Mike the Mad Biologist

Too Big to Fail Is Now Too Big to Manage?

It looks like nationalization of failing banks is off the table. What bothers me are two of the reasons given by Treasury Secretary Geithner. Reason #1:

Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic adviser Lawrence Summers think governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.

Given that the goal is to wipe out the shareholders and sell off Big Shitpile for whatever you might get for it–and that we did this before with the savings and loan crisis, management isn’t the top issue here. I don’t want government officials managing banks any longer than they have too, although since so many of them come from the financial sector, you might think they wouldn’t be so bad at it (or maybe you would…). But the two main and intertwined problems are:

  1. Banks lost money that is never coming back making a lot of stupid loans.
  2. Banks are holding pat in the hopes that a Magick Pony will appear and magically raise the value of their Big Shitpile holdings.

Somebody has to lose a lot of money here, and the banks will do everything in their power to make sure it’s not they who will do so. That’s why nationalization of the ‘walking dead’–those banks whose assets are less than their liabilities–is vital. Onto reason #2:

Another danger is that by taking over a substantial portion of a bank’s stock and wiping out the investment of the firm’s other shareholders, the government could also precipitate a sell-off across the banking system as investors flee, fearing they could be next.

Again, there’s this insane belief that this is a psychological issue, not a reality-based one. Banks lost a lot of money, some of them too much money. More important, does anyone really believe the statements put out by the banks that aren’t the walking dead? They still might not be bust, but there’s so little transparency, only a fool would trust their statements about assets and liabilities. In that situation, their share values should drop, perhaps even precipitously–that’s why transparency matters (and the banks are so stupid for opposing it). Would you put your 401(k) money in bank stocks? Didn’t think so.

Believe or not, I’ve never had a Top Sekrit Plan to nationalize banks, but this situation calls for it. And somebody (or multiple somebodys) is going to hurt. The question is who.

Comments

  1. #1 abb3w
    January 29, 2009

    Banks lost a lot of money

    It might help if one considers that there are three different economic senses of “money”.
    1) Repository of Value
    2) Medium of Exchange
    3) Unit of Account

    What seems to have happened was that banks provided Medium of Exchange to people, but the underlying assets (the houses and the ability/willingness of owners to repay loans) were not of equal Units of Account. As a result, these banks are being eroded as a useful Repository of Value, and thus so is the social institution of banking.

    I’m not an economist, however.

  2. #2 eddie
    January 29, 2009

    Breaking rocks in the hot sun,
    I ran the bank and the taxpayer won.

  3. #3 nusret
    August 22, 2009

    very thanks for article