So Explain This: The Nationalization Of U. S. Banks
Posted by J. Alexander Mitchell on 06.25.2009
Everyone like to throw around the term "socialism" lately... but I think we were a few months too late...
Late last week I had a meeting with a real estate agent and a loan officer about buying a house. These sorts of meetings almost always involve a lot of small talk to make everyone comfortable with the thought of handing over one's life savings to these people in order to purchase a house. This one was a bit more interesting, though. The real estate agent – an older man from the Midwest that exuded a "Pulled Up by My Own Bootstraps" vibe – talked about the nationalization of our banking industry. He didn't mention anything that occurred this year, however. Instead, he told a story of a meeting with the Treasury Secretary and the sort of strong arming that would make Tony Soprano go "Maybe you should start usin' some subtlety, capiche'?"
Unfortunately, my background is Computer Science, and most of my training has been in education. As such, I can provide the story and give some insights, but undoubtedly have limits to my exploration. This is where you, the reader, can chime in – did we not already nationalize our banks in 2008?
Our story comes from a New York Times article from October of 2008. Then Secretary of the Treasury Henry Paulson called the chief executives of the nine biggest banks in the United States – all in Washington for a meeting of the International Monetary Fund – into his office. He then handed them a document saying they would sell shares of their company to the government, and that would have to sign it before they left the room. Flush with new TARP money, Secretary Paulson made the call that the banks would all need an infusion of capital to allow them to begin trading together again in hopes of spurring the economy. Some banks, such as JPMorgan Chase, were more than happy to accept the money. Others, like Wells Fargo, felt that they didn't need an injection of cash. That mattered not, though, as every single bank agreed to the terms by the end of the evening. Moreover, as with any scenario in which the government funds another entity, strings were attached to this deal. More specifically, there were limits on executive compensation placed. There was not, however, a big push to change day to day operations, from what I have researched.
So, to review: the government goes to the banks and says "you must take this money". The banks are not given a choice. Finally, the banks are forced to follow the rules that come with accepting the money, not matter how minor they are. This seems like the dictionary.com definition of nationalization: "To bring under the ownership or control of a nation, as industries and land".
Why was this not more widely reported? I could not easily find an article about this meeting from what I deemed a "mainstream" source outside of the New York Times article I quoted above and a Time article that referenced the situation but did not give a lot of details. For all of our talk about the "Media Left", they certainly seemed to have fallen down on the job on this one, as it actually occurred during President Bush's tenure, specifically right before the election. I would think that, if there was nearly the bias that some would suggest, this would be almost as unavoidable as a teabagging joke a few months back.
As well, why was there not more outrage? I have been called a socialist recently (by a good friend who should probably use dictionary.com as much as I do), but my personal viewpoint is that the government should act as "referee" to anything that doesn't involve basic human needs. I have a difficulty with the bailout of the auto industry (we are beginning to see now that no one is "too big to fail"), and I have a difficulty with this nationalization of the banking industry.
So… can someone explain to me if (a) I am off on my interpretation, and (b) is this somehow an okay thing if I am not?
Other quick notes…
Governor Mark Sanford is stepping down from his post as head of the Republican Governor's Association after admitting he had an affair. Should he have had to? I really do not like when an elected official resigns or is punished for a personal affront. I do not care how much oral sex you get or what country you went to in order to visit your mistress – Can you balance a freaking budget? I'm fairly certain Californians will vote a pothead into office at this point if they can deal with that mess. Heck, maybe one needs to smoke something to deal with that mess…
Banks were not "nationalized". Forcing all major banks to accept TARP money was to mitigate the possibility of a bank-run at anyone of the participants. A bank-run would have been fatal at any of the banks more or less the weaker. The equity markets could not determine which of the participants was in serious trouble and which were not. If the equity markets new which banks were in worse trouble short sellers would pile on driving the price to zeros (see Bear Stearns) and thus eliminating any hope for recovery. If the public knew which banks were in definite trouble, they would pull their deposits thus eliminating any hope of recovery.
Which is the same reasoning underlying the government not accepting repayment until all participants can repay.
Posted By: AdmChesterMynuts (Guest) on June 25, 2009 at 06:03 PM
Hard to balance a budget when you're a governor who plans a 10 day trip (newly revealed) out of the country without telling any of your staff or assigning a temporary replacement to take charge if there's an emergency. Last time I checked, anyone who skips out on work without telling their boss or their staff and not being reachable by phone because they're "indisposed" for personal reasons is cause for dismissal, and I doubt his or her co-workers would want to depend on someone who thinks it's okay to disappear for over a week without telling anyone.
At least Bush told people where he was when he was spending all that time on vacation.
Posted By: GaryML (Guest) on June 25, 2009 at 06:55 PM
AdmChesterMynuts makes a lot of sense. In principle I don't like it, but it adds up. One thing I know is they are very eager to pay back so they can start raiding the company, er, giving themselves bonuses again. I just opened an account at Chase and nothing there seems any different than normal.
As for Mark Sanford, disappearing from the job without notice is indefensible. On the personal indiscretion, Rachel Maddow already showed numerous examples of him campaigning rather loudly on moral superiority and how important trust is. If by his own assertions he is unqualified for office, how can he not resign? I didn't care if Bill Clinton had an orgy on the White House lawn as long as he helped run budget surpluses. But Republicans always set themselves up to be labeled hypocrites with this stuff. How hard is it to keep your pants on?
North Korea strikes me as trying way too hard to seem important and scary. The international community should thumb its collective nose at them and do whatever we deem necessary. When even China and Russia aren't backing them, what can they get away with?
Posted By: Shockmaster (Guest) on June 25, 2009 at 09:55 PM
For once Gary has a point ;) The issue isn't (nor should it be) the fact that he has a little side-dish. It's the fact that he essentially abandoned the post. Most fair minded people see that, and most fair minded people don't care where their politicians do in their personal life. Doesn't mean they think it's a great thing to have an affair, they just know that it isn't any of their business. The main focus should be the fact that he abandoned the office.
Posted By: gwpbrian (Guest) on June 25, 2009 at 10:29 PM
Wow...gwpbrian and I have something in common!
Sanford's personal indiscretion should not cause him to hang. His abandonment of his office and his dereliction of duty is another story. Even still, do I personally think he should resign? No. That is not my call. It's up to the people of South Carolina whether or not they want him to continue to serve at the next election.
Posted By: Crow21 (Guest) on June 26, 2009 at 03:06 AM
The admiral explains the "nationalization" perfectly. If only the troubled banks took TARP, everyone would know which banks were in trouble, and would automatically withdraw all their money from said banks. That would destroy those banks, and then of course, clients of "safe banks" would still make a bank run just to be safe.
Obama and Treasury made the right call on TARP. What they didn't do was compel these banks to actually have to lend the money out. That wasn't one of the Obama Admin's shining moments.
Posted By: Crow21 (Guest) on June 26, 2009 at 03:09 AM
Crow,
There were actually Wall Street Journal reports that bank lending actually increased during this time frame. To dictate though that they lend this money out would be to invite the same sort of disaster that led to this crisis in the first place. That being the unchecked loans to unqualified borrowers as mandated by the government via the Community Reinvestment Act/pressure from Clinton Justice Dept. Throw in the implied authority to lend from the government created Fannie ans Freddie who were buying these loans with implied taxpayer backing and you have government's fingerprints all over this mess.
Posted By: Da Man (Guest) on June 26, 2009 at 10:31 AM
Not that it really matters but it was Secretary Paulsen that set-up structure of TARP in forcing banks to take money and Secretary Geitner who prevented repayment.
And your right, making additional risky loans is not a solution to losses created due purchase of risky loans. Barney Frank disagrees and this week instructed Fannie and Freddie to loosen lending standards in order to artificially create another asset bubble within multi-family housing such as condominiums.
He did not yet disclose who he intends to blame for his policy position, maybe it will be Ron Paul this time given Bush is no longer in office. Spin the wheel, we know he will deny any responsibility for policy with his name on it.
Pure speculation but I suspect a large housing developer near to the Frank organization is having trouble filling a condo development thus creating negative pressure on unit pricing. He has turned to Barney to rig the game, temporarily inflate pricing by artificially inflating demand from subprime borrowers.
Once he has mitigated his losses, the developer will walk, the subprime lender will be in over their head and the tax payer will end-up holding the paper at Fannie/Freddie.
Posted By: AdmChesterMynutz (Guest) on June 26, 2009 at 11:50 AM
Wait, a Mitchell article that I can find absolutely NOTHING. NOTHING GOD DAMMIT! to bitch about. I'm putting money on the Lions winning the Super Bowl now...
I've read through this 4 times now and I STILL nod my head in agreement.
You know what I think JAM? I think you're right...
It might be the only time in history, but that's what it is...
But for a short response. Anyone who throws Obama under the socialism bus and claims that Bush was not socialist under the same classification is too biased to see how idiotic that statement is. Bush was really bad about it, and the only reason it's not a popular discussion in the media is because the Republican "But he did what he had to after 9/11" argument and the Democrat "ILLEGAL WARS!!!111" debate clash so wonderfully...
Posted By: The Man (Guest) on June 26, 2009 at 12:02 PM
Da Man,
I concur; you found a "loophole" in my unclear phrasing. I intended, but never clearly stated, that the lending needs to happen, but obviously, not in the same irresponsible--and also predatory--ways it was before. But the money needs to flow out to the people who really need it: those defaulting or nearly defaulting on their mortgages. If these folks can get a nice, tight bandage to stop the bleeding, then the real estate and lending markets stabilize a bit.
Posted By: Crow21 (Guest) on June 26, 2009 at 01:55 PM
"If these folks can get a nice, tight bandage to stop the bleeding, then the real estate and lending markets stabilize a bit."
So take money out of the hands of people that can afford a home and give it to people that can't afford a home.
What do we get? no one can afford their home so then the government can buy up everyone's mortgage, go bankrupt, destroy property rights, and live happily every after is a socialist paradise.......
Posted By: Mikel (Guest) on June 26, 2009 at 11:15 PM
There goes Mikel again, wowing us with his great understanding of economics and real estate...
Posted By: Crow21 (Guest) on June 28, 2009 at 02:09 AM
STAY CURRENT