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When reading through two articles from The Washington Post and The New York Times something was missed in both articles that I think deserve some serious discussion.  While both articles focused on regulationg bonuses, I think they both glossed over what could possibly be the biggest story concerning the administration's thoughts and possible future actions.

I think that the administration has a plan B. And that plan B might be temporary nationalization of not only banks, but corporations that are deemed too big to fail.

From The New York Times

A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large troubled companies not now regulated by Washington, like insurance companies and hedge funds.

That proposal would, for instance, make it easier for the government to cancel bonus contracts like those given to executives at the American International Group, which have stoked a political furor. Under the proposal, the Treasury secretary would have the authority to seize and wind down a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board.

Now I want you guys to really think about this.  The government and the administration want broad powers to take over insurance companies and hedge funds to wind them down.  

Usually the word winding down means that they want to break it a part and then sell the pieces.  If there is any other meaning, please tell me in the comments.

The New York Times then goes into why the adminstration wants these powers:

The government now has the power to take over only the banking unit that controls federally insured deposits of large troubled institutions, not the parent company — a limit that could pose problems if large financial conglomerates like Citigroup or Bank of America continued to spiral downward.

That's mind blowing when you really think about it.  So if the government wanted to take over Citigroup, it could only take over its banking unit.  They have no permission to touch anything else in the company but that.  Citigroup has so many different units that do so many different things that don't fall under just banking.  Which would explain why the admnistration has not made moves to nationalize it yet because even if they did, they could only take charge of the banking portion of that business, which in Citigroup's case, would be but a small part of the international company.

Which leads me to The Washington Post article about the toxic assets plan.

The Treasury also intends to ask Congress to pass legislation that would provide the government with the authority to take over large nonbank financial firms on the brink of collapse. Government officials said that if they had such powers last fall, they could have seized AIG and wound down its troubled businesses at far less cost to taxpayers.

So the government would have taken over AIG completely if it wasn't for the fact that it doesn't legally have the power to do that.  

Which leads to the question of why the government and the administration want the power now? Bernanke lays out the case:

Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.

Is it just me or does that sound like nationalization?

Now I know what some of you are thinking "Niwind, you are reading too much into this! The administration has made it clear it will never ever do such a thing as temporary recievership to the big banks! It will never happen!"

The thing is most banks that get nationalized don't know they are nationalized until the FDIC knocks at their door after closing to tell them they are.  The goverment then seizes all assets, puts a nice little sticker on the door to tell custormers what is going on, and then proceed to run the bank.  The reason they do that is to prevent runs on the banks where concerned depositors might try to take their money out, thereby making it much harder to keep the bank alive.  

You will not hear a peep from this administration if they do this.  It will happen on a Friday night when everyone is asleep to avoid a  run on these banks.  The reason that Paul Krugman can say this and Tim Geithner cannot is that Geithner is actually Treasury Secretary and him saying it can actually create a panic and run on banks.  Krugman can just get interesting dicussion.

"But Niwind, I don't think that is possible.  Why would they go with the toxic asset plan if they are considering temporary nationalization?"

Because temporary nationalization is plan B if plan A doesn't work the way they want it to.  Right now the government can control those companies banks, but not much else.  You don't ask congress for powers you are never going to use.  You don't make a case for it if you don't plan on implimenting it in some way.  

I think that if Plan A doesn't work out for Obama he may use the power of Plan B to bring the situation under control.  But first the administration must have congress' vote on it in order to have that power.  The difference between Fannie Mae and Citigroup is that Fannie Mae had the Federal Housing Finance Agency to step in to place it into conservatorship where as Citigroup is more of a hybrid of different businesses and not just a bank.  Same goes for Bank of America.

It is a very interesting examination of what might be the thoughts of the adminstration.  I'm surprised that newspapers didn't focus on that aspect of the plan rather than bonuses.

Originally posted to Niwind on Sun Mar 22, 2009 at 10:32 AM PDT.

Poll

Is temporary nationalization on the table?

50%17 votes
20%7 votes
29%10 votes

| 34 votes | Vote | Results

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Comment Preferences

  •  Hmm.. (0+ / 0-)

    Very interesting. What you say makes a lot of sense.

  •  I don't think is was ever on the table. (1+ / 0-)
    Recommended by:
    andrewj54

    I am more concerned with how I go about taking my tax dollars off the frigging table.

    St. Ronnie was an asshole.

    by manwithnoname on Sun Mar 22, 2009 at 10:41:14 AM PDT

  •  And excellent and well writtin analysis, Niwind. (1+ / 0-)
    Recommended by:
    sabredance

    We should all be continuously striving for the best plans possible and to improve them.

    I like your Plan A and Plan B thinking.   So far, I like plan B much better than Plan A which a lot of really credible folks do not think will work.

    Why don't we continue to develop a Stiglitz, Krugman, Waren Buffet, Jerome Paris , Bebchuck etc Plan B as fast as we possibly can and do side by side scenario planning tests to see which are more robust and have the best chance of working.

    This is reality so we are do not have a reset button.  

    Instead of insular and secretive back room plans, wouldn't it be better to use all the collective intelligence and best team planning technologies available to get the best thinking and most actionable strategies possible?

    Great work thanks for this encouraging progress.

    The means is the ends in the process of becoming. - Mahatma Gandhi

    by HoundDog on Sun Mar 22, 2009 at 10:44:09 AM PDT

    •  Warren Buffet was the guy who came up with (3+ / 0-)
      Recommended by:
      jj32, HoundDog, allep10

      Plan A.

      Last fall, billionaire investor Warren E. Buffet, Goldman Sachs chief executive Lloyd Blankfein and William H. Gross, the managing director of PIMCO, the largest bond fund in the world, approached Treasury officials about an idea to create investment funds, using public and private money, to buy toxic assets from banks, according to former senior Treasury officials. Buffett is a director of The Washington Post Co.

      Plan A

      •  He was agreeing with Paul Krugman a few weeks (0+ / 0-)

        back about the general lack of understanding of the full magnitude of this crisis.

        But, let's put all the plans and their various sub-option on the table for analysis.

        In my exerience, it is often possible to craft hybreds that are vastly better than all the starting points.

        Thanks again.

        The means is the ends in the process of becoming. - Mahatma Gandhi

        by HoundDog on Sun Mar 22, 2009 at 10:51:21 AM PDT

        [ Parent ]

      •  Problem is...hard to value "assets" are just... (0+ / 0-)

        that....hard to value.  In this proposal to create a bad bank, who is going to do the valuing?  And who is going to absorb the losses?  Hint: Banks valuing, and taxpayers absorbing.  Heads I win....tails you lose...

        This is doomed to fail as well.  It will be trillions of dollars of taxpayer losses by the time this "bad bank" idea is dropped.  I only hope the dollar survives this episode.  Fighting over millions of dollars of bonuses over the likes of AIG traders will mean nothing, if a few years down the road, it's enough to buy a loaf of bread (think Weimar Republic of Germany, saddled with massive War Reparations; they simply printed money)....

        •  Evidently the toxic assets aren't "hard to value" (0+ / 0-)

          after all.

          When we buy them through the US Treasury the banks and counter parties know exactly what the toxic assets are worth.

          When we discuss the worth however then "no body" knows the worth, it's all a secret.

          Hi! My name is Chip Reid and I'm a perfect asshole.

          by 0hio on Sun Mar 22, 2009 at 12:51:42 PM PDT

          [ Parent ]

  •  Nationalization is bad (0+ / 0-)

    According to free market principles every one of these institutions should simply go out of business and then all the people can go hungry.

    What's the problem?

    I assume the guys who pocketed large sums of money have built sturdy fences around their estates to keep the riff raff out.

    In God we trust. All others must pay cash.

    by yet another liberal on Sun Mar 22, 2009 at 10:45:50 AM PDT

  •  I dont know (0+ / 0-)

    Not saying you're wrong, but I just read it to mean exactly what they said there. Bernanke and others have expressed frustration with having to bailout AIG, and they feel it would easier if the government had the option of taking over the company. I dont necessarily see the connection to nationalizing the banks, but maybe you are right. On a related note, I'd definitely like to see a more detailed analysis of nationalization, I havent really seen the costs/risks of even temporary nationalization discussed.  

    •  That is a good point. But at the same time (2+ / 0-)
      Recommended by:
      liberte, jj32

      those banks aren't just banks.  They are hybrid monsters that have their feet in every pie.

      I've always thought that all of this is going to nationalization one way or another.  If this new plan doesn't work, it is the next logical last step.

  •  Important legal reality noted here! Rec'd! n/t (0+ / 0-)

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Sun Mar 22, 2009 at 10:48:23 AM PDT

  •  Um... (1+ / 0-)
    Recommended by:
    ctsteve

    where will they get the MONEY for nationalization after they have blown TRILLIONS on buying toxic assets?

    Because nationalization will be very costly?

    And think of all the credibility they will have at that point:  "Well, we THOUGHT that throwing trillions at toxic assets would, um, do the trick, but, um, now we KNOW that we really, really need to NATIONALIZE.  THAT'S the ticket!"

    Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

    by andrewj54 on Sun Mar 22, 2009 at 10:52:27 AM PDT

  •  This I think a very intellegent question to ask. (3+ / 0-)
    Recommended by:
    Inland, andrewj54, Niwind

    One would have to wonder why they would be asking for such powers if they had no thought of using them.

    As I understand it, if they took CitiBank into receivership under the FDIC that would mean certain bankruptcy  for CitiGroup the holding company. It would be wound down under the supervision of the bankruptcy court which has the power to appoint receivers. The same sort of scenario applies to AGI. It's regulated insurance subsidiaries would be liquidated under state insurance regulation and the rest would wind up in bankruptcy court.

    I can understand why insolvent commercial banks are handled differently from other types of businesses. There is the danger of a run on the bank which would make the ultimate resolution much more difficult. It is plausible that given the government's willingness to pump huge amounts of money into these non-banking operations they are persuaded to view them as being at the same kind risk of a run as banks and needing similar specialized procedures.

    The really big problem is the lack of transparency about what they are doing. The FDIC approach of doing bank closures on Friday night without warning or discussion is probably appropriate. I don't think that the same approach should apply to decisions about long range government financial policy.

    •  I think that temporary receivership IS still on (3+ / 0-)
      Recommended by:
      liberte, Inland, sabredance

      the table.  That is why they are asking the Congress for the power to take over MASSIVE entities that have international implications such as AIG, Citigroup, Bank of America, etc.

      Perhaps they are NOT announcing that as an option for fear the stop market will just flip out and crash.  However, if they do take over MASSIVE banks and companies like AIG over by temporary receivership, it will be done on a Friday night after the stock market closed and in one big swoop.  It won't be piecemeal for that will surely scare the markets.

      "Because we won...we have to win." Obama - 6/6/08. WELL WE DID IT!!! 11/4/08

      by Drdemocrat on Sun Mar 22, 2009 at 11:07:39 AM PDT

      [ Parent ]

      •  I can see the risk of market panic. (0+ / 0-)

        But at the same the idea of giving any government vast new powers without asking questions about how they are going to be used makes me nervous. To my mind it is not all that different from passing a resolution allowing Bush to invade Iraq. That didn't work out so well.

  •  I agree (1+ / 0-)
    Recommended by:
    sabredance

    I really think the papers have burried the lead on this story.  They've given in to the "outrage" of the bonuses, but the other aspects of the article are far more important.  You know, I've found that a lot of people really don't understand what is going on.  They say "nationalize citigroup!"  Well, we could only take over the actual bank, and they aren't the problem.  As I've said before, my only concern is giving these powers to the Fed.  I would prefer the FDIC.  

    •  What I have never understood (0+ / 0-)

      is exactly what it is we are bailing out by pumping money into CitiBank/Group. If it is the commercial bank that we need to protect, then we could take that over and let the rest go down the tubes. If we need to protect the other stuff, then somebody ought to be able to explain that clearly.

      •  I think the big fear with this is (1+ / 0-)
        Recommended by:
        liberte

        what happened with Lehman Brothers when they entered into bankruptcy.  They wound down so quickly because it was such a huge company that it left then entire international market a huge cratering mess that made bank and other financial entities fear to trade.  

        AIG is much much bigger than Lehman and I could see why the government would want to slowly wind it down that let if file for bankruptcy.

        •  That's one plausible possibility (0+ / 0-)

          but without a clear explanation of that it is not completely implausible for the public to conclude that they are trying to save the fortunes of the fat cats. Again it's an issue of the opportunity cost of the huge amounts of money involved.

  •  A sufficiently large bailout is nationalization (0+ / 0-)

    by other means.

    Ambition is when you follow your dreams. Insanity is when they follow you.

    by Batfish on Sun Mar 22, 2009 at 11:10:28 AM PDT

    •  Not true, sadly: (2+ / 0-)
      Recommended by:
      Richard Lyon, Niwind

      A bailout is just money.  Nationalization would have to be the management control the gov gets in exchange.

      Congress! Pass a 100% tax on Bush's pension, because tax dollars shouldn't reward incompetence that blew up the country.

      by Inland on Sun Mar 22, 2009 at 11:17:10 AM PDT

      [ Parent ]

      •  And an ability to break a bank (1+ / 0-)
        Recommended by:
        Richard Lyon

        and or company into many pieces and sell them off.

      •  Disagree. (0+ / 0-)

        The bailout of AIG was more than just money. We own 80% of the company, but we have little hand in its management. Looks like nationalization to me. What else is 80% ownership? You have to ask yourself one question. Given that AIG has now clawed $170 billion out our collective hide, now arguably the most expensive acquisition in history, why didn't the government just buy AIG Financial outright and let AIG Insurance go on its merry way? The answer is kind of important. The government cannot afford to take on the default liabilities acquired by AIG. If the US government cannot afford these liabilities, how big must they really be? So nationalization at this stage may not even be possible. The debt exposure may be just too great; I am talking trillions here.

        Put yourself in the shoes of a bond issuers and holders here. As long as the party and counter-party to the bond know that AIG is in trouble, they will try hard not to default because they are not sure AIG has the dough to back up the default. If the government is the guarantor, then really what's holding them back. So nationalization of CDS holders could actually massively increase the default rate and end up costing the taxpayer trillions instead of hundreds of billions. That's just a guess on my part. I say this only to suggest that the law of unintended consequences may come into play here.

        Ambition is when you follow your dreams. Insanity is when they follow you.

        by Batfish on Sun Mar 22, 2009 at 12:37:21 PM PDT

        [ Parent ]

        •  It may not be the cost of CDS debts (0+ / 0-)

          that held up the AIG nationalization.   Other reasons that spring to mind:

          a) It was politically impossible to go the nationalization route in the fall.
          b) We didn't have the mechanisms or the legal authority to nationalize AIG or to break it up.
          c) 'Ownership' just doesn't seem to come with the authority to dictate anything...
          d) The Treasury needed a back door to pay off AIGs creditors, one that wouldn't be obvious to the public.
          e) The gov't didn't know how bad AIGs books were.

          And one possible flaw in your thinking: If the US gov't nationalizes, they also effectively declare AIG bankrupt and wipe all prior contracts out.  Under such circumstances the counterparties cannot demand immediate payback of any CDS.  So if the CDS holders want to get paid, they have to accept a slow payment schedule and play nice...

  •  Receivership vs nationalization (0+ / 0-)

    I think we've got to make a distinction.  But it seems that either are on the table: any country that wants the government to control bonuses and nix employment contracts doesn't want the hands off, don't let teh governmetn manage philosophy that caused us to give money almost string free.

    Congress! Pass a 100% tax on Bush's pension, because tax dollars shouldn't reward incompetence that blew up the country.

    by Inland on Sun Mar 22, 2009 at 11:16:18 AM PDT

  •  No. (0+ / 0-)

    Looting is all that is left.

  •  Excellent analysis, but... (1+ / 0-)
    Recommended by:
    sabredance

    if the administration asked for these powers, there would be, I imagine, a huge fight in congress. What would be the reaction of the markets? If they tipped their hand with a bill, would there be a run on these very same companies? Could they "sneak it in" to a conference committee, or with some innocuous seeming language in the budget?

  •  That is exactly what needs to be done. (1+ / 0-)
    Recommended by:
    sabredance

    Bust 'em up and brake them down.  If Geithner gets on board with this he will look more like Joseph Kennedy  rather than Rumsfield.

  •  Thank you for this post (0+ / 0-)

    It's far more valuable than "the Geithner is a nitwit vs. Krugman is a shrill kibbitz" posts that have been clogging the rec list.

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