Hurry Up and Nationalize the Banks

[Sweden] took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. We've got thousands of banks.
-- President Obama

Fair enough. Then again, I don't think anyone has called for every American bank to be nationalized. Just the bad ones. In fact, I'd be content with just two: Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) .

Why? A few reasons. First, Citigroup has $93 billion of tangible equity, most of which is claimed by preferred shareholders, almost all of whom are the government. Bank of America has a market cap of $29 billion, after Uncle Sam pumped in $45 billion of capital. Anyone who thinks these two aren't already effectively nationalized is fooling themselves.

Second, let's be real: What are our other options? First Hank Paulson, and now Treasury Secretary Tim Geithner, have been running in circles for almost five months, trying to craft a plan to purchase toxic assets at some Goldilocks number that's high enough to keep banks intact yet low enough to avoid a taxpayer ripoff of Madoffian proportions.

While we've yet to see exactly what Secretary Geithner has in mind, 2+2 will never equal 1,000, no matter who's in charge. In the end, taxpayers are guaranteed to swallow the amount between what banks need to stay afloat, and what the market is willing to pay for toxic assets. By any estimate, that'll end up as a massive wealth transfer from taxpayers to bank shareholders and bondholders. If Merrill Lynch's $30 billion CDO sale for the equivalent of $0.06 on the dollar is any indication of private thirst for these assets, the taxpayer-to-shareholder wealth transfer could easily approach trillions of dollars.

Anyone in favor of that?

[Cue boos and hisses]

Didn't think so.

Now, this hardly means I'm an anti-TARP-ian. I realize this debate is as heated as it gets, but the $700 billion bank bailout was never a plan to save consumers' love for American Express (NYSE: AXP  ) , nor a strategy to "get banks lending again." It was, from Day 1, a Hail Mary endeavor to halt a run on the banks that threatened the collapse of everyone from Goldman Sachs (NYSE: GS  ) to JPMorgan Chase (NYSE: JPM  ) , as well as, according to Congressman Paul Kanjorski, "the end of our economic system and our political system" and the entire global economy within 24 hours. Say what you will. I think TARP was undeniably necessary.

But now that last fall's all-out panic has subsided, we need a long-term solution to getting our largest banks back on track. Doing nothing isn't an answer -- they can't survive on their own. Hoping to lure in private capital to purchase toxic assets is fundamentally flawed -- investors can already buy assets. They either choose not to, or banks aren't accepting their bids. "Ring-fenced" asset guarantees are as untransparent as it gets. Hoping legacy management will get right what they've proven spectacularly incapable of brings new meaning to "moral hazard." Our current plans are not, and likely will not, work.

So, what's the solution?

Just bite the bullet already
However the "stress test" the Treasury is toying with works, I have a suggestion: Don't give "contingent capital" to those deemed unstable; give them a contingent funeral. Nationalize them. Wipe out shareholders. Strip them down. Hose them off. Replace management. Fire the board of directors. Quarantine the bad assets. Don't worry about trying to find a "fair price" for assets. Just hold them for Pete's sake. Then, as soon as possible, spin off the stripped-down, streamlined, lesson-learned banks back into the private market. The quicker, the better.

Bottom line
There are several banks that kept their noses clean during the boom years -- including Wells Fargo (NYSE: WFC  ) , BB&T (NYSE: BBT  ) , and US Bancorp -- that will probably make it out alive. There are also a select few that have proven utterly incapable of surviving as private firms. They need to go.

The U.S.'s top economists and politicians spent years criticizing the Japanese for trying to resuscitate zombie banks. Now, we're hoping to avert a "lost decade" of our own by resuscitating a problem that's magnitudes greater, even though we know the catalyst that finally pulled Japan out of its slump was wiping the slate clean and starting anew. It makes no sense.

Nonetheless, we now realize why it took Japan so long. Nationalizing is politically detested and free-market suicide. It's the last thing anyone wants. No one doubts that. Regardless, Japan taught us exactly what not to do. I hope we learned its lessons.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article, mainly because he thinks a few of them won't be around much longer. US Bancorp, JPMorgan Chase, and BB&T are Motley Fool Income Investor selections. Bank of America is a former Income Investor selection. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express. The Motley Fool is investors writing for investors.


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  • Report this Comment On February 13, 2009, at 1:04 PM, PROFESSORPUFFPOW wrote:

    This is the best solution I have read. There are too many holes in this ship and no matter what we do, it is still going to sink. Let the banks that are bad fail and nationalize the ones that have a chance to survive but need help. Rehab these and make them respectable and profitable again and then sale them back to the free market. Prosecute the bankers and federal officials that allowed this to happen in the first place. This dog is dead and it is insane to walk around carrying a dead and decaying corpse.

  • Report this Comment On February 13, 2009, at 1:05 PM, PROFESSORPUFFPOW wrote:

    This is the best solution I have read. There are too many holes in this ship and no matter what we do, it is still going to sink. Let the banks that are bad fail and nationalize the ones that have a chance to survive but need help. Rehab these and make them respectable and profitable again and then sale them back to the free market. Prosecute the bankers and federal officials that allowed this to happen in the first place. This dog is dead and it is insane to walk around carrying a dead and decaying corpse.

  • Report this Comment On February 13, 2009, at 1:06 PM, pondee619 wrote:

    "In the end, taxpayers are guaranteed to swallow the amount between what banks need to stay afloat, and what the market is willing to pay for toxic assets."

    Maybe I'm wrong, but, won't the taxpaayers get the return on the assets purchased? Unless these assrets are completely non-performing, there is an income to be derived therefrom, no?

    The banks currently must mark these asstes to market to comply with their capital requirements. The government would have no such requirement. The government can hold these assets to maturity, collecting their performance/payments along the way. There has to be a mathmatic equation for valuing performing/semi-performing/non-performing assets. Banks and investors have been doing this for many years.

    The difference is not what the government would have to pay for the assets now (to keep the banks afloat) and what they are now "worth". The difference is what the government would have to pay for the assets now and what those assets will pay in the future.

    Gently explain why I'm wrong on this.

    thanks:

  • Report this Comment On February 13, 2009, at 1:16 PM, pfdeck wrote:

    While the action taken last year to stabilize the banking system was vital, the banking system is still not operating in a normal manner. Credit or access to Capital is the lifeblood of business.

    Having heard the main points of the Treasury’s Bank Plan to deal with the crisis, there appears to be a key point missing in the plan. The financial system is still very frozen with only a trickle of financing taking place. It all centers around Mark to Market Accounting. It is strangling the banking system from making the loans to anyone with less than perfect credit or places any risk with the loan. As the banks have to reserve greater amount of capital against losses, there are less funds to loan. Each time another wave of foreclosures is announced against uncertain values it requires banks to reserve more capital, leaving even less funds to loan. This has turned into a downward spiral requiring more and more capital to be reserved and less capital available for businesses and individual.

    In terms of Supply and Demand, as this crisis has grown, normal market function in the housing market has disappeared.

    Supply of homes available is growing;

    Demand for homes is dropping rapidly due to fear, reduced credit available in the financial markets for all buyers, and the reduced demand from economic contraction (currently a recession).

    Unlike other Recessions, normal market function has disappeared and we continue to see a downward spiral in confidence of financial institutions. We are seeing distress amplified by a lack of certainty in housing values bring even greater fear. Fear has overtaken rational behavior. In some parts of the country homes are being auctioned for 40-50% of the value of the home 3 years ago.

    As long as financial institutions must follow “Mark to Market Accounting” during abrupt dysfunctional periods, it will only lead to greater calamity. The increased write downs lead to greater collapse of confidence by buyers and lower amounts available by banks to lend. This is causing a greater downward spiral than normal on the real estate market and stressing the fundamentals of the financial system.

    Steps should be taken to suspend Mark to Market Accounting or limit the reduction to the 75-80% value level of the original mortgage. This would only apply to mortgages and commercial property. Any mortgages that are considered distressed should be placed in a pool with a five year period to allow markets to stabilize; the banks would still own the assets, the mortgage, with the government offering a backstop against any losses. Creating in essence an insurance pool, with premiums paid by the banks in exchange for limits on their losses, the period of time and the loss protection allows real estate markets to return to normal function and should begin to stabilize prices to a more normal market.

    It is critical to suspend Mark to Market and establish this backstop function. Every day more businesses are cutting back employment; every day more Americans are seeing a declining withering economy. Only the government has the resources and time horizon to allow this plan to work.

    This allows in turn the market to work. Large capital outlays now by the government are recovered as the market is restored over the next few years.

    This is a plan to deal with fear and crisis that restores Demand in the marketplace and will allow the financial system to repair itself along with the previous action of the government. While the Stimulus plan will aid the crisis, it does not attack the root of the problem, the normal functioning of the banking system.

  • Report this Comment On February 13, 2009, at 1:34 PM, jasonjim wrote:

    It is all very well for the author to advocate nationalization of banks like Bank of America (BAC) and the wipeout of all common stock and preferred stock shareholders as a result. The idiot author probably holds no shares and has nothing to lose by making this proposal. I, personally, would lose over $40,000 if nationalization took place, money I invested in good faith in an American icon institution before the crisis, in the belief that it was a solid investment, like American pie. Now you want to punish me for believing in American know-how and grit to survive all crises. Shame on you. If nationalization happens I will never invest another dime in any American stock, and I am sure I will not be the only one in the world to take this action. I am not an American, but I wonder where the old American spirit of fighting through adversity has gone when I read capitulative drivel like this writer presents.

  • Report this Comment On February 13, 2009, at 2:59 PM, rags2riches247 wrote:

    I think it is inevitable as well. they were way over-leveraged and monetary injection into these banks is just throwing money down the drain.

  • Report this Comment On February 13, 2009, at 3:18 PM, SteveTheInvestor wrote:

    Jason:

    I can certainly sympathize with you, but there may not be an option. You have witnessed what happens when greed (and stupidity) is allowed to run rampant. The toxic assets will never be made whole. Nobody wants them now and they never will. Nationalization may be the only real option if we are to ever move forward. And just to state the obvious.... this situation is not restricted to America.

  • Report this Comment On February 13, 2009, at 3:29 PM, ByrneShill wrote:

    @jasonjim : If you invested before the crisis you've already lost most of that 40K$.

  • Report this Comment On February 13, 2009, at 3:50 PM, CathrynMataga wrote:

    ""In the end, taxpayers are guaranteed to swallow the amount between what banks need to stay afloat, and what the market is willing to pay for toxic assets."

    We never talk about what exactly is on the other side of the C/BAC balance sheet, and why exactly is it so critical that we heave trillions to make sure none of these guys take any loss.

    Nationalization seems to me to be a massive subsidy of this group of people. That they had crappy Citigroup debt, and nationalization turns all this junk into USG debt -- what a deal.

    What is fair, it seems to me, is to make everyone share in the pain a little bit. If the guys who Citigroup owes money to take some hit, we can reduce the total US dollars that go down this drain. They should at least have to pay the difference between the value of their citigroup assets and their new nationalized-USG-Citigroup assets.

  • Report this Comment On February 13, 2009, at 4:08 PM, jasonjim wrote:

    SteveTheInvestor:

    I disagree with you that everything is hopeless and that the toxic assets cannot find a market and be sold. I think a majority, perhaps 70% of these assets hold value and all it will take is the government to make them attractive to private investors to establish a market for them. This could be done by limiting the downside risk in some fashion, and the upside risk would take care of itself because the potential for gain would be high---investors would want to take on the riskiest of investments which have the potential for the greatest gain, and the government would cover any downside risk. This is just one method. There are probably others that might be better. Any one of them would be better than complete nationalization of BAC.

  • Report this Comment On February 13, 2009, at 4:17 PM, whereaminow wrote:

    Ah Keynesianism. Here is a problem we created. We blame the free market. Here are the solutions. They all suck and give the Keynesians more control. They all create new problems. They blame free markets. Then those problems grow. Then new solutions are offered. They give the Keynesians more control. Then these solutions create more problems. Then those problems grow. They blame free markets. Then solutions are offered. The solutions suck but they tell you it's the best we can do. Then those solutions create new problems, worse than the old problems. They blame free markets. They offer solutions.

    End the FED!

  • Report this Comment On February 13, 2009, at 4:18 PM, jasonjim wrote:

    To ByrneShill:

    No, I have not lost the whole $40,000 in my BAC investment as you so gleefully put it, because I averaged down my cost over a period of time, so that today I have a $24,000 loss on my books, and $16,000 to the good. If I hold for a year or two I expect I will have no loss at all as BAC slowly recovers. Nationalization gives me no opportunity to recover at all, wiping out the good with the bad, $40,000 down the drain.

  • Report this Comment On February 13, 2009, at 4:55 PM, Dwdonhoff wrote:

    You can't "buy" your way out of a natural cycle, and letting the system heal naturally will be exponentially less damaging (8especially* to our grand, and unborn great-grandkids... if anyone really gives a damn) than the bail-out-at-any-cost-so-we-can-pretend-to-avoid-our-consequences lunacy.

  • Report this Comment On February 13, 2009, at 5:08 PM, jcder wrote:

    I too am a shareholder of both C and BAC. I bought them with the idea that the government was ALREADY INVOLVED in their business affairs, and would thus have awareness of relative risk as well as a say in what these banks could or could not do. These are FEDERALLY REGULATED institutions. The Federal Reserve should never have been allowed these banks to take the risks that they took. Thus, the government, and consequently the taxpayer, should bare at least part of the financial brunt of the reclamation of these banks, and some shareholder equity should be spared, or at least reconstituted.

  • Report this Comment On February 13, 2009, at 6:02 PM, bigdividends wrote:

    The problem I have with nationalizing B of A is that the shareholders will be paying the price for acquiring Merrill. Lewis was ready to pull out of the deal until the feds put in the necessary guarantees for the acquisition to go through. Without the intervention, I do not think the deal would have been completed. If the deal did not go through, there would be some serious repercussions within the market place but the BofA shareholders would have survived. The feds though forced the deal for the greater good of the nation. I do not have a problem with this but you should not penalize the shareholders for the forced marriage. If BofA does not need any more TARP money and they can absorb the existing losses based off the arrangement made by Paulson, then I think the shareholders should not be penalized.

  • Report this Comment On February 13, 2009, at 6:27 PM, dukeofwail wrote:

    NO to nationalizing ANY US banks.

    The Emergency Economic Stabilization Act of 2008 is about nationalizing the entire United States financial system, a radical act that will hurry the United States of America along the road to total socialism.

    Writer Morgan Housel and Motley Fool may take the long view in stocks, but apparently take the short view of history and forms of government.

    Karl Marx recommended the "centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly."

    Together, Treasury Secretary Paulson and Fed Chairman Bernanke have grabbed near-dictatorial powers over financial activity.

    "Danger, Will Robinson!!"

  • Report this Comment On February 13, 2009, at 6:42 PM, Harley117 wrote:

    Mr. House does not know what he is talking about or is one of the hedge funds selling short and is trying to drive down the price of BAC. BAC was pressured into buying Merrell Lynch or it would not have taken the second round of TARP money and would not have encurred Merrell's losses. BAC will pay off all of the TARP money and taxpayers will get a handsome reward.

    It is true that the market cap is only $29B but that is because of all the piling on by those trying to drive the price down. Tier one capital is over 9% and there is adequate capital to get through this recession.

  • Report this Comment On February 13, 2009, at 6:59 PM, bernbern0 wrote:

    I agree strongly with jasonjim. Why punish long-term loyal investors who have continued to support those corporations with dividend reinvestments all those years. There has to be smarter solutions to these major problems.

  • Report this Comment On February 13, 2009, at 7:58 PM, rd80 wrote:

    Morgan,

    Good article on a hot button topic. I have a question.

    Why should the government set up a whole new structure (and probably agency with all the costs that go with that) to nationalize problem banks?

    We already have the FDIC set up to take over and manage failed banks. Let them do their job.

    I simply don't see any significant difference between nationalizing a failing bank and it falling into FDIC receivership.

    We have a proven process and structure in place to deal with failing banks. Let's let it work.

    In short, if C or BAC problems reach the point where the rules say the FDIC takes over, so be it. If they aren't that bad off, let them continue working to get back on stable footing.

  • Report this Comment On February 13, 2009, at 8:00 PM, ReillyDiefenbach wrote:

    "I, personally, would lose over $40,000 if nationalization took place, money I invested in good faith"

    That's where you went wrong, Bunky, assuming good faith. You were warned many a time that things were going sideways, but you hung in there regardless, or so it would seem.

    Let that be a lesson to you. As for the rest of us, the prospect of 50 new banks capitalized by us @ 50 billion apiece sounds a whole lot better than saving your hide.

  • Report this Comment On February 13, 2009, at 8:12 PM, xetn wrote:

    Your suggestion about nationalizing banks is completely stupid. If the c.e.o's of the two biggest banks you refer to had been right, no one would have said anything. But they made stupid mistakes. So listening to you, we would all have been patting each other on the back from having invested in these two banks but instead they are effectively bankrupt. What ever happened to personal responsibility? No one force any one to invest in these banks and despite what you think, we will all lose if the banks are nationalized. Better to let them die and I will be free of them. If they still have any assets worth buying, other companies can purchase them out of bankruptcy. That is the market system's way of dealing with the problem. If you want a hint, look at what China (the biggest socialist country) is doing. They are privatizing almost all of their holdings. The reason is simple, governments do not know how to price anything and really do not care. The real culprit in the the whole financial crisis is the Fed that keeps inflating trying to solve the problem of the Fed inflating. End the Fed!

  • Report this Comment On February 13, 2009, at 11:29 PM, jcmatt wrote:

    HERE IS A PLAN.

    IT WORKS. We've done it on a small scale, in a slightly different format with banks, acquiring toxic assets. I'll explain that in more in detail after expanding the basic principal to a national format/solution .

    Here it is:

    1. The Feds serve only as an auction platform for any assets banks want to get rid of. The auction is weekly, banks can only offer assets for auction in proportion to their capital, say 1%/week (or by some reasoned ratio).

    2. Bidder can pay either in cash, or in corporate bonds with a C or higher rating, accepted at face, but with a maturity of 4 or fewer years.

    COMMENT: (A) The bank improves its relative position, as it is rid of the toxic asset, and a C or higher corporate bond that will mature in 4 or less years is better than a failed bond of unknown maturity. (B) This gradually increases the cash position of banks, and increases the demand for corporate bonds, thus increasing their funding capacities. (C) To explain how we did this on a small scale with a local bank, I'll use round numbers, The bank had 26 condo REOs, their cost basis thru foreclosure, about $5 million. We offered a bundle of C, BBB, and a few A rated corporates at face, that cost us about $8 million. BUT, we asked the bank to lend us $13 million, $5 mil to buy the 26 condos, $8 mil to buy the bonds, which we assigned directly to the bank. We thus ridded the bank's books of $5 million in bad assets and replaced it with a pre-paid principal loan of $13 mill. For this we required non-recourse, of course, and an interest rate of 2,8%. We then had an annual interest obligation to the bank of $325,000 for 4 years. The condos rent easily for an average of $1,200 a month, which runs an annual negative of about $30,000 after the interest+HOA+taxes+property management. So we bought 26 condos for $120,000 over 4 years. And the bank added $13 mil in capital over the same period. It works because of the spread between the yield on the bonds and the 2.8% money from the bank, their base rate prior to index.

    This was a very distressed situation, and afterward, we saw that it would work, even with higher rated bonds at a higher cost in situations less distressed. There is a question of who gets the tax liability for the gain on the bonds, and that is negotiable, In our situation, we required the bank to take the gain.

    IT TOOK TWO MONTHS TO GET THE PRESIDENT OF THE BANK TO UNDERSTAND THE DEAL, but suspect you out there will get it in an instant, and even give me, and others a few pointers.

    JCM chet_911@msn,com

  • Report this Comment On February 14, 2009, at 12:42 AM, gardengertie wrote:

    Hey Jasonjim, I'm sorry for your rotten luck, but the market doesn't reward emotional loyalty to American grit and know-how, etc., but instead tends to reward research and thinking. There were warnings of a catastrophic crash as a result of the huge American debt to China, the extreme American deregulation, and the worldwide housing bubble, several years ahead of the beginning of the actual crash. I saw them in The Economist magazine, in articles by Nobel-winning economist Joseph Stiglitz, and in Nobel-winning economist Paul Krugman's NYTimes column, and there might have been others. Also, there were the scary, spot-on predictions in David Hackett Fisher's 1996 economic history text, The Great Wave (if you wanted to get even more depressed.)

    I'm inclined to trust the people who predicted the crash to prescribe the remedies for it. I've read books and columns by Paul Krugman about how well Roosevelt's New Deal worked. Recently Thomas Gale Moore, an economist at the Stanford Hoover Institution and the Cato Institute, sent a letter to the London Financial Times saying that the economy spiraled downward as long as Hoover did nothing, then started to grow almost immediately when Roosevelt took over, and declined only during the '37 to '39 period when Roosevelt tried to slow government spending. Paul Krugman and also Japanese economists and businessmen have been quoted or written in several newspapers that Japanese stagflation continued to destroy their economy under the same treatment that Bush and now Obama have been giving, until they finally nationalized some of the banks. Many economists, including Milton Friedman, have said that tax cuts simply don't work in this situation (as they didn't do anything for the economy under W). I think the economists who say the government should do nothing (because they believe a highly deregulated economy is healthy and automatically goes back into balance) are the same ones who didn't foresee this crash (because of the same belief.)

  • Report this Comment On February 14, 2009, at 2:02 AM, RaulChapin wrote:

    whereaminow reading your dislike for Keynesian logic, I think you might enjoy this thought:

    CAPS mining through the super algorithm is what is now the hot new product at the Fool. The idea is that the wisdom of ALL the CAPS players is recorded and analysed by a super computer. Those CAPS players that have less insight and fail consistently, have bad scores and being losers are taken in consideration with less weight than the "all stars" which are the ones that consistently find themselves being right. There are assumed to be jokers, players, newbies and experts, all playing, it is also assumed that by letting the winners have more weight, most of the rest will become irrelevant.

    Now I believe that their product is likely to come up with great market beating returns. However... if they decided to BETTER that market, they could choose for example to add points to all CAPS players, when the average fell too low (equivalent to monetary policy, in that no new wisdom (Wealth) is created, instead a distorted market is... meaning if you used to have 10 points and looser had 1, by adding 10 points to each one, you now have a 2 to 1 ratio to looser, while before you had a 10 to 1... all of a sudden your wisdom is weighted in at much less than before, and by doing this, no one has learned or contributed more... so no real gain) Similarly, you could use fiscal policy in CAPS by TAXING those with too many points... then redistributing these points amongst the least fortunate. That would prevent inflation of CAPS points.

    After doing that ad nauseum ad infinitum... David would declare that CAPS was a useless system and then decide that only him in his infinite wisdom would know always what to buy. Problem being, it was not CAPS that screwed up.. it was the monetary and fiscal policy that did it... David is a great stock picker, but when he dies... will David Jr be as good? and what about David the 3rd...

    Would David trust his every penny to his CAPS algorithm now? Perhaps... would he still trust his every penny to it after knowingly altering the results over and over again???

    O well, that is the beauty of Democracy, Morgan can give his comments, and everyone else as well, regardless of what we all say, the desision will be made at the top, but hopefully this back and forth will result in some increased wisdom by all of us.

    I for one will be chewing on what JCmatt said, perhaps it will not be done for the banks (it might not even be appropriate) but who knows i might use something like that in my future dealings in business.

    Fool on.. people this site is addictive!!

  • Report this Comment On February 14, 2009, at 9:36 AM, murderofone wrote:

    Question to jasonjim ,why would you think a financial institution would be a stable investment?Without nationalization these two institutions(Cti,BAC) are going to drag our markets down for years.Poorly managed,greedy CEO's,and now we all have to pay for it,that seems fair.Sorry for your loss,but if I had that much money invested in a company,I think I would have followed the way things were being handled a little closer.Warning signs started in 2007 and no one payed attention until the clumsy card house finally fell.

  • Report this Comment On February 14, 2009, at 9:56 AM, billdick6 wrote:

    You ask: "What's the solution?" Here is one answer:

    Have FHA buy (for price of unpaid mortgage balance) ALL homes going to foreclosure that do not sell for that amount (and then usually rent back to occupant) instead of trying to sell the "toxic assets" to investors? This makes these assets non-toxic as ALL mortgages in the tranches will be paid in full. ( A perfect and cheaper antidote) “Cheaper” as most mortgages in the tranches are being paid. – No need to buy ALL the mortgages in the tranches. It also avoids needing to set any value on the toxic assets. Also keeps these houses off the "for sale" market for a few years. (Stems the slide down of home prices.) Tax payers get real, rentable assets for their dollars with probable capital gains in a few years, not “toxic trash.”

    More details and other social benefits at:

    http://www.sciforums.com/showpost.ph...40&postcount=1

    Which is a post that explained why TARP would fail PRIOR to Congress voting even the first time on Paulson's plan.

    Geithner’s just announced plan for selling toxic assets will fail too because

    (1) Private investors are not investing. Not even the banks know what toxic assets are worth; yet need to set some value on the toxic assets.

    (2) Deep discounts needed to attract investors the banks cannot accept and tax payers should not as they will then need to give the banks more funds. The toxic assets need to be, and can be, made non-toxic as explained above.

    (3) Does not address the fundamental cause of the crisis. – Too many bought, via “creative mortgages” homes they cannot afford. They need to become renters of their houses or downsize to house (or even a trailer, if need be) that they can afford.

  • Report this Comment On February 14, 2009, at 10:05 AM, billdick6 wrote:

    "Doing so in a way that helps banks and protects taxpayers is as close to impossible as it gets."

    No. Here is how:

    Have FHA buy (for price of unpaid mortgage balance) ALL homes going to foreclosure that do not sell for that amount (and then usually rent back to occupant) instead of trying to sell the "toxic assets" to investors. This makes these assets non-toxic as ALL mortgages in the tranches will be paid in full. ( A perfect and cheaper antidote) “Cheaper” as most mortgages in the tranches are being paid. – No need to buy ALL the mortgages in the tranches. It also avoids needing to set any value on the toxic assets. Also keeps these houses off the "for sale" market for a few years. (Stems the slide down of home prices.) Tax payers get real, rentable assets for their dollars with probable capital gains in a few years, not “toxic trash.”

    More details and other social benefits at:

    http://www.sciforums.com/showpost.ph...40&postcount=1

    Which is a post that explained why TARP would fail PRIOR to Congress voting even the first time on Paulson's plan.

    Geithner’s just announced plan for selling toxic assets will fail too because

    (1) Private investors are not investing. Not even the banks know what toxic assets are worth; yet need to set some value on the toxic assets.

    (2) Deep discounts needed to attract investors the banks cannot accept and tax payers should not as they will then need to give the banks more funds. The toxic assets need to be, and can be, made non-toxic as explained above.

    (3) Does not address the fundamental cause of the crisis. – Too many bought, via “creative mortgages” homes they cannot afford. They need to become renters of their houses or downsize to house (or even a trailer, if need be) that they can afford.

  • Report this Comment On February 14, 2009, at 10:44 AM, MedPeddler wrote:

    gardengertie-

    Try reading some material that doesn't validate what you already think. That Paul Krugman thinks FDR and his brain trust were economic heroes is no surprise. Try reading Amity Shlaes' book 'The Forgotten Man' for a different take at least. The European depression lasted 3 years while the American one lasted 10. Tight money policy and the Smoot-Hawley tariff drove us further down. Unemployment peaked at 1 in 4 during FDR's admin. WWII spending was what brought us back. You'll find these as well as other interesting facts in the book.

    The worse part of this crisis is that Americans no longer know who or what to trust. Our faith in business and free enterprise are collapsing all around us. Depression-era folks who didn't trust the banks or the markets are saying, "See, I told you so." Faith in government evaporated a long time ago - from both the right and the left.

    People may dismiss all the talk around the Weimar Republic now, but things are all too similar. The time is right for a nationalistic, Hitler-like demagogue to step in and say, "Put all your hope in me." Add in some Weimer-like hyperinflation and watch things explode.

  • Report this Comment On February 15, 2009, at 4:11 PM, tx2346 wrote:

    It would be a good start. Please consider a more comprehensive approach that would include solutions to much of the the current crisis:

    http://bright-ideas-thomas.blogspot.com/2009/01/what-is-mone...

    Summary:

    The key idea is to re-define 'money' as a 'legitimate government service monopoly' as supported by the US Constitution (Article 1, Section 8: 'coin & regulate').

    in summary:

    1) convert the banking infrastructure that is now the "Federal Reserve System", plus the big failed banks, into a true democratic "National Central Bank"

    2) give that Central Bank the monopoly on 'money creation' and remove the authority for private banks to do so via 'fractional reserve lending'

    3) make the Central Bank the 'Principal Lender' of US Dollars

    4) fund the US Federal Government using a combination of (1) interest earned on loans (2) newly-created money (3) 1% tax on each banking transaction

    5) replace the current system of interest-bearing US Treasury debts, with non-interest-bearing 'Certificates of Deposit' into the National Central Bank [ie, eliminate the 'National Debt' interest-payment load]

    6) eliminate most forms of federal income tax (maybe keep it on multi-millionaire incomes until this new scheme is proven)

    What this plan does is remove major drag on our economy and replace it with the most efficient form of federal funding -- in abstract, a 'tax' on worldwide holders and users of US Dollars.

    [please read the blog for rebuttals of objections to this radical plan; i really appreciate feedback, especially if you can give me good reasons why this plan would be wrong]

  • Report this Comment On February 15, 2009, at 8:42 PM, Johann01 wrote:

    Your suggestion that banks be nationalized is an assinine simplistic solution that would destroy too many people's investments - including those of retirees and others whose financial wellbeing rests on those investments. I am sick and tired of hearing from people like you who want a simple solution so they can wear a capitalist halo and not do the hard work of correcting the problem with a reasoned approach. Mark-to-mark accounting should be scaped because the prices it forces on banks are absurdly low. The notion that this would be covering up the problem is dead wrong because many of these assets are performing, albeit at a low level. Such assets are not worth ten cents on the dollar and the tax payer would make out like a bandit if the government paid fifty cents on average. A cash flow model should be used to estimate that value of the loans with a built in extropolation for possible increases in defaults. It is not easy to settle on a model but it is better than destroying banks and the people who have invested in them.

  • Report this Comment On February 16, 2009, at 12:12 PM, umlguy wrote:

    This is the worst idea since social insecurity started with FDR! Government needs to stop meddling in the free market, stop forcing the banks to make these bad loans in the fist place just to "make it fair to poor people", and let the market simply work these things out! Then, and only then, the government should let the banks fail after the stupid government regulations are removed, to weed out the bad ones. Fine, leave FDIC in place to protect your average bank account holder, but to try and keep bad banks going, even after being nationalized, is not a good idea.

    I think the bail out will be something we all regret when it is all said and done.

  • Report this Comment On February 17, 2009, at 12:46 PM, Joelshann wrote:

    That's a GREAT IDEA! I mean, our government is so efficient at "stripping" and "hosing" as it is--I can see the bright future for government banks.

    If the bank proves profitable after such endeavors, then government would loath a spin-off. If it proves unprofitable, the government would "save" it until it--like the Social Security system, the Detroit auto makers, and thousands of growing departments within the government (ever heard of one shrinking? One Czar turned into a subcommittee this week!)--would be just another anti-free-market action.

  • Report this Comment On February 17, 2009, at 3:59 PM, robertf36009 wrote:

    Now that the FED has made zombie banks out of CITI (C) and Bof A (BAC) they have little choice but to prop them up. They made them give loans to people who could never pay them back. They were coerced to buy other failed institutions to prop up the investors of those institutions. Now the investors of those banks have seen thier investment strategy shreded by the FED interfering. So far I haven't heard any of the geniuses in washington identify the problem let alone articulate a solution for it. Get rid of the CRA. Reinstate Glass/Steagul and the uptick rule. Repeal Sorbanes/ Oxley and scrap mark to market rules. Then the FED can bid $0.35 on the dollar for the bad assets hidden on the ballance sheets of C and BAC. Should private investors come in to bid on the toxic assets so much the better. Fool on.

  • Report this Comment On February 17, 2009, at 10:10 PM, SwampBull wrote:

    Hallelujah.

    The US won't get out of this mess until the mortgage "toxic asset" fiasco is fixed.

    I agree with you on a great many points - especially about wiping the slate clean. Let's get rid of the banks that are worth less than the walls they reside in. Let the ones who didn't become credit addict junkies dictate the future of the industry - the good banks. That's what would be fair... but since when does Wall Street or the government care what is fair?

    Until the CDO/MBS/CDS/insert useless paper here Crisis is resolved, expect poor returns in your portfolio and more dreary whining on the cable networks.

  • Report this Comment On February 18, 2009, at 5:42 PM, cydcyd wrote:

    The government should start a saivings bank & maybe tie it to Fannie Mae...ect...

    CD's & savings accounts...

    Pay middle of the road interest...

    Insured of course & no Charge card...or checking accts.

    This would back the Housing market (to fannie mae)

    Not that the government would be taking us over ..HaHa.

    We could make lots of money this way...& then maybe they will figure out...they could get the deficit paid off.

    They of course would have loan monies to other banks & charge interest...

    It could work

  • Report this Comment On February 19, 2009, at 11:22 AM, rm96696 wrote:

    Finland has a very similar story to sweden (bubble in late '80s, depression and banking collapse in early 90's). It didn't nationalize the banks (except some savings banks), but lent to them, merged the weaker into the stronger etc. And it came out of the depression just like sweden.

    So maybe nationalizing the banks isn't the thing which turned sweden around. Maybe it had more to do with leaving the european monetary system (to maintain the exchange rate peg the swedish central bank pushed overnight rates up to 500 percent), devaluing, the recovery of eastern europe, the buoyant international economy of the late '90s..

  • Report this Comment On February 19, 2009, at 2:44 PM, FoolInYakima wrote:

    Sure, let an agency (i.e. the U.S. government) take over a troubled industry where said agency helped cause many of the troubles.

    Government: If you think the problems are bad, wait till you see our solutions.

  • Report this Comment On February 23, 2009, at 3:07 PM, cwt3822 wrote:

    The government has never been able to run something for profit (fannie mae going from govt agency to a gse is proof). So how do we expect the fed to run a bank well or recognize a good profitability plan from detroit? Tell citi and Bof A to "fix yourself or fail" and tell the damn uaw to compromise or become unemployeed with no benefits of any kind from anyone. I bet you'll see some of that good ol' American grit, determination, creativity and cooperation come back quick. And make the banks do it now when they'd be left with nothing instead of later when it would be easier to take taxpayer money & run than fix things. One question also: Can anyone provide me just one address of a home not foreclosed on b/c of all that's been spent so far?

  • Report this Comment On February 27, 2009, at 2:13 PM, dwc9999 wrote:

    From what little I understand of the banking crisis, the reason the government is and has been bailing out the banks it to keep credit flowing so that the entire market does not collapse. There is another possible way to go:

    The government goes into the banking business to provide credit, without impacting viable banks, or undermining the free market place. It provides a safety net to keep credit flowing while allowing bad banks to fail. It does this by taking over one or several large failing banks to get the infrastructure (people, processes, information systems) to offer credit. It may even have to add a lot of people to this infrastructure (jobs stimulus). It then offers credit to any and all viable businesses at a percent or two above the nominal market rates. It stops bailing out bad banks, and instead uses the money to fund the credit. Viable banks will be able to make money by providing credit below the elevated rates which the government sets. As the market recovers, the government bank will get less and less business as more banks become viable and step in to provide credit. At some predetermined threshhold, the government bank transfers its credit lines to private banks and gets out of the business.

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