Arguments against nationalization, from one who’s been through the process before.
William Isaac Stands Up for Regulators, Against Nationalization
Courtesy of StockJockey at 1440 Wall Street
While I personally favor wiping out the common shareholders and cleaning up a few problem institutions and then flipping them quickly in a "pre-privatization", not everyone is on board with that. Indeed some influential people who have been there, done that, are weighing in on the topic du jour.
Chew on this:
People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization — government seizing control of ownership and operations of a company — is not a viable option.
Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country’s seventh largest bank.
The FDIC purchased Continental’s problem loans at a big discount and hired the bank to manage and collect the loans under an incentive arrangement. We received 80% ownership of the company, which increased to 100% based on the losses suffered by the FDIC on the bad loans.
The takeover occurred in 1984, the FDIC completed the sale of its ownership stake seven years later, and Continental was purchased by Bank of America in 1994. The old shareholders ultimately received nothing, all creditors and preferred shareholders came out whole, and the FDIC suffered what we considered a reasonable loss: $1.6 billion. WSJ
Isaac’s experience should not be discounted -the story of Penn Square Bank in Oklahoma, which ultimately brought down Continental Illinois and nicked Chase pretty hard, is an interesting one. And an episode I hoped we would not have to repeat – it was big news at the time.
Perhaps a bit boring by today’s standards, but riveting enough reading when for those of you who are killing time waiting for the job market to turn around.
Read Bill’s Op-Ed in the Journal, and the book detailing it all if you can. It will certainly seem quaint compared to what we are up against now.
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Bank Nationalization Isn’t the Answer
WSJ
Belly Up: The Collapse of the Penn Square Bank
Amazon.com
*****
Here’s a few more important excerpts from the WSJ article, Bank Nationalization Isn’t the Answer, Trust me. I’ve done this before, by William M. Isaac.
So, you might wonder, what’s so bad about nationalization?..
Let’s begin with the fact that today our 10 largest banking companies hold some two-thirds of the nation’s banking assets,…
First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern…
What’s more, we won’t be able to stop at nationalizing one or two banks. If we start down that path, the short sellers and other speculators that the Securities and Exchange Commission still refuses to re-regulate will target for destruction one after another of our largest banks…
Second, for nationalization to work there needs to be a reasonable exit strategy…
Third, who will run these companies when we dismiss the existing senior managers and board members?…
So-called experts frequently cite the success of the Swedish experience with bank nationalization in the last decade. Nothing could be less relevant….
Mr. Isaac, chairman of the FDIC from 1981-1985, is chairman of the Washington financial services consulting firm The Secura Group, an LECG company.
