Apparently the nationalization debate is still raging on and bank stocks, especially preferred, are tanking daily. Some analysts call it inevitable; even Greenspan, now working for a hedge fund which shorts financial stocks, advocates it. And low and behold, some Republicans seemed to have had a change of heart as well and started to support the concept.
I believe it is safe to discount the opinion of minority politicians, who do not have the training to understand what’s going on and simply love to believe that if you just nationalize left and right, surely things will get better soon (because this is what they now hear from all the analysts who didn’t see any of this coming in the first place ). Also, republicans are now in the opposition so they’re naturally inclined to say “No” when the democrats say “Yes”, and vice versa.
It is also safe to ignore Greenspan. This guy had no clue of the mess he was causing when he was in office, so why would his opinion count now? All he did when things hit the fan during his tenure, was slash interest rates. If that makes him a maestro, well, I think a simple algorithm can easily replicate his efforts.
Fortunately he is not in power anymore. And the people who actually are in power, like Geithner and the White House, made it clear yesterday that nationalization is not on the agenda, unless it becomes absolute necessary, for example because of a bank run. The good thing is, nationalization talks alone usually do not trigger bank runs and I do not expect any.
What every advocate of nationalization does not seem to understand is that this crisis is only in parts because of the subprime and housing debacle. What made everything much worse last year was the government’s reckless way of handling private capital. The most egregious mistakes were:
1. Wiping out Fannie and Freddie’s Preferred Stockholders
2. Letting Lehman go bankrupt, wiping out even their Senior Bondholders
3. Seizing WaMu, also wiping out their Senior Bondholders
Do you see a pattern above? In every case, preferred equity and bondholders were wiped out. In WaMu’s case it is even highly controversial that the FDIC came in and seized them at that particular time.
The problem is not the wiping out of shareholders or bondholders of a particular institution, but the fact that it killed all confidence in the capital markets. Proponents of nationalization, read this twice: Whatever you do to one institution, the capital markets will REPLICATE it to every other institution. It is this instant replication of losses that caused the incredibly painful credit crunch we are in right now.
What do you think happens when the FDIC comes in and seizes Bank of America, which perpetually claims that they’re doing good and do not need any more help? This calamity will instantly be priced in at every other bank stock, including Wells Fargo and JP Morgan. Insurance companies, which hold untold billions of bonds and preferred stock, would take another deep hit across the board. They’ll then depend on even more money from the government, because private capital would once again retreat, just like it did last year.
It took hundreds of billions of support from the Fed to stabilize things last time. If they do the great wipe out again, maybe not even that would suffice. So, the lesson is, if you keep nationalizing, you will ultimately have to nationalize more and more and more, not because this was really necessary in the first place, but because you MADE it necessary.
How much money would it have taken to rescue Lehman? What if rescuing Lehman would have cost $ 40 billion, but it would have prevented the credit crunch, which now required $ 700 billion in TARP money and another $ 800 billion stimulus package? Would that have been a good deal?
Wiping out the preferred stockholders of Fannie and Freddie saved the government the incredible amount of $ 2.5 billion a year in cash flow. Unfortunately it also killed off more than $ 40 billion in regulatory capital that was held in these two institutions alone, greatly contributing to the current plight of banks and insurance companies. It also destroyed untold billions of additional capital, because the value of preferred stock ACROSS THE BOARD was cut in half.
I understand people having difficulties with moral hazard. But in these times, this problem should rank at the absolute bottom of the our long list of issues. After last year, it should be clear to everyone with a brain that what is required is a solution that does not wipe out any more wealth. We have had enough of that and it only made things worse.
What we need now is confidence. Confidence in the markets, our economy, our people. All the politicians, economists, fund managers and bloggers who know about the wealth destruction replication of nationalization and still support the concept, can, pardon my language, go fuck themselves. I certainly hope Obama and Geithner learned their lesson from last year.
