the Financial Crisis?
- Option ARM--The Toxic Mortgage
- Debt Binge--The Perfect Financial Storm
Monday, February 16, 2009
Republicans support the idea of nationalizing insolvent banks
Crazy or what?
Graham: We May Have to Nationalize the Banks
Graham: We May Have to Nationalize the Banks
Subscribe to All American Investor via Email
Subscribe to:
Posts (Atom)