The Best Argument Against Nationalization


We are very much in favour of the US government forcing banks to tell the truth about how little their assets are worth (take the writedowns) and then going to the shareholders and bondholders to fill the capital hole. 

It is hard to see how the government can do this without actually temporarily seizing such banks.  Thus, in cases where it is warranted, we support “nationalization.”

We are NOT, however, in favour of the government actually running the banks.  This would be a disaster.

One of the big flaws of the current approach to the crisis, in fact, is that the government is already quasi-managing the banks (see Citi), while insisting that it not actually taking them over.  As today’s Wall Street Journal illustrates, the current situation at Citi is probably worse than temporary nationalization.

Monica Langley and David Enrich, Wall Street Journal: Citigroup executives are attempting to strike a seemingly impossible balance: Run the business in a way that will please their new federal masters, but also help the bank rebound from $28 billion in losses over the past five quarters.

Former federal officials have dubbed Citigroup the “Death Star,” comparing the bank’s threat to the financial system with the planet-destroying super weapon in the “Star Wars” movies. Privately, in the words of one official, they regard the banking giant as “unmanageable.”

Complicating the issue is the government’s back-and-forth between bouts of micromanaging the banking giant and periods of ignoring it. In trying to be neither an active nor a passive investor, the U.S. is directing the business without a firm strategy or particular expertise.

Central to the confusion: There’s no one individual or entity in charge of the federal oversight of Citigroup.

That’s because banks like Citigroup are regulated by a patchwork of agencies including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Treasury Department also has oversight because it’s the one that is injecting government capital into the banks. And members of Congress, who initially approved all that money, have their own stake in how things play out. All these interested parties have been handing Citigroup a jumble of sometimes conflicting orders, advice and critiques.

Officials with the Fed, for instance, informed Citigroup executives they have “observer rights” that entitle them to participate in the bank’s board meetings. Though the government hasn’t joined in so far, the fact that it might has led some Citigroup executives to complain privately that the U.S. now has “unlimited power” over the bank. One person close to the company compared the government’s role to the sword of Damocles, an ever-present evil hanging over their heads.

What sorts of decisions is this mob rule affecting?  Mostly PR, pay, asset sale, and financial decisions at this point (“How dare you buy that jet!”), but that’s what a lot of decisions at a big bank like Citigroup are about.

This, we hope you’ll all agree, will NEVER work.  So the current situation is as unsustainable and damaging as long-term government ownership.  If “nationalization” becomes a multi-year workout process in which government bureaucrats determine which kind of toilet paper Citigroup should buy, “nationalization” will fail, too.

So what we’re really pleading for is fast, tough decision-making that forces the banks to acknowledge reality (asset writedowns), rebuilds their balance sheets (debt to equity conversion and, possibly, new capital), and then puts them immediately back in private hands.