Nationalization in Denial?

[darrels joy]

Nationalization in Denial?




As this blogger and others have noted, the bank rescue programs have been designed to work around constraints more than to fix the underlying problem, which is a lot of bad debt that needs to be restructured and renegotiated, including the debt of the banks themselves. Instead, the boundary conditions have included "No more Lehmans", "We don't do nationalization", "Sanctity of contracts" (aka no trying to cut the securitization Gordian knot), an unwillingness to have bank bondholders take hits (with WaMu an odd exception) plus a fear of going back to Congress for more dough.

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?

http://www.nakedcapitalism.com/2009/...in-denial.html