Against the Current, No. 140, May/June 2009
Socialism Then -- And Now!
— The Editors
The NAACP at 100
— Malik Miah
John Hope Franklin's Message
— Malik Miah
The Many Faces of Bank Nationalization
— Jack Rasmus
The FMLN's Historic Victory
— Marc Becker
China's Disposable Labor
— Au Loong-yu
Crisis from Pakistan to Motown
— interview with Tariq Ali
Saving Corporations, Sacrificing Workers
— Dianne Feeley
Capitalism and Social Rights
— Ellen Meiksins Wood
- Pinkney Fight Continues
- After the Destruction of Gaza
The United States and Gaza
— Stephen R. Shalom
The Lessons of Gaza 2009
— Bashir Abu-Manneh
Code Pink's Gaza Delegation
— Rick Congress
Peace Prospects in the Middle East?
— Hisham H. Ahmed
Israel: Obama's "Bibiyahu" Problem
— Uri Avnery
Rachel Corrie Presente!
— Cindy and Craig Corrie
Dissidents Looking Beyond Zionism
— David Finkel
Race, Politics and Christianity in America
— Angela Dillard
U.S. Poetry and the Politics of Form
— Sarah Ehlers
Reviewing Red: Love and Revolution
— Alan Wald
The Crisis of Revolutionary Power
— Sarah Badcock
CALLS FOR NATIONALIZATION of the banking industry have been bubbling since at least September 2008, when the current banking panic began in the wake of the Lehman Brothers’ collapse, the initial AIG bailout, and the quick absorption of Merrill Lynch-Wachovia-Washington Mutual banks by their larger competitors, Bank of America, Wells Fargo and JP Morgan Chase.
One of the first to raise the idea of the possible need for bank nationalization were the editorialists from the Wall Street Journal, as well as ex-Federal Reserve chairman Alan Greenspan. What the Journal’s editorialists and Greenspan meant was that the government should assume responsibility for cleaning up a bank’s bad assets at taxpayer expense, followed by quickly selling off the best of the bank’s remaining assets at firesale prices to new investors.
The “nationalized” bank would subsequently and promptly reopen for business in short order as a completely private institution, its “bills” (bad assets) having been paid for by the taxpayer in the interim.
Nationalization is thus merely a kind of ad hoc bankruptcy proceeding declared and set in motion by the U.S. government. The banks would not be “taken over” in anything but a legal, formal sense. A quick transfer of bad assets follows, after which the institution is “spun off” again and sold to private investors. Nationalization in this sense functions merely as a tactical move for removing bad assets and resurrecting a zombie bank from the dead.
Something quite similar to this, in fact, occurred with the failure of the mid-sized regional bank IndyMac in late summer 2008. It was taken over by the U.S. government agency, the Federal Deposit Insurance Corporation. Today IndyMac has reopened expunged of its bad debts, which are now debts of the government and taxpayer.
Indeed, the same group of investors who once owned IndyMac have rebought it at firesale prices, from the FDIC! They are the owners once again. The investors were “rescued.” Nationalization is thus a form of investor rescue, a kind of “temporary trusteeship” in a formal, legal sense pending reprivatization.
What the Journal and Greenspan meant by bank nationalization is simply let’s “do an IndyMac” for other, even bigger banks. There’s no idea implied that a bank might be more permanently taken over and operated on a day-to-day basis, not for the interests of private investors but for the broader public interest of the nation.
When Bankers Go on Strike
Since last fall 2008, when the bankers essentially went on strike in terms of refusing to lend to businesses and consumers except at all but the most usurious rates, debate has raged in ruling-class circles as to what to do with the trillions of “bad assets” on banks’ balance sheets.
In the form of both “bad loans” and “bad securities,” these now amount to somewhere between four and six trillion dollars, according to various sources such as Fortune Magazine, the Journal, reputable independent sources such as New York University Professor Nouriel Roubini, and even Treasury Secretary Geithner prior to his appointment in that official role.
The central argument is that until the “bad assets” are somehow relieved from the banks’ balance sheets, banks will continue to refuse to lend and the accelerating decline in the U.S. real economy will worsen.
The Journal-Greenspan notion of bank nationalization must be viewed as part of that ongoing capitalist-class debate. Nationalization is merely a tactic for addressing bad asset removal and subsequent quick reprivatization, nothing more.
Other tactical proposals have contended with the idea of bank nationalization as “temporary trusteeship” and means to remove bad assets. They include proposals such as creating an “Aggregator Bad Bank,” into which the government would deposit the banks’ “bad assets” after somehow purchasing them.
But “purchasing” has proved difficult since banks have actually refused to sell these bad assets. Banks have been “on strike” since last fall, in other words, not only in “refusing to lend” but in “refusing to sell” bad assets as well.
The Grand Dilemma
Bad assets on banks’ books take two forms. One is “bad loans,” another is “bad securitized” assets. According to legal accounting rules, banks can hold bad loans on their books at their initial purchased values. Hence they have little incentive to sell them at lower values and write down the loss. But who wants to buy the loans at top dollar when it is clear they are worth far less than the banks are willing to sell?
Thus, no other investors have wanted to purchase the bad loans way above their market value since last September. And should the government do so, it would mean a clear subsidization of the banks at taxpayer expense. So the “bad loans” have not moved off the banks’ books.
Something similar has been the case with the “bad securitized” assets. These are the subprime mortgages, auto loans, credit cards, student loans and various other asset-backed securities that since 2002 have been “securitized,” or bundled for sale into new financial instruments. Unlike the “bad loans,” these securitized bad assets must be valued at their true, virtually worthless, prices today — close to zero.
While banks would like to sell these assets (to investors or government), they want to sell them only above their true “mark to market” values. Investors, in turn, want only to buy them at their true price — if at all. Some are considered so worthless that no one has stepped up to buy them. So, once again, the “bad assets” in this form are not sold and remain “toxic” on banks’ balance sheets, worsening with the passage of each day.
What I’ve described in the preceding two paragraphs is the “grand dilemma” faced by the financial system today. The U.S. government, Treasury and Federal Reserve, have been trying various ways to rid the banks of the bad assets, without success. The banks in the meantime remain on strike and refuse to lend (or to sell the assets).
The “Aggregator Bank” is one idea for trying to rid the banks of their bad assets. Something like that was tried in Sweden in the early 1990s with success. However, that was one small country. The problem is many times more immense in the United States (and globally) today.
The Swedish government could successfully “buy up” the bad assets and place them in the “Aggregator” bank. The amounts to be bought up today, however, are likely greater than any one government can finance, including the United States.
It has sometimes been said that the Swedish government “nationalized” its banks in the process of setting up its Bad Bank Aggregator. But once again, that idea of nationalization is simply a variation on the theme proposed by the Wall Street Journal and Alan Greenspan.
Other variations on the theme that have also been confused with nationalization have been efforts by the U.S. Treasury and Federal Reserve to buy stock in the failing banks — whether in the form of preferred stock purchases, common stock, or some convertible arrangements combining both common and preferred. Instead of buying up the balance of the bad assets altogether (e.g. Aggregator bank), the idea here is to offset the bad assets on the banks’ books with the hope that, once the assets are neutralized, the banks will begin to lend again.
Stock ownership, partial or even majority, is thus also identified with the idea of nationalization. Thus last fall the Fed and Treasury bought 80% of the stock of AIG and therefore somehow effectively “nationalized” it. But formal stock ownership is in no way equivalent to nationalization.
AIG simply went on to act as it always had, throwing billion dollar parties for its managers and doling out huge sums of TARP (Troubled Assets Relief Program, or “bank bailout” — ed.) money in bonuses. If there is any example of the limits of legal ownership definitions of nationalization, one need look no further than the experience of AIG.
Under the L8 TARP
The TARP program introduced last October was an attempt to generalize the AIG action. But at $700 billion it was soon apparent that TARP was a drop in the bucket needed to plug the gigantic hole in bank balance sheets. Amazingly, what the TARP experiment shows is that the U.S. government had no idea of the magnitude of the banks’ losses — or how effectively the banks had hidden that magnitude from the public and government itself.
The TARP program quickly ran into the problem of banks’ refusing to sell at anything but inflated, above-market prices for their bad assets. Then Secretary of Treasury Paulson panicked Congress and the public into giving him the $700 billion, only to find it was a grossly insufficient amount. In any event, the banks refused to sell their bad assets unless massively subsidized by the government to do so.
When Citigroup and Bank of America collapsed in November 2008, the Treasury and Fed threw much of what remained of TARP funds at them (and more for AIG as well), and came up with hundreds of billions more in guarantees against their losses ($300 billion alone for Citigroup) from the Fed as stopgap measures. But Citigroup and Bank of America fell still further into a hole in January-February 2009, requiring still more bailout.
By February it was increasingly clear that that cumulative balance sheet hole in the 19 big banks continued to grow daily. It was becoming increasingly unlikely that even the government could afford to buy all the bad assets on banks’ balance sheets on its own.
This re-ignited the discussion and debate on bank nationalization. If the U.S. government itself can’t afford to buy all the bad assets, why throw any taxpayer money at all into “the black hole,” some began to argue?
Perhaps the banks were not “too big to fail.” Perhaps they should be allowed to go under. Or perhaps the government should nationalize them. But if nationalization defined as bad asset cleanup was not possible, what would nationalization now mean?
What Would Nationalization Mean?
By early February the call for some kind of nationalization began to emerge from various directions. The AFL-CIO raised it, but provided no definition of what it should mean. Noted economists like Nobel laureate Joseph Stiglitz called for it, as did NYU professor Nouriel Roubini, whose predictions of the evolution of the crisis had proved correct for the past two years. James Baker, the main policymaker during the Reagan administration, came out for it. Greenspan reiterated that nationalization was necessary for an “orderly restructuring” of the system.
Key figures in the Republican Party, such as U.S. Senator Lindsey Graham, declared on TV that “if nationalization is what works, then we should do it,” as did Senate Banking Committee chair Democrat Chris Dodd.
But immediately the Obama administration’s big guns responded, discouraging the very talk of nationalization. Geithner, White House economic advisor Larry Summers and Fed chairman Ben Bernanke all quickly debunked the idea, as did House Banking Committee chairman, Barney Frank. Dodd backtracked and joined the denial. They sounded off in unison with big bank CEOs Ken Lewis of Bank of America, Jaime Diamond of JP Morgan Chase and Citigroup’s Vikram Pandit, who declared it “would be a step backwards.”
The resistance to the very concept itself flowed from yet another scheme in the works by which the government and taxpayer subsidize the banks and investors to remove the “bad assets” from the banks’ balance sheets. That latest scheme was revealed with details later on what was called the Private-Public Investment Program, or PPIP, released by Geithner on March 23.
But like TARP before it, PPIP was essentially still a “bad asset buyout” idea — this time with the twist that somehow those speculator-investors, who created the financial crisis, would now come to the system’s rescue and buy up the bad assets — providing, of course, that the government generously subsidized the process.
Subsidization would be financed not only by the Treasury providing funds but by having the Federal Reserve print more money to the tune of trillions of dollars. The government commitment to the banks thus doubled overnight.
But should the newest bailout of banks fail, as it will, the question on the agenda once again is to proceed to some form of nationalization. The debate on nationalization is thus bound to reappear aggressively once more as it becomes clear that the Geithner plan is failing.
But when the debate re-emerges anew, it can no longer be limited to its past definitions. Nationalization as mere government stock ownership — indeed any kind of formal ownership — has already been attempted and failed. AIG alone is testimony to that fact. Nationalization as temporary trusteeship is clearly insufficient. It doesn’t address what’s to be done with the bad assets in the trillions that are taken under “trusteeship.”
Nationalization as an Aggregator Bank raises the problem of how to capitalize an entire banking structure that is largely insolvent, which would cost several trillions of dollars to start. The option of FDIC-IndyMac type takeovers raises similar problems. The IndyMac‘s takeover cost the FDIC less than $10 billion. Bailing out Citigroup common stockholders alone will cost more than $1 trillion.
Who benefits in any nationalization arrangement is the key: is it the “nation at large” or is it some set of private individuals? It is called “NATIONalization” for a reason. To call it nationalization, while in the service of individual investors, is to appropriate and distort the meaning of the term.
Who Benefits? Who Controls?
Who then is “the Nation” that is supposed to benefit? There are 114 million U.S. households, of which 91 million are households where wage and salary earners each earn $80,000 a year or less. The wealthiest 5% of households, five million or so, earn the vast majority of their income from capital sources (capital gains, dividends, interest, rents, business incomes). The wealthiest 1% earn virtually all income from capital sources.
The 91 million — i.e. the working class and most of the middle class — are the overwhelming bulk of the nation. But they do not in any credible way benefit from “nationalization as investor bailouts.”
Any true program of nationalization would thus have to show how the 91 million would benefit. And if it can’t be shown, then the program, whatever its structure, simply can’t be called nationalization in any proper sense.
Nor can true nationalization be limited simply to a legal arrangement, however much or what kind of stock (preferred, common, convertible) may or may not be purchased. Mere legal ownership is not nationalization. Nationalization implies control — and control directly on behalf of the public interest, not private interests. But “control” over what and in what form? That’s the next reasonable question!
There are all kinds and degrees of control. Formal stock ownership arrangements to date have required at most only occasional reporting by the bank in question. Reports and information in themselves don’t confer control. Nor does veto over management decisions represent effective control. AIG and other banks that have taken hundreds of billions of taxpayer money attest to the limits of reporting decisions made by managers representing private investors.
Control must also mean more than the government simply “vetoing” bank management decisions after the fact. Control must mean decision making itself.
But what kind of decisions? Certainly strategic decisions of the banks — and likely an important range of operational decisions as well. For that the government must fire all of a nationalized bank’s board of directors and appoint new ones, hopefully with labor, community and public representation.
CEOs and senior management teams must be totally replaced. Second tier, operational decision making must be daily reviewed by the new senior management team. Key divisional and mid-level current managers may be left in place, providing their performance is closely reviewed periodically. All this is a minimum decision-making structure that accompanies true nationalization.
Opponents of this view of nationalization will argue that it will result, if implemented for one bank, in the collapse of stock prices for remaining banks as other banks shareholders realize their institution may be next in line and dump their stock. But that need not be the case necessarily. In taking over one bank, the government could announce that it would guarantee stock prices of other, still private banks at their current levels. That would set a stock price floor and stabilize prices.
Facing the Facts of Insolvency
Another argument opponents of true nationalization raise is that banks are fundamentally sound, only in need of liquidity. While that argument might have fooled people in 2008, it is now abundantly clear that the “big 19” banks as a group are insolvent. “Too big to fail” is clearly now “too big to bail.” The nation cannot afford these institutions any longer. They are literally sucking the economic lifeblood from the country.
Still another opposing argument is to point to AIG and Fannie Mae/Freddie Mac and their continued loss of assets as examples of the ultimate failure of nationalization. But AIG and Fannie/Freddie are not examples of nationalization; they are examples of bungled bailouts.
Another common complaint is that taking over a bank is too complex, that the government does not have the personnel or know how to run a bank efficiently. How could government possibly do any worse than the so-called “private experts” now running the banks into the ground?
Today’s so-called bank experts have lost more than five trillion dollars to date. By any private capitalist company’s standards, they should have all been fired long ago and the companies reorganized. America needs an entirely new banking structure. Moveover, such a structure is quite possible. For a start, it could begin with a full nationalization of the residential mortgage and small business property markets.
A new agency, the Home and Small Business Loan Corporation (HSBLC), based on experiences in the 1930s with the then Home Owners Loan Corporation and the Reconstruction Finance Corporation, could clean up the current mess and continue as the primary financial source for lending all residential mortgages to consumers earning less than $200,000 per year and companies with 50 or fewer employees.
As a second development, the Federal Reserve itself could be fully nationalized. It could then serve as a “lender of primary resort” to all consumer loan markets — auto, student, and other consumer loans. Its local structure might include local credit unions and HUD (Housing and Urban Development department) offices to interface with the consumer.
It is possible to expand on these ideas similarly for other credit markets. In short, there is another structure for banking that is imaginable.
Every economy needs a credit system. The United States just doesn’t necessarily need the one it now has, which is destroying the real economy and millions of jobs by the month. Another credit system is possible.
It is time to prepare to shift the inevitable debate on bank nationalization that will soon emerge to consider other possible arrangements — structures that exist for the purpose of serving the “NATION” itself and not private investor interest.
copyright by author, 2009.
ATC 140, May/June 2009