> am I right in thinking that the FDIC specifically has
> never nationalized an investment bank?
Yes, you're right. We do have two recent examples of what happens when a large, diversified investment bank melts down:
- Lehman
They were "allowed to fail" in a way that both dragged half of the rest of the world down with them (wait until state pension funds start failing! You ain't seen nuthin' yet, oh fan-of-populism!) and provided the legwork for the "Bankrupcy Lawyer Full Employment Act of 2008" ...
Ok, I don't think anyone is interested in repeating that :-)
- Merrill Lynch
This is the closest to the "FDIC" model that we've seen: a secret weekend meeting full of promisses and guarantees to "sell" the bank in full to someone who is a big enough snake to absorb and try to digest the rat. In the days before the move (and even to a certain extent the weeks after), ML's business came under attack by the rest of the party (nothing smells better than blood in the water) and what it was "worth" on Friday afternoon was significantly more than what it was worth the following Monday.
Given that the snake in that case was BofA, it seems really unlikley that another snake would get lined up to do a similar move for them ... or for Citi, for that matter. It's just too big: there's essentially no one left.
> If nationalization comes with a huge infusion of government
> funds, these firms won't be insolvent. Rather, arguably it'll
> be the first time they'll be solvent in months.
And I think this is the crux of the issue: the easy way to infuse cash is to loan it, at easy terms. But the actions so far have been anything but easy; the terms were so harsh that it has put the US Govt. in the *political* problem position of not being able to try to help more: because there's no traditional "value" left to buy. They set the bar high enough that they essentially own more than anyone else; and it's a precedent that will be tough to break. I think this is why Citi suggested transforming the Preferred shares into Common -- so that they'd have something left to use as collateral for more capital raising activities.
The "pro-Nationalization" camp says things like "We already own most of it, why not just take the rest?" -- but market capitalization is very different from a balance sheet. Remember when Buffett "got a better deal" for Goldman and everyone got all pissed? Multiply that by 100 if Citi and BofA get any more money without similarly harsh terms.
> In short, why should the USG becoming the owner be any different
> than Warren Buffett becoming the owner? Why can't 99% of the
> employees in the bank keep on doing exactly what they're doing
> the day after nationalization while the auditors examine the books?
See above: that's not even how the FDIC model works! Come Monday morning, those people work for a different, stronger, bank. We don't have one of those -- let alone two. And in the ML example, the same folks came back to work and lost another $15B :-)
> As Klein points out above, at the height of the S&L crisis, the
> FDIC had 20,000 employees. It now has 5,000 employees, and the
> receivership section has fallen disproportionally more.
FWIW, I heard a story on NPR yesterday about the FDIC's boot-camp for new employees:
http://www.npr.org/templates/story/story.php?storyId=101097890
"So some of you may go to a bank closing this weekend.
Don't tell your significant other where you're going. Or
what you're doing," Murray says. "Everyone knows someone
who knows someone. You need to be sure you don't talk in
a conversation that could be overheard. Don't check in at
the hotel and say, 'Well, I'm here for this event.'
You are on a secret mission."
Heh.
> Why haven't these questions been raised at all in the public debate
> over nationalization?
My theory is that the question is purely political at this point: the technicals are settled. Bernanke said it again today: we're just not going to do that. But might it happen anyway? Might political pressure be brought to some tipping point that would force it to happen? Anything is possible.
I agree that Klein is the first person I've seen to consider what exactly would be meant by nationalization, at the nuts-n-bolts level. That's the simple reason no one is talking about it: no one thought of it. Except for the people at the Fed and Treasury, who know it all too well, but need to be playing politics at this point. Beware if they lose the political fight, however!
I suppose there's the possibility that they could nationalize one of the $100B+ banks that are going to get stress-tested; maybe they can find one that's of a managable size to "practice" on :-) ... note that, just as a bit of trivia, the #1 bank (BofA) is 20x larger than the #10 bank (CapOne) ... and IndyMac, the biggest recent bank (and 3rd biggest overall) to be taken over by the FDIC, had assets of $32B: nearly 1/100'th the size of BofA, which is 50% bigger than Citi.
But of course, that would take resources that might be needed in the eventual actions taken with Citi or BofA ...
Finally, I think one other problem with nationalization is that the current support that's being given by the Fed and Treasury is effectively leveraged by the recipient banks, because it is largely being used to bolster *capital ratios* to keep them solvent; if the govt. takes over, that ratio goes to 1:1 ... so it's worth it to try to help the banks dig themselves out, because if the govt. has to do it, it'll be a LOT more expensive.
/jordan