The case for nationalizing Citigroup and Bank of America, and getting Robert Reich a fact checker
A couple of commenters have pointed me to Robert Reich's list of "Criteria for TARP II." Nos. 3-6 seem the most important:
3. Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.
4. Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.
5. Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulant assertions, and on balance sheets that hid the true extent of these banks' risks and liabilities.
6. Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable lenders, they should return the money.
Okay, all somewhat hard to execute, but I get where Reich is headed with them, and generally share at least his sentiments on 3 through 5. But then he writes something that makes me wonder if he's been paying any attention at all over the past few months:
You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning. At least then we'd find out what was on their balance sheets, because they'd have no choice but to sell off some of their junk, even at fire-sale prices (believe me, if the price is low enough, there are investors around the world who will buy them); they'd have to negotiate with their creditors and pay some of them off; many of their CEOs would be fired and directors replaced, which they should have been already; and most of their shareholders would be wiped out, which is unfortunate for them but, hey, they took the risk. In other words, these provisions would force the banks to clean up their balance sheets.
Because of the danger of bank runs, banks don't go into Chapter 11 bankruptcy. They get taken over and wound down or sold by the FDIC. Lehman Brothers went into Chapter 11 because there is no FDIC for investment banks, and the messy result is widely agreed to have escalated the financial crisis to a new and global-economy-threatening level. So Reich's exit scenario is impossible, and taxpayers are on the hook here no matter what.
The issue now is not really whether the government ought to impose new conditions that will force more banks into deeper trouble, it's whether it should bite the bullet and simply nationalize the banks that pose the greatest risk. The government-appointed receiver or conservator or whatever he or she would be called could conceivably then impose the conditions Reich outlines, although I would think the much higher priority ought to be forcing the fire sale of troubled assets that Reich thinks would happen in his imaginary bankruptcy.
Felix Salmon makes the non-imaginary case today for nationalizing Citigroup and Bank of America, Brad DeLong has been on the topic for a while, and I highly recommend Steve Randy Waldman's more general September post, Real capitalists nationalize. As for Reich, his heart seems to be in the right place, and like a lot of people I've moved closer to his worldview over the past year or two. But his troubled relationship with facts—as documented by Jonathan Rauch in his classic takedown of Reich's memoir of his time as Labor Secretary—continues to amaze.
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1
OH "B of A" FLOAT AWAY
(Oh Shenandoah)
WilliamBanzai7Oh B of A,
Your Board's retarded,
Float away as your shareholders quiver,
Oh B of A,
Your CEO has screwed you,
Away, your market caps bound away
'Cross the wide Merrill Level III divide.Oh B of A,
Your market cred's been slaughtered,
Squandered away as your Board twittered,
They'll take her 'cross
The rollin' bailout river,
Away, your bound away
'Crossing Paulsen's rolling TARP highwater line.'Tis been just one Q,
Since Merrill bent you over,
And on that day
You thought you could win by being bigger,
But your shareholder returns,
Began their downward spiral,
Sucked away, sucked away
In the Bear market's fury.Oh B of A,
Sorry but we have to leave you.
Away you inept Magilla,
Oh B oa A,
We've all been deceived by you.
Now we're bound away
To escape another sorry mismanaged Mega Bank story. -
2
Justin,
-
You're opening up a hornets nest here, my friend. Let me tell you before I get on my plane to DC a few words that could have been written by this guy named William.....
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A bank nationalization by any other name....TARP I, TARP II or TARP III, how sweet it is for banks socialize their risk and privitize their profits.
-
Let me pose this question to you, Barbara, pluk, curmudgeon, etc.
Is capitalism dead for our largest banking and financial entities at this moment in time?
-
Like I said, you have opened up a hornet's nest here. This strikes at the heart of the matter. How much risk is too much risk? When does risk become so great that the government must step in to protect the financial system at the risk of killing (or at least maiming) capitalism? All rhetorical questions that I suppose will be answered in time.
-
One final ultimate question though:
-
Where are the Republican free market supporters and why haven't they created a sort of FDIC for large non-bank financial entities? -
3
@Bryan: I'm flattered that you think I might have something worthwhile to say. I'm sure that bankers still think of themselves as capitalists. I would venture to guess that they view the government as just another player (albeit a major one) in their capitalist universe. They have to negotiate with this player to try to build the most profitable/largest/most powerful bank they can.
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4
Let me pose this question to you, Barbara, pluk, curmudgeon, etc.
Is capitalism dead for our largest banking and financial entities at this moment in time
_
lets hope so -- at least in terms of what we currently define as "capitalism".
_
the problem can be found in the words "too big to fail". Unlike the manufacturing sector, where enormous amounts of capital are require to produce "big" items (like cars, etc), there is really no need for massive banking/financial companies that are "too big to fail. And the vertical integration of these companies (i.e. what has happened thanks to the repeal of Glass-Steagal (sic?)), was always a horrible idea.
_
BTW, I suspect that Reich recognizes the "hornets nest" that gets poked the minute you use "third rail" words like "nationalize", which may explain why he used "chapter 11" Its still a stupid mistake, but Reich probably didn't want to use the word "nationalize" and chose "bankruptcy" instead.
_
As to the Justin's idea that we should not have let Lehmann Brothers fail -- hogwash. There was probably no way to "unwind" the consequences of the irresponsibility of the financial sector without some kind of crash like we've seen --- Lehmann brothers was just the straw that broke the camels back, but the camel was tottering anyway, and any straw would have had the same consequences. -
5
@plukasiak: I have to agree with you on your last point. Had it not been Lehman, it would have been another event, and quite possibly one that was much worse.
-
To follow up on your other point, you also have to ask the question if "too big to fail" means "too big," and perhaps we should consider size as a measure of antitrust. Still, then we place them at a disadvantage with national champions in other countries.
-
And it's not clear to me that manufacturing companies require the level of vertical integration that has existed in, say, the auto industry. I know that with rare exceptions, vertical integration in high tech has typically been a prescription for failure. -
6
Still, then we place them at a disadvantage with national champions in other countries.
_
I don't see how size makes a difference in terms of competition. I'm not saying that all banks have to be mom-and-pop operations--rather that banks can be big enough to handle any transactions without being "too big to fail".
_
as to the question of "vertical integration" of manufactuing, I agree with you. What I'm talking about is things like defense industries -- they pretty much have to be massive to build a battleship or the latest military aircraft. The steel industry would be another example. (Upon thinking about it, car companies should not be allowed to get "too big to fail" GM should not be allowed to "fail", but it should be broken up -- there are too many car "brands" but not enough car companies, (companies should be allowed to collaborate in some cases -- e.g. coordination of assembly lines. -
7
I think John Stewart said it best when it comes to GM, at least if they're not making any money, at least they're making cars.
With Citi, if they go out of business, there's no product being added to society.
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