"Nationalization in Denial?
As the economy keeps downshifting, the Administration seems to be coming to the recognition that it has to relax one of those constraints, but it appears to perceive otherwise. From the New York Times:
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.
While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.
The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.
So we may get to the government as majority owner in some banks (with a Citi conversion, its stake would be 36%) and unwilling to act like it (or perhaps only until the next regime change). And let us not forget that significant minority stakeholders generally have significant rights, particularly when they come in as rescuers (they extract more). Board seats and lots of veto rights are the usual minimums.
As Joseph Stiglitz and pretty much any private equity investor would tell you, the worst position is to have ownership and no control. The US choosing to act as absentee owner (or merely throwing its weight around on the odd political hot button) is the worst of all possible worlds. But that seems to be the Obama bank policy hallmark, so why should this decision be any different?
Me:
Don said...
You've summed up the administration's assumptions perfectly. We don't like it, but we haven't liked it for a long time. We're stuck talking practical problems now.
Right now, I agree, we're only talking Citi for sure, or as close to sure as we can get. So I'm willing to accept your assessment of giving bondholders stock. However, along with your clear presentation of the assumptions, we now have a much clearer idea of how this is playing out.
http://www.nytimes.com/2009/04/20/business/20trustees.html?ref=business
"3 Trustees of A.I.G. Are Quiet, Perhaps to a Fault
By EDMUND L. ANDREWS
WASHINGTON — In an early sign of just how tricky corporate governance has become in the era of taxpayer bailouts, three little-known trustees with no office, no staff and almost no mission will soon be deciding questions that affect the fate of American International Group, the giant insurance company.
The trustees include a retired Wall Street executive, the head of a Texas pipeline company and the chairwoman of a firm in Bermuda that provides administrative services to hedge funds.
Even though the government has bailed out A.I.G. with $170 billion in federal money, and even though the Treasury owns nearly 80 percent of its shares, the voting power is in the hands of the three trustees. "
Just like in everything else, we're back to September and October.Here, it's AIG as the model. So, we are going to:
1) Take stock for our money
2) Possibly gain controlling interest
3) Have appointed and independent trustees make the decisions for us as to who manages the bank, etc.
In other words, a hybrid, in the sense that:
1) The govt owns shares,and actually controls the bank, but there are also, I presume, private shareholders
2) Trustees will act as private trustees but be public
3) The stock will still be bought and sold
All the problems with hybrids will remain, plus the problem of foreign govts now expecting their bonds to be guaranteed by the US Govt, and stock and asset sales possibly involving us in foreign politics.
I think that this is better than other alternatives given the assumptions above. In fact, this makes sense:
"Officials who helped draw up the plan for A.I.G. said their main goal was a practical one: how to avoid conflicts of interest between the government’s role in setting broad policy and its role as a corporate shareholder."
because we've already seen how silly the decisions are when the two govt sides are at war.
Finally, one point: I earlier said that we should call what we're doing Nationalization whether it is clearly that or not, for motal hazard reasons. The govt disagrees:
"In any other country, such moves would add up to at least a partial nationalization of major financial institutions. But nationalization remains so politically explosive in the United States that President Obama and his top advisers are straining to avoid the slightest hint of it."
So, I call what is being planned nationalization, because it scares the hell out of bankers. Now check this story out:
http://www.nytimes.com/reuters/2009/04/20/business/business-banks-europe.html?ref=business
"U.B.S. Sells Brazilian Unit as Banks Step Up Disposals
By REUTERS
ZURICH/LONDON, April 20 (Reuters) - Two European banks on Monday stepped up efforts to raise capital privately and reduce their reliance on state funding.
Switzerland's UBS AG agreed to sell its Brazilian business for about $2.5 billion while Allied Irish Banks pledged to raise $2 billion possibly through disposals.
Recent asset sales by Britain's Barclays (NYSE:BCS) and Royal Bank of Scotland showed a reluctance to sell assets at low prices may have shifted, with banks acknowledging that "self-help" is a preferable option to taxpayer cash and selling non-core assets may be the best route to take."
And:
"That dilemma faces many banks. Dozens of lenders in Europe and the United States have been shored up with rescue funds from governments, but many are keen to limit their reliance on the state and selling profitable units is the most realistic alternative. "
I say that the fear of nationalization is helping to drive this. Moral Hazard accomplished, as far as taxpayers are concerned.
Don the libertarian Democrat
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