Specter of bank nationalization driving historic fire sale of stocks including Citigroup & BOA

[seemslikeadream]

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/20/AR2009022003831.html?hpid=topnews


By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Saturday, February 21, 2009; Page A01

The specter of bank nationalization is driving a historic fire sale of stocks including Citigroup and Bank of America, making it harder for those firms to survive and imperiling the efforts of the Obama administration to keep banks in private hands.

A burgeoning chorus of prominent economists and members of Congress has concluded that some banks lack the money to solve their own problems and charges that the government has not yet announced an effective plan to help and that time is running short.

The administration has publicly and repeatedly denied that the banking system will be nationalized. But some experts and lawmakers say the government may be forced to take temporary control of the most crippled firms to scrub their books of troubled assets.

"I don't welcome that at all, but I could see how it's possible it may happen," Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said on Bloomberg Television yesterday. "I'm concerned that we may end up having to do that, at least for a short time."

The talk has only mounted in the 10 days since Treasury Secretary Timothy F. Geithner sought to assure the nation that banks could be stabilized without being taken over. Citigroup's stock has dropped nearly 42 percent, while shares of both Bank of America and Wells Fargo have lost about a third of their values. J.P. Morgan Chase has lost about 19 percent of its value.

[FarCenter]

1. Citi and BofA might be taken over, but they won't fail.

The legal fiction that they are alive and well has to be preserved.

If they were to fail, it would trigger covenants in 10s or 100s of trillions of bilateral, over the counter derivatives contracts.

It's unclear who the survivors would be, since unrelated firms could have bilateral contracts related to Citi or BofA instruments. Since these are private and unregisterd, many of them done off-shore, there is no way for even the Fed and Treasury to know what would happen.

[Subdivisions]

3. Gibbs said today that nationalization was not the way to go. I expect

he's echoing the Administration's policy. Also, Citi and BoA are in jeopardy of failing! Here's a DKos post about it, not that it's anything more than rumor, but it's not the first place I've seen mention of Citi/BoA's potential failure: http://www.dailykos.com/storyonly/2009/2/20/142628/784/866/699841

Edited to add: More mention of Citi/BofA troubles: http://www.investors.com/editorial/IBDArticles.asp?artsec=5&issue=20090219

And more: http://www.chartingstocks.net/2009/02/gone-in-60-days-citi-and-bank-of-america-wont-live-to-see-may/

[FarCenter]

11. He has to say that, right up to the minute that they nationalize them

Of course, if they do nationalize them, they probably won't use that word either.

[leftstreet]

2. How does that work?

the government may be forced to take temporary control of the most crippled firms to scrub their books of troubled assets.

Then sold back to private investors - so they can start all over again, right?

Sounds like a great deal for the investor class!

[FarCenter]

7. Yes, the scheme is to take assets from the banks at a low price,

sell them to private investors, who will then make a ton of money.

I also don't see how it helps the banks. For example, if you remove $500 billion of level 3 assets from a bank then the bank goes out and borrows another $500 billion from depositos/investors and then lends the $500 billion to borrowers.

Where does the bank get $500 billion in new deposits?

Where does the bank find $500 billion of creditworth borrowers?

And this happens only once, and we are at a stop again.

The thing that isn't working is that non-bank lenders can't float dodgey loans to sleazy borrowers, sell them to investment banks who now no longer exist, who then sell the paper to unwary lenders in Europe and Asia (plus the more inept insurance companies, pension funds, and mutual funds in the US). That game is pretty much over and it isn't starting up again.

Foreign banks and investors only want bonds backed by the US Government. e.g. Treasuries.

[leftstreet]

8. You had me at "...who will then make a ton of money"

Exactly!

Thanks for spelling it out.

[Double T]

4. Nationalize the banks, the insurance companies, the energy companies, the health care system, ....

the automobile manufacturers and the grocery stores.

[Subdivisions]

5. Gibbs said Friday that nationalization isn't the way to go. n/t

[Double T]

9. I just took a trip across New York State and concluded we are in a depression.

Under these conditions NOTHING is off the table.

[Subdivisions]

12. I just drove to and from Texas in the past 10 days and the one

thing I noticed most was that there were NOWHERE NEAR the number of long-haul trucks on the roads as their used to be. In fact, used to be at night you'd have to navigate in and out and around them and the rest areas and pull-offs would be jammed with them. Not this time. Truck stops were half empty. Rest areas and pull-offs were half empty. And the interstates, in my case I-20 and I-85, were dark and lonely in the late night hours.

It was down right eerie.

[nc4bo]

6. We could've saved 750 billion if someone would've shouted "nationalize" into a crowded board room.

a little earlier, right?

[FarCenter]

10. It could happen, but it may lead to nationalization of the whole industry

The big four are JPMC, Citi, BofA and Wells with assets that range from $1250 billion down to $1380 billion. Then there is a big gap down to PNC at under $300 million. In the gap are two foreign banks, HSBC and Deutsche Bank, as well as Goldman Sachs and Morgan Stanley.

In terms of commercial/retail banking, if the big four get nationalized, odds are that they then get used to "get credit flowing again", by expanding their balance sheets and reducing the Federal Reserves. Which will make the gap even bigger.

A lot of the regionals will either fail or be merged in.

The end result will be an industry structure with about 4 large banks, similar to Canada's or the UK's.