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Posts Tagged ‘IMF’

There’s a lot of talk right now about nationalizing America’s banks but not everyone agrees on what it would mean.

The first idea that most likely comes to mind would be an outright takeover of troubled firms such as happened with the mortgage giants Fannie and Freddie Mac when the government put them into conservatorship but many people using the word ‘nationalization’ simply mean that the government would invest large amounts of cash into banks thereby enabling it to have a major say in their activities.

Although the Obama administration is on record as saying that it wants to keep the banking system in private hands it hasn’t completely ruled out taking over troubled firms as can be seen by recent comments made by people that should be familiar with White House thinking.

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system”. – Treasury Secretary Tim Geithner

“I don’t welcome that at all, but I could see how it’s possible it may happen. I’m concerned that we may end up having to do that, at least for a short time” – Senate Banking Committee Chairman Chris Dodd, D-Conn.

Following further large declines in the shares of Citigroup on Friday which caused it to end the day with a 22% loss, White House spokesman Robert Gibbs told reporters,

“The president believes that a privately held banking system regulated by the government is what this country should have”.

That said, his statement left open the question as to whether or not the administration might consider intervention which would involve the taking over of a troubled bank after which it would be broken up and then new investors would be sought after a cash injection had been made.

The idea is one which is somewhat popular and Simon Johnson who was chief economist at the IDF had this to say,

“We have no problem in this country shutting down small banks. In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks. Nobody has the political will to do it. So you need to take an FDIC-type process. You scale it up. You say, ‘You haven’t raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone”.

It is not clear however if what the FDIC succeeded in doing with a few small banks would work with banking giants that employ hundreds of thousands of people and donate millions of dollars to various campaigns.

The bottom line however was probably best expressed by Paola Sapienza who is a finance professor at Northwestern University in Evanston, Ill.

“There seems to be some sort of ideological bias against the government taking over banks but eventually we’re going to pay for this, one way or another!”.

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A spat recently broke at a panel discussion of the ‘World Economic Forum in Davos’, Switzerland between the Nobel laureate Joseph Stiglitz and Angel Gurria who is the head of the ‘Organization for Economic Cooperation and Development’.

Stiglitz, who is a professor at Columbia University in New York and a former adviser to President Bill Clinton had said that any decision by President Barack Obama to establish a so-called ‘bad bank’ to help rid financial companies of toxic assets risked increasing the national debt and added that the intended plan would leave taxpayers paying for years of excess lending by banks and would also deprive the government of money that could be better spent by propping up Social Security.

“That amounts to swapping taxpayers’ cash for trash and you shouldn’t chase good money after bad. We’re talking about a national debt that’s very hard to manage”, he said.

Angel Gurria who was Mexico’s former finance minister replied that a ‘bad bank’ is necessary if lending is to resume, “I agree about the moral, ethical fallout, but you’ve got to face the music and someone has to take the loss. It’s the only way to jumpstart the economy”.

The Obama administration’s idea of buying the illiquid assets that are currently clogging banks’ balance sheets that are thought to be what is preventing them from lending is increasingly gaining criticism, as is global impatience with U.S. fiscal inaction.

George Soros said in an interview that “it’s not the measure that would turn the situation around and enable banks to lend”.

John Monks, who is the general secretary of the ‘European Trade Union Confederation’ said, “governments are getting close to straining the patience of the public and voters by repeatedly extending lifelines to banks”.

Gloria Arroyo who is the President of the Philippines urged Obama to act quickly, “We want Americans to do something. We can discuss what to do but the worst thing is to do nothing”.

A report just out from the International Monetary Fund states, “Bank losses worldwide from toxic U.S. originated assets may double to $2.2 trillion”.

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