It's not often that I urge readers to listen to a radio debate -- but there's a first time for everything. The reason for my recommendation is that the government could soon nationalize our banks -- something that has never really happened in our history. And I think you should consider listening to this radio debate yesterday on KCRW's To the Point with Warren Olney involving a former International Monetary Fund Chief Economist, a reporter from the Washington Post, a blogger from Portfolio, and yours truly discussing the pros and cons of nationalizing the banks.
It's not precisely clear what it means to nationalize our banks. In general, it means that the government takes control of the banks and runs them. In many cases, such as Bank of America (NYSE: BAC) and Citigroup (NYSE: C), the U.S. is already the largest shareholder thanks to the $45 billion each we invested in Bank of America and Citi. In fact, these investments exceed the value of their publicly-traded common shares -- which are valued at 81% and 38% of that investment, respectively -- Bank of America ($36.5 billion) and Citi ($17 billion).
This highlights one of the negatives of nationalization -- common shareholders who are among the innocent (and often ridiculed) victims of managements' poor decisions get wiped out. In theory, the board of directors is supposed to protect the interests of the shareholders. But in the case of the banking industry, they made sure that the executives and "top producers" got enormous bonuses by letting them take on risks that put the financial system at risk -- creating a $2.2 trillion capital shortfall. While my fellow radio debaters argued for nationalization, I argued against it.
I think nationalization throws good taxpayer money after bad. What is the point of putting real money into banks that are unable to lend it out? Instead, I suggested that we create new banks -- using a mixture of public and private money. I have suggested this before. The benefit of this approach is that the new banks won't be saddled with the bad assets, so if they find good lending opportunities they can take them.
Of course, once the new banks started lending, they would draw customers away from the ones that aren't. This would get capital back into the economy and it would also lead to the demise of the "zombie" banks that are too crippled with toxic waste to lend. But the transition of customers from the old banks to the new ones would also give regulators some time to wind down the operations of the old banks in an orderly manner.
Of course, shareholders of the old banks would be wiped out -- but they've already lost most of their value already. But the beauty of creating the new banks is that the shareholders -- which would include taxpayers -- would have a very high chance of making a profit since the new banks would grow and the value of the equity would grow right along with its customer base.
If the objective of nationalization is to get capital flowing back into the economy, creating new banks is a better way to achieve that objective.
What do you think?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. Portfolio published his eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing on December 26, 2008. He owns Citi and has no financial interest in Bank of America securities.
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Reader Comments (Page 1 of 1)
1-23-2009 @ 11:22AM
paul s said...
Common shareholders should get wiped out. That is the only way they will learn to not invest in managements and BOD's that do not protect their interests. If managers, directors, and government oversight do not protect dimwitted investors, why the hell on earth should taxpayers?
1-23-2009 @ 11:43AM
duncan.stewart said...
This guy should stick to teaching management. He is proposing the complete recapitalisation of the entire economy. Two questions: what happens to your currency when you recapitalise the entire economy? What happens to the depositors in the old banks when you start a massive, wholesale run on the banks by withdrawing support? Actually, three questions: why walk away from bad assets? They may not be worth what they used to be worth, but they are still assets, with value... Gibberish.
1-23-2009 @ 11:51AM
Trace said...
I agree with you, Peter, as well as the first commenter, Paul.
This isn't the first time I read about your idea to start new banks, and I'm hoping that you could answer this question. If it's such a good idea, what are the real reasons that it's not happening? Play devils advocate for us, and tell us why our government is not even talking about this idea of new banks.
1-23-2009 @ 12:57PM
mauricio said...
All these "Managers" should be in jail where they belong!! Shareholders don't have any power to regulate these "Big Geniuses" as they "create" these corporations to screw people, they are the "majority" shareholders until they can no longer maintain their Ponzy scheme; This is the way it works, they "buy" stock @ nominal cost when they start, then, as they inflate and cook their books, "investors" (Retirement Fund managers) start to buy and drive the price up, they "Original Creator" of the company makes like a bandit selling stock he "bought" for $10.00 @ $80.00 and to throw more salt to the injury, he collects large bonuses for the Company doing so well, then comes the point in time that reality sets in and they can't keep it going, so they dump their stock and go make another company, this is why we got: Builder's Emporium being pushed out by Home Base, Home Base, Home Base being pushed out by Home Depot, Lowe's will surely eventually push out Home Depot, net result: A few crooks make a lot of money and a whole bunch of honest hard working Americans loose their butt in the stock market!!!
1-24-2009 @ 3:29AM
jojo said...
"why walk away from bad assets? They may not be worth what they used to be worth, but they are still assets, with value..."
sold to YOU Duncan...
sold to you.