There is a lot of talk about Nationalizing the banking sector and in general there is a lot of resentment against it.
To me, most of this is because of the connotation of the – N word, rather than the actions that are expected out of this process.
What Would Nationalization Mean?
There have been 14 Nationalizations already this year, with the FDIC taking over 14 insolvent banks and transferring their assets to stronger banks. The losses on these were shared between the FDIC and the stronger bank, and the depositors were protected by FDIC.
This is nothing new and has been happening for years now.
Typically FDIC does this over a weekend and the depositors of the old bank switch over to a new bank from a Monday. So the government doesn’t end up running a bank till eternity, but is only a temporary owner till it finds a new home for the assets of the bank.
However, the key thing this time is the size of the bigger banks. The banks that the FDIC normally deal with doesn’t exceed a few billion dollars, and rarely has operations outside United States. They usually don’t have any complex financial derivatives, currency assets, trading desks and such.
So, the Nationalization question should really be an – operational one and not a ideological one.
Even if everyone agreed that Bank Nationalization is the only alternate, could the Government do that with existing resources at hand?
But there is nothing that stops them from going the Sweden way and hiring professionals who deal with these derivatives, currencies etc. and augment FDIC to deal with the current situation.
Too Big to Save?
It is being harped upon repeatedly that the big banks are too big to fail, but the real question is – are they too big to save?
There is probably no single entity that can take over a 2 trillion dollar bank. The only way to deal with a – T – is to break it to a – B. This happened recently when Citi sold its retail brokerage business – Smith Barney for 2.7 billion dollars. So, it is possible, albeit, by breaking it up into smaller pieces.
There are plenty of other alternatives around, like the – Bad Bank idea based on Securum. Then there are other wackier ideas like the government pledges to buy up to twice the number of bank shares currently available, at twice the recent average prices, in five years.
Right now, the Nationalization one is doing the rounds as the most popular one and I think with a little rebranding like – Interim Nationalization orÂ Nationalization till Reprivatization – this may just make it through.