Saturday, October 11, 2008

Its Time to Nationalize the US Banks

Good Afternoon Everyone!

I hope everybody is having a great weekend. I must say its a sad day when I see socialism as the only way to save our financial system.

A nationalization of our banking system is the only way to get out of this mess IMO.. After watching Goldman Sachs and Morgan Stanley tumble on Friday. I came to the conclusion that if they aren't propped up with direct capital, they will follow the path taken by Lehman Brothers. If we allow this to happen, I believe the financial system is toast.

Drastic steps must be taken in order to prevent this from happening. I see nationalization as the only solution. Buying bad assets doesn't solve the problem because you will be left with zombie banks that still don't want to lend.

There was a great article in Bloomberg today on this.

"Oct. 11 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the biggest independent U.S. investment banks, may reap cash infusions as part of Treasury Secretary Henry Paulson's plan to buy stakes in financial institutions, investors said.

Paulson, in a statement yesterday, said the U.S. will purchase equity in a ``broad array'' of banks and other financial firms to restore market stability and ensure economic growth. The Treasury is working on a ``standardized program that is open to a broad array of financial institutions,'' he said.

Morgan Stanley Chief Executive Officer John Mack, 63, and Goldman Sachs CEO Lloyd Blankfein, 54, failed to regain investor confidence by converting their firms into bank holding companies last month and raising new capital from private investors. Morgan Stanley's stock dropped almost 60 percent this week, while Goldman's fell 29 percent."

Its obvious from the article that even the pigmen are beginning to understand that this is the only solution:

``Based on the fact that they're allegedly commercial banks now and are moving that way, I think they're likely to get protection,'' said Benjamin Wallace, an analyst at Grimes & Co. at Westborough, Massachusetts, which manages about $700 million. ``Whatever solution they come up with for the banking industry as a whole will apply to them, because they're no longer special.''

``The government can go a long way by buying a stake in Morgan Stanley,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC, which oversees $650 million, including Morgan Stanley shares and bonds. ``Paulson has to follow through on his promises; he and Bernanke went to Congress and said `we need this TARP facility to protect against ongoing systemic risk' and here we go, put your money where your mouth is.''

Egan-Jones Ratings Co. said Morgan Stanley probably needs to raise $60 billion in new equity to reassure customers and investors. The investment bank has about $900 billion of assets and an equity market value of $10 billion. Mark Lake, a Morgan Stanley spokesman, declined to comment.

``The analogy is a snowball rolling down a mountain; the mass needed to stop that negative momentum increases as that snowball picks up speed and size,'' Egan-Jones's Sean Egan said in a phone interview yesterday. ``Perception trumps reality. They need a massive injection to stop the slide.''

The government can't allow financial companies to continue collapsing, Paul Krugman, an economics professor at Princeton University, said in an Oct. 9 interview.

`Big Mistake'

``It's really hard to put humpty-dumpty back together again after those things fail,'' Krugman said. ``The failure to rescue Lehman it turns out was a really big mistake.''

My Take:

I don't see any other way out of this crisis. Unlike our counterparts in Europe, The New York Times reported today that the short term debt of the US banks is only 15% of GDP. This makes it doable if the government can talk the banks into being nationalized.

Some of the European countries have bank debt that totals 3.5 x total GDP. Mathmatically, this is much less doable for Europe's banks. IMO Europe's crisis is much worse than ours. What makes nationalization here even more critical is the fact that if the European banks fail, they most likely take our banks down as well. This makes it even more imperative for the US to take ownership in the banks. We need to make our banking system as liquid as possible to make it through this mess.

Now are their risks here? Of course! Inflation will rise dramaticallyas the government spends like a rock star. The government may realize they don't have the resources to do anything. Even worse, the USA may end up defaulting on its own debt in the process as we head into a severe US recession which will most assuredly pummel the banks with another round of severe losses.

On the positive side, if you regulate all the banks to a standardized 12-1 capital ratio, the $700 billion bailout turns into a heck of a lot more money if you directly inject it into the banks.

Banks could lend out 12 times the capital they received which would result in more than $8 trillion of additional lending capacity if the Treasury spent the bailout on capital injections. That's a lot of money folks. Does it solve all of our problems? No, but its a nice start. It would go a long way towards loosening up the credit market lockup.

Banks would be much more likely to lend if they have huge injections in capital along with the backing of the US government.

Now, getting the pigmen to agree to be nationalized will be a battle. The bankers will be extremely reluctant to accept terms that include watching their stock price go to zero and being forced to share profits with the US government.

However, if they care anything at all about this country, they will do the right thing and accept the terms. After all, they created this mess!

Bottom Line:

I don't see any other solution folks. I am also not sure if this will work, but its the only shot we have in my opinion. After seeing the huge losses in the auction of CDS Lehman swaps last week, its apparent to me that some of these banks are too big to fail.

I am ready to roll the dice and give it a shot. If it worked for Sweden, why can't it work for us?


Jeff said...

Oh this is just fantastic. Another $40 billion a month being thrown right out the window.

Didn't the bailout bill disaster tell them that buying assets isn't the answer to the problem?

Where did they get the authority to do this? This is $500 billion a year.

My guess is this is going to be used to mop up the US subprime sanwiches while the bailout bill is used to buy the same crap off of the foreigners:

"Oct. 11 (Bloomberg) -- Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program."

opportunistic said...

Jeff, will you check your dividend payment on dxd? My account is showing a payment of $3.82/share and I'm afraid if I ask they'll discover it was a mistake.

Jeff said...


I didn't have any dxd so I can't help you. I used TWM, SDS, and QID.

I checked the dividend and its 1.78%. Thats a nice divedend. I hope its right!

Avl Guy said...

Jeff, do you read Mish daily? What do you think of his Elliot Wave Chart beliefs and his chart Guestimate on the S&P 500 where Wave 4 Up and Wave 5 Down of Wave 3 will occur? He's not 100% sure but says Wave 5 down might takes us to 500 on the S & P, in months perhaps, rather than days.

opportunistic said...

Checked marketwatch and they show a 16.27% dividend at $3.82. That makes selling on Monday a bit easier to swallow.

What do you think of American express? Their yield is 3% and their business model is more sound than other cc co's, deriving more income from retailers than the others.

Also, what about SRS. That stock is like a pretty lady to me, I want to get back in and the drop Friday looks like an opportunity, but my emotions have gotten involved after missing out on last weeks gains and I'm not sure if I like it for the right reasons.

Initially I thought $140 was a good target and have to believe that is still the case. Is money moving to real estate? Could be a good hedge in an inflationary scenario.


Jeff said...


I read Mish all the time. He is great but I don't understand how you can make a bottom call in market like this.

Cramer tried to call a bottom at 10,500 and it blew up in his face.

I am a huge bear, but I refuse to call bottoms because it could be years until we hit one.

My practical self tells me that you cannot look at trading waves when the financial system is on the brink of collapse.

At this point, the trading book is thrown out the window. I am honestly more worried about us surviving this versus making money.

If i had to guess, We might see a bounce on the massive intervention and then sell off.

I must admit, this is a complete guess, and I won't trade the market right now until i see some confirmation on the stability of the system.

Trading ETF's doesn't mean much if the banks that are trading it go BK.

I am on the sidelines with small positions! I hope Mish is right.

Minton Mckarkquey said...

I'm disappointed with this post, given the 18 months of very solid economic analysis that you have. I think you should seriously rethink your piece here.

Jeff said...


Great ideas except for one in my book: Do not buy Amex! I actually think this is a nice short.

Amex recently started allowing people to make monthly payments on cetian accounts similiar to Visa and MC.

The problem here is they have no deposit accounts to cushion themselves like a bank does that issues a VISA/MC.

Stay away here IMO.

As for SRS, commercial real estate will blow up, but I have heard that this is not a good inverse for commercial real estate.

The reason why is SRS is shorting certian commercial real estate properties that should do well during a recession. These Co's own things like hospitals that won't get hurt in this downturn.

I am hesitant to trade going into Monday. If you think the market drops lower, buy some TWM(russell) and SDS(S&P500) in additon to your DOW shorts!

Congrats on the divedend! SDS had a nice one as well.


Jeff said...


I was sick to my stomach writing this post. I am disgusted by how we have so few options left.

I totally agree with your thoughts and beliefs. This totally sucks! I hate this idea as much as you do.

Give me some another option if you have one.

I don't think anyone wants to suffer through a depression. This is where we are heading without doing something drastic.

I am as frustrated as you are. This whole thing makes me sick!

ZMonet said...

I know we are well past this point, but I find it remarkable how dead on folks like Roubinni, et al. were about this financial crisis. I heard their warnings but since everything seemed reasonably ok for a time, I got lulled into a false sense of being more secure. Now things are unwinding at an incredible rate.

Jeff, I can appreciate your not wanting to make money off of this and your concern on whether the financial system and our way of life survive, but obviously making money off this is not going to be the cause of the downturn. I'm not concerned about making money at this point either though; I'm concerned about survival. When everyone feels like that -- more concern about capital preservation than capital growth -- then maybe we'll be closer to a bottom. At least in the past that would spell a bottom, but as broken as the system is now I'm not sure it won't continue down.

Is your take now that we go pretty quickly to inflation or do you think we'll go through a term of deflation first? How long do you think deflation would last? In an inflationary state, I'm concerned that renting might not be the way to go. Since you're renting, you must have a take on that.

Jeff said...


I still don't think we have had a capitulation type sell off that marks a bottom.

The inflation/deflation question is a good one.

I think we will see a long period of massive deflation followed by inflation.

I understand your concern about buying a house. Its still way too early IMO. Housing prices are always based primarily off of incomes.

Incomes are not rising anytime soon as we head into a massive recession. Massive unemployment will put even more downward pressure on housing prices.

Incomes rose dramatically in the 1970's which allowed inflation to run wild. The reason incomes rose is because of the unions in manufacturing. Many workers in the steel mills back then were making more money than most people are today.

When it comes to buying a house, always look at where incomes are heading especially when the lending standards are tightening.

You can't raise housing prices when people are making less and less money.

Housing has a ways to go on the downside. Inflation is a concern, but its a ways away unless our government decides to print(which is unlikely).

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