In his Communist Manifesto, published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly,” The Oath, September 30, 2008.
ATLANTA— I keep thinking as this crisis continues to unfold- what in the world is happening to America? So now I hear some Senate Republicans are even tossing around the idea of bank nationalization alongside certain members of the Obama Administration, according to the Financial Times.
Ok, ok! So comparing this to the Soviet Union is a stretch- I know. The nationalization plan currently being discussed by the government stems from a comparison that is being done between Japan and Sweden, both of which faced financial crises in the early and mid-1990′s. Japan took a less interventionist route with respect to their banking system and instead relied on massive stimulus packages to revive their economy. They slumped for the remainder of the decade and now have massive amounts of national debt. Sweden, on the other hand, aggressively nationalized banks and attacked bad assets. Sweden then auctioned off the banks back to the private markets. Within a few short years, the crisis was over and the country was up and running again.
The debate is over which model should the United States follow? Currently, we seem to be following the Japanese model. The libertarian model that I prefer, which involves limited or no government invovlement, is evidently off the table.
So let’s discuss the Swedish model. Here is an interesting excerpt from the New York Times on the bank nationalization process as it worked in Sweden. Interestingly, it was their center-right party that performed this trick- here’s a little glimpse of what they did:
With Sweden’s banks effectively bankrupt in the early 1990s, a center-right government pulled off a rapid recovery that led to taxpayers making money in the long run.
Former government officials in Sweden, many of whom come from the market-oriented end of the political spectrum, say the only way to solve the crisis in the United States is for the government to be prepared to temporarily take full ownership of the banks.
Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending.
In the process, Sweden wiped out existing shareholders.
By contrast, the United States government, so far, has bailed out banks without receiving large equity stakes in return, said Bo Lundgren, Sweden’s minister of fiscal and financial affairs during the Swedish bank takeover.
“For me, that is a problem,” said Mr. Lundgren, who called himself more of a free marketer than some Republicans. “If you go in with capital, you should have full voting rights.”
To be sure, the United States has a much larger economy than Sweden’s, with a vast and international banking system. The toxic assets Sweden took from its banks improved when the economy improved, but Sweden was not confronted with a global recession.
Still, many analysts believe that Stockholm has lessons for Washington.
In effect, the Swedish state took on all the assets that were worthless or impossible to value at the time, and then managed them or sold them with the aim of getting as good a deal as possible for the taxpayer.
“We hired real estate people,” said Lars H. Thunell, the former chief executive of Securum, the institution that became Sweden’s repository of all the underwater assets. “We hired industrial M.& A. people. We needed to manage real assets.”
The United States has become embroiled in a debate about creating its own bad bank after months of decisions to recapitalize American banks without taking control of them.
For all the billions of dollars committed to the banks by the Treasury and the Federal Reserve, American taxpayers have, in effect, used mostly loans to turn themselves into emergency creditors of the financial system.
For their part, bank shareholders have taken big hits as the stocks plummeted. But the government has largely avoided acquiring equity and diluting the value held by existing shareholders.
Former Swedish officials said that was a mistake, for political reasons if nothing else, because owners of bank stocks did so well in the boom years early in the decade.
Fears of bank nationalization are diverse — skeptics worry that nationalization would cost too much, the government would not run banks effectively or nationalization would be too complicated. Mr. Lundgren, the former minister of financial affairs, said the costs of nationalization have to be measured against the perils a hobbled banking system creates for an economy.
Moreover, he said the mere threat of nationalization nudged some Swedish bankers to find creative solutions to their problems in the 1990s.
SEB, the bank controlled by the Wallenbergs, the first family of Swedish business, engineered a private recapitalization to plug the hole in its balance sheet. Distressed assets were then placed in a bad bank of its own, freeing management to run the sound parts of the business.
My Thoughts on the Swedish Model
The Swedes seem to have gotten off pretty well through their bank nationalization process.
What strikes me in the above commentary is that the Swedish government appears to have run the nationalized banks like a business during their period of ownership. If this path is tried by the United States, then in my view it is fundamentally necessary that the government manage these banks like a business. What I mean by this is, the government should not use these banks as tools for social programs, such as low-income lending, tools to prop up minority-owned businesses, tools to build public works projects, etc.
I would have a very difficult time stomaching nationalization. I would be beyond furious if the nationalization resulted in our current left-leaning government using these banks as tools to consolidate power via a continued expansion of unsustainable social programs that would only elongate the crisis. (Unfortunately, I fear that is a likely scenario).
My Thoughts on Bank Nationalization in General
As to my opinions on nationalization in general? I continue to be against it. I like the last couple of paragraphs from the above excerpt, which describe how the threat of nationalization led several banks to take creative solutions. My hope is that is what is allowed to happen. That banks will offer themselves for sale to other banks- or will come to the market with their own plans to establish off-balance sheet “bad banks.”
I honestly think these “toxic assets” that are constantly being discussed are only “toxic” because of the current economic environment. I am certain they are under-performing their original plans, but I am also a believer that they are likely well undervalued as a result of illiquid markets. The short of what I am saying is that once confidence is restored ever so slightly to the credit markets, these assets might quickly transform into a gold-mine for smart buyers.
In my view, that will be one of the signs of the recovery- when more confident, well-capitalized players reenter the markets for these assets on the hopes of turning a quick profit. I tend to think if the Bush Administration and Obama Administration hadn’t been constantly coming out with these disorienting stop-and-go rumors and “bank plans,” many in the market would have handled this problem for themselves long ago. I think the government is only exacerbating and elongating the crisis.
TennesseePaul
Stephen VanNuys
Brooklyn Daniel
The Freedom Thinker
I just read this bit from CBS. I hadn’t heard about this until now. This has to be the most ridiculous idea ever put forward. Just absolutely foolish. I hope this gets killed on the floor.
Yeah – that is foolishness on stilts, TP. It will drive private capital away from the mortgage markets, making mortgage interest rates ever higher. That shouldn’t be touched- but the fools in Congress never know these things. How would you like to know as a bank that if you lend to someone, a bankruptcy judge could change the terms of your contract on a whim so that you are stuck with the losses? Seems the fundamental free-market idea that a contract should be binding between two parties is being tossed out the window in leiu of expediency and economic populism. Contract law could get a lot more complicated, in my limited understanding.
I think you both are missing the picture here. Bankruptcy judges and bankrupt companies pretty much do this on any given day. Losses are always passed along to debtholders. If I claim bankruptcy right now pretty much all debtholders get screwed in some way. Your credit card debtholder would be at roughly $.25 (sometimes pennies) to the dollar of debt owed on most bankruptcies. I guess the key consideration being from a corporate standpoint is that your senior debtholders get equity in the Company. As far as personal debts, you can always Homestead your house and tell the debtholder to go pound sand.
Look at Florida guys, I believe you can Homestead your house to an unlimited amount (it is $500,000 here in Massachusetts).
Why is it wrong for someone to work through the courts to actually payoff their personal debt through renegotiation? While a CEO or CFO of a company who owns property in Florida who pilots the Company to disaster (most likely committing fraud along the way a la Kozlowski at Tyco) can seek the protection of bankruptcy courts on his personal debts (likely criminal penalties due to fraud) and you are ok with it? Seriously guys, what kind of rock are you smoking?
The Constitution provides for the federal bankruptcy courty system by the way.
Bankruptcy has always been a legitimate business risk, whether dealing with individuals or companies, it was those banks’ decision to do business with these folks without wherewithal to pay. Now the bankruptcy courts have stepped in – adjustment of debts is nothing new in bankruptcy law. You don’t see a vaccuum of capital going to other corporations because one claimed bankruptcy. The capital markets are constricting – it’s the economy. Mortgage rates can only be expected to get higher given the overall risk out there in the economy (just keep waiting for the other shoes to drop, Alt As., Jumbo Loans, and what have you).
BMM has hit it right on the head again!
You guys always say the same things (like this statement below) and they are not a good reflection on you:
“What I mean by this is, the government should not use these banks as tools for social programs, such as low-income lending, tools to prop up minority-owned businesses, tools to build public works projects, etc.”
One other consideration – apparently Homesteading in Florida does not shield you from mortgageholders (at least according to Wikipedia). So the banks there can take over the home that is worth substantially less than their overpriced mortgage and avoid the interest they would collect (I believe a 43% decline in some areas over one year).
http://en.wikipedia.org/wiki/Florida_homestead_exemption
Homesteading your house is something everyone should do though. It costs a minimal amount of money (in MA it is around $35) and it can shield you from numerous creditors in the event of bankruptcy (i.e. bankruptcy due to hospital bills, credit cards, auto financers). After all, it is legal to screw over the folks you owe debt too. Just like tax avoidance schemes are legal.
I believe Kozlowski as well as many others just put their homes in their spouse’s name and do not have claim to the land OR you can involve a third party if you want to protect your assets from your spouse in divorce (i.e. I own a car that I bought while married didn’t put my spouse’s name on it, but I put my mother’s name on it – This isn’t what I have done BTW). See it is perfectly legal to screw a lot of people over – but is it ethical? Well, today’s world of moral relativism I am sure can see this about 7 billion different ways (around the world’s population). If you count the number of politicians in the world you can see that change about twice, because they will have to flip flop on the issue a couple of times.
Sorry, I found this on Kozlowski. Pretty entertaining. I know everyone knows about the orgy, but a vodka-pissing statue?
Dennis Kozlowski, former CEO of Tyco, received widespread attention for his decadent lifestyle, which he funded in part from the coffers of the company he ran. For his wife’s 40th birthday, Kozlowski staged an extravagant $2 million party on the Italian island of Sardinia. The party featured a ice-sculpture of the Statue of David that pissed vodka. He charged the company half the bill for this orgy [this was done under the guise that it was a shareholder's meeting - by Dallas].
BMM- what are you smoking!? Come on! Do you honestly believe all of this populist rhetoric out there that all of these people defaulting on their mortgages are innocent bystanders screwed over by large, greedy banks?
I am not denying that there are a lot of people who are struggling right now b/c of the economy – and it is tough. But there are a lot of highly ethical businesses and banks that are suffering through this as well- that employ 10s of thousands of these people.
So – I’m not going to stand around while our fair Missive is treated as some populist sounding board for bashing the business world by people I thought believed in capitalism (or at least suggest that they do by voting for Ron Paul).
: )
(how do you like that?)
Just kidding. I don’t want us to get too far over the top here.
In all seriousness, what I am saying is that my money is there is at least a small chunk of these people that got into these overpriced houses by lying about their income. They are reaping the whirlwind they sowed for themselves (and that the bankers who lent them money sowed for them as well).
I’d also like it noted that the banks are already screwed enough – their sitting on bad assets, some are insolvent, some have been forced to take federal handouts and now they have varying degress of caps on pay, regulation over their actions, etc. – soon some of them could be nationalized- which will screw their shareholders and likely lead to the axing of their management. So – I don’t feel like we need one more thing to “stick-it-to-the-banks” in this environment.
My basic position on this is that we shouldn’t sacrifice the future for today. That’s been my position on virtually every form of government interventionism we have seen date.
I predict a number of things coming out of this legislation, should it pass, which we will begin to see over the upcoming months/years:
1. Spike in bankruptcies, as people who might not otherwise seek bankruptcy protection now seek to use the system to have their loans chopped off and rewritten, in the hopes of turning a profit a handful of years down the road when the housing markets bottoms out and turns around again.
2. Steady increase in mortgage rates, as banks price in this additional risk to the rates they charge.
3. More volatility in the credit markets- as more people declare bankruptcy, it will cover more than just their mortgage- it will cover credit cards, etc. etc. Will be interesting to see how that plays through the system.
At any rate, those are my thoughts. And you are right in point #3 above to point out that my rant there was kind of foolish in light of the fact that the purpose of bankruptcy courts is to rewrite contracts for all varieties for companies, etc. I popped that off this morning, thinking only of individuals and mortgages. Then a few minutes later I thought, that was kind of dumb. But oh well. This is all in good fun (and tragedy). : )
#4 Jorge- your comment makes little sense- perhaps that is a poor reflection on you?
“BMM- what are you smoking!? Come on! Do you honestly believe all of this populist rhetoric out there that all of these people defaulting on their mortgages are innocent bystanders screwed over by large, greedy banks?”
Response: I can’t tell you what I am smoking. I just promise it didn’t happen in SC with Michael Phelps. And no, I don’t necessarily believe all of these people are innocent bystanders screwed over by large, greedy banks. However, if there is a way to keep them in their home, avoid foreclosure, and the bank continues to get the interest income versus taking the immediate loss and being forced into another foreclosure (of which only 1/3rd are on the market according to TennesseePaul and JorgeWChavez – one of the few things they agree on – granted Jorge doesn’t think but only a 1/3rd of prospective foreclosures are in foreclosure right now). That foreclosure has a negative effect on mine and your property values as it is sold at a severe discount and drives down our property values further. Granted, who gives a crap – the price should be what actually is dictated by the market, right? Just my attempt to drive you by your own self-interest here. You know, appealling to a capitalist and all.
“I am not denying that there are a lot of people who are struggling right now b/c of the economy – and it is tough. But there are a lot of highly ethical businesses and banks that are suffering through this as well- that employ 10s of thousands of these people.”
RESPONSE: Yes, the economy is tough. If this keeps someone in their house it may be better than nothing. If business is afforded the same luxury why shouldn’t an individual? I remind you that all of this is Constitutional! Article 1, Section 8 to be exact.
“So – I’m not going to stand around while our fair Missive is treated as some populist sounding board for bashing the business world by people I thought believed in capitalism (or at least suggest that they do by voting for Ron Paul).”
RESPONSE: I do believe in capitalism. I personally believe bankruptcy allows for individuals and businesses to take risks that lead to innovation, entrepreneurship, and everything else that drives a free market. However, I am not going to look through rose-colored glasses and say that all of these individuals are innocent. As you say, there are tons of well-run banks that were not securitizing their loans and funding them through Fannie Mae and Freddie Mac. These are normally smaller local banks which tend to securitize far less of their assets. However, the overall industry had a problem and they are more than comfortable changing the rules of the game and going hat in hand to the government. These ladies and gentlemen are the ones that need the lesson in capitalism, not myself.
Your response was fun to read. I guess my final word comes down to a quote from Spiderman, which I think should pretty much drive any capitalist, “With great power comes great responsibility.” These banks have unfortunately reaped what they sowed as they made stated income loans to people who clearly couldn’t afford them and other toxic loans. Everyone knows that any vagueness or due diligence on the drafter of a contract is generally resolved against them.
As for your fears of what is going to happen down the road,
1.) Yes, this will probably happen. Many people are declaring bankruptcy or letting their homes slip into foreclosure and the other party (i.e. spouse not on mortgage or significant other) comes in and scoops it up in a shortsale. Call it back alley mortgage repricing to conjour an abortion image.
2.) Mortgage rates probably need to rise altogether as it is. They aren’t reflective right now of the overall risk in the economy for even those with good credit and well-paying jobs (those jobs could be axed the next day).
3.) I don’t believe you can declare selective bankruptcy. Most likely you are going to seek full protection. Unsecured credit card debt is pretty much like subordinated debt for a company. Worthless. Interest rates are high enough here, but they have started more schemes to reprice on even individuals with good credit due to risk in the economy. Good on them – it will curtail credit card spending and carrying of balances maybe.
You can’t have socialization of losses for Corporations and not expect to see it across the general populace. It is called “tone at the top”. You remember that from COSO framework and overall control environment, right? I don’t believe this to be a populist rant, but rather an observation of human nature. The average Tom, Dick, and Harry doesn’t understand why a corporation can get its debts and losses absolved while they are left holding onto a home that has devalued and paying a mortgage they can’t afford.
On a side note, one of my clients just renegotiated its remaining debt from bankruptcy with a hefty 18% interest rate. Ouch!
“You can’t have socialization of losses for Corporations and not expect to see it across the general populace”
Perhaps I don’t speak for VanNuys on this, but… You can speak out against all of this socialization and be just as disappointed with the next course of socialization which comes down the pipe. I think the average Tom, Dick and Harry thinks if they have to have their own debts, the coprs should too… and hence the unhappiness about this whole mess. The image I work from, maybe not all, is that if all these bad business choices were allowed to fail without bailouts, the average Tom, Dick and Harry wouldn’t expect further butchering of the system, futher bailouts, and further infuriation to cover up their own short comings.
Basically, it’s about being consistant. Instead of blasting Bush for the exact same process and turning to Obama saying “What other choice does he have?”. You say, “All of this is wrong. From Bush to Obama. They are all wrong.” And then basing this idea on a foundation of economic school of thought. But I like your comments. I understand the idea of the “double standard” and the reason why some of these moves make sense in light of previous moves. Speaking for myself, I simply disagree with all of these moves.
#9 Good points, BMM. I hear you. And I like that you provided a good intellectual foundation for it all by quoting Spiderman – nice touch. I guess we’ll have to agree to disagree here.
I read the other day in the WSJ that there used to be a similar law for auto loans- that bankruptcy courts could alter the terms, interest rates on auto loans for individuals. Supposedly, this was overturned in 2005. The New York Federal Reserve did a study afterwards that showed auto loan rates dropped by over 2.5% on average after this change to the law. With all the trouble in the auto industry right now, it is probably a good thing the interest rates aren’t artificially propped up by such a law right now (though there are certainly plenty of other things going on to impact those rates).
As to bankruptcy, my limited understanding is that personal bankruptcy is much worse for you as an individual that simple foreclosure. I think you can be foreclosed on without having to file for bankruptcy? I could be wrong here, so correct me if I am. But it seems if this pushes more people into bankruptcy, this will ultimately be worse for those people in the long-term.
As to housing prices, I agree foreclosures hurt others’ housing prices, even those who are paying their mortgages. I guess to that I simply say, it’s a tough reality that we are in right now with dropping housing prices and there’s not a really a whole lot that can be done about it until the market finds a bottom. At some point, I remain convinced there will be a day when housing prices hit such a low, more people will come in to buy them and we’ll start the trend back upwards. Remember, we’re still 92-93% employed in this country. There are plenty of people who can buy houses out there- many might just be waiting for them to become affordable again (they were way overinflated before).
Anyway- those are my thoughts. Thanks for the thoughtful discussion!
#9
How is what I wrote inaccurate Stephen as it is a quote and not in any way, shape or form out of context. It is also far from the first time it has been mentioned on this site. It is my considered opinion that that issue is not in any way the cause of this problem, just a red herring.
BMM – just read an article with another interesting perspective on this housing bailout. The article says 92% of Americans are still paying their mortgages on time. I find it hard to believe that a significant majority of them favor a plan in which tax dollars are given over to the 8% that do not. Granted, I think people have hearts and are concerned. But I have to believe people are not buying into this thing wholesale.
#12 Jorge – I hear you now, I wasn’t sure what you were going after earlier. Also, I should have put a
next to my comment.
I assume the red herring you speak of is conservatives who talk a great deal about the home ownership expansion initiatives of the government over the last 30 years or so (by both Republican and Democratic administrations).
As you correctly note, I actually believe that is a fairly big part of the problem, though certainly not the entire problem (I think I’ve listed a couple of times on here some of the other things I think are parts of the problem).
At any rate, I guess I disagree with your opinion that this is a red herring. One of the primary reasons stems from my reading Alan Greenspan’s book from 2 years ago called the Age of Turbulence. (Pretty prescient title if you ask me). I’m sure you don’t like Greenspan, but I trust you will at least recognize that given his position at the helm of the Federal Reserve, he should be considered an authority on the US economy.
In that book, he talks about how various economists over time debated what was the maximum sustainable percentage of home ownership that could exist in the US. The thinking was that at some point, when you push home ownership too far, you start getting people into homes who simply can’t afford them- if you get too many of those people into homes, then you start having a increasingly higher rate of defaults (as we are witnessing). They worried about a default spiral, etc. that could roil the credit markets.
Off the top of my head, I believe the number they thought was too high was between 65-69% of the population (not sure what cross section of the population- I assume working age and retirees).
At any rate, Greenspan said government officials fretted about whether all the programs to push home ownership would tip the balance past this point, causing a potentially dangerous uptick in foreclosures, etc. That government officials worried about this, yet kept on doing it seems reckless to me. Again, I’ll bet they looked good to their consituents when things were going well and I’m sure these types of programs won them so votes back home.
Interestingly, Greenspan himself in the book says he favored the government programs and thought that the government should continue to expand home ownership and run that risk. I believe he said he did not think the risks outweighed the rewards. The rewards in his view were that the more private property ownership there was in this country, the more people would be protective of some of the foundational elements of a free market system.
At any rate, it is a fact that this turbulence we are currently enduring has its roots in the subprime lending market, the very market used to expand lower-income home ownership. And it was high rates of default in that market that began the turmoil- just as the government had previously predicted.
I just don’t think you can toss this out as a red herring. I think it has to be considered as being among the key drivers of our crisis, in my view.
If you are aware of some facts that run counter to some of these I’ve provided above, I’d be glad to consider them.
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