It sounds so noble. Let's "nationalize" the banks. There's an air of "the taxpayers are in charge now" that makes the notion seem romantic and noble. It's very Obama-esque.
Just wait a cotton-pickin' minute here. I don't think anyone has thought through how this is actually going to work, and if they did, I doubt they would be advocating for a wholesale takeover of the banking system by the federal government, particularly since the federal government is, uh, kind of busy right now.
To be fair, nationalization is just an idea currently. As Walter Gerasimowicz, CEO of Meditron Asset Management, told The Wall Street Journal's Marketbeat blog yesterday, the current debate over bank nationalization "is nothing more than prodding. It will still be up to the administration to find a way to effect this type of nationalization, and that is not at all clear at this point."
Right he is. But that hasn't stopped Nobel Prize-winning economist Joseph Stiglitz and others from arguing for nationalization as if it is an American imperative. In an interview with National Public Radio yesterday Stiglitz said nationalization "solves the problem" of banks' seeming insolvency brought on by assets worth a fraction of their present-day accounting marks.
OK, so let's think about this a second (that's what BankThink is here for, after all). Presumably, the government takes over the nation's largest banks much as they assumed Fannie Mae and Freddie Mac. The banks' assets go on the federal government's balance sheet and the federal government can, in turn, spur the banks to invest in the nation's economy. That sounds good - until you get to the "takes over the nation's largest banks" step. Citigroup has effectively been nationalized because its management could not run such a sprawling, risk-laden bank. Are we to presume that the federal government can do better? While at the same time it is running Bank of America, JP Morgan Chase, Wells Fargo & Co., and any number of other banks? Is this the Mars Department of the Treasury we are talking about here or the United States?
The Treasury Department is tapped out, period. Just click over to the list of positions that Treasury is trying to fill in order to effectively run TARP. Get your resume in order because Treasury is hiring professionals in these areas of expertise:
And that's just TARP. It's only a matter of time before Treasury starts a search for a bottle washer.After nationalization, the management minutia that the federal government will be forced to address is staggering, and there is evidence that the government has already fallen short in its management of the financial institutions it currently owns. Consider Fannie Mae. At the moment, Fannie Mae is effectively the lone purchaser of reverse mortgages in the nation. In the past few weeks, Fannie Mae has increased the margin it requires when it purchases a reverse mortgage from an originator. We called Fannie Mae's regulator to find out whether the government was OK with the fact that borrowers were effectively paying more for their reverse mortgages and Fannie Mae was acting counter to the government's "make more affordable loans" campaign. The Federal Housing Finance Agency's response: "We're looking into it." That's government-speak for, "We have no clue."
Before all this nationalization prodding turns into nationalization planning - and it will soon enough, if it hasn't already -- there must be a cold, hard assessment of the practical and logistical implications. Put another way, someone had better look into it.
JJ Hornblass is Executive Editor and Publisher of BankInnovation.net, a blog and social network for bankers.