To nationalise or not to nationalise? That’s the multi-billion dollar dilemma for the US Fed
But to cure the terminal disease that ails Citibank and BoA, a few bitter pills need to be swallowed, says Deepak R. Patra
Does not matter whether it’s news, rumour, or just a rumour of a rumour. The moment someone even whispers the word ‘nationalisation’, millions of US investors get the jitters. They are the same guys who were laughing all the way to their banks when Citibank and Bank of America were still the gods of global financial sweepstakes. And just now, with speculation rife that the government might be forced to take a cowboy approach to seize and rope in the banking sector, they are more than nervous. It needs no rocket science to know why. Share prices of giant US banks have shrugged off about 90% of their market value over the past 12 months, and if the government opts to nationalise them at this point of time, the ‘N’ bomb will not only wipe out the residual value the shareholders are left with, but also obliterate the slightest chance they have to get their money back in case the banks somehow manage to recover in future. Sad, and as the famous American humorist Mark Twain said, “There are many scapegoats for our sins…” But it’s time to look out for the larger good.
Thinking about nationalisation of collosal US-based banks like Citigroup, Bank of America, Wells Fargo, et al a few months ago would have been a laughable idea. But not any more! If you are an advocate of nationalisation for these banks, you have a good chance to be treated as a rock star among economists. Don’t believe it? Well, ask Doctor Doom then. Ah sorry, Professor Nouriel Roubini (the real name), who specialises in predicting gloom and is in real high demand these days! He is getting support from unthinkable fronts; first Lindsey Graham, the Republican senator, and then Alan Greenspan, the erstwhile Fed boss. Greenspan was even quoted saying to a media house, “It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring.” But unfortunately the man who matters, Fed boss in charge Ben Bernanke, does not seem to be very fond of the idea. He just squashed the option in the Senate Banking Committee meeting saying, “We don’t need majority ownership to work with the banks. We have very strong supervisory oversight. We can work with them now to get them to do whatever is necessary to restructure, to take whatever steps are needed to become profitable again, to get rid of bad assets. We don’t have to take them over to do that.” Interesting, isn’t it? If he thinks his ‘strong supervisory oversight’ can do the magic, what was it doing till now? Warming the benches, till Bernanke included this ‘oversight’ in the playing 11 perhaps?!
Moreover, while Bernanke is planning to ‘work with them’, he is forgetting that these are the people whom the government has given stimulus packages recently, only to be asked for more. And the funniest of all is that these mammoth banks now are not even worth the amount given to them under the bailout schemes. The case of Bank of America is a real eye opener in this case. The US government has already infused $158 billion ($40 billion in cash and $118 billion in support of the bank’s debts) into it. And guess what its value is today? Well, don’t try hard because it’s even lesser than your wildest of imaginations, a pitiable $25.5 billion (total market value calculated as per February 25th closing price), less than one sixth of the package awarded to it within the last six months!!!
What Bernanke urgently needs to do is to shed his arrogance and take a lesson from his British counterpart. The UK government nationalised Northern Rock Bank last year itself, passing a legislation that offered the shareholders next to nothing in compensation. And this despite the fact that the bank had substantial book value. Professor Tim Congdon, former economic adviser to the Conservatives, told 4Ps B&M, “The justification was that the bank had difficulty in financing its assets because of the breakdown of the international wholesale funding market, and so was dependent on loans from the state to continue in business.” And see the result of that ruthless action! People now are hopeful that Rock can play a major role in UK’s duel with the financial turmoil.
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2009
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
The Most Revolutionary Concept In Education PLANMAN CHE CENTRE FOR HIGHER EDUCATION, Supported by IIPM India’s Leading B-School
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IIPM INTERNATIONAL - NEW DELHI, GURGAON & NOIDA
IIPM - Admission Procedure
IIPM, GURGAON
IIPM : EXECUTIVE EDUCATION
Does not matter whether it’s news, rumour, or just a rumour of a rumour. The moment someone even whispers the word ‘nationalisation’, millions of US investors get the jitters. They are the same guys who were laughing all the way to their banks when Citibank and Bank of America were still the gods of global financial sweepstakes. And just now, with speculation rife that the government might be forced to take a cowboy approach to seize and rope in the banking sector, they are more than nervous. It needs no rocket science to know why. Share prices of giant US banks have shrugged off about 90% of their market value over the past 12 months, and if the government opts to nationalise them at this point of time, the ‘N’ bomb will not only wipe out the residual value the shareholders are left with, but also obliterate the slightest chance they have to get their money back in case the banks somehow manage to recover in future. Sad, and as the famous American humorist Mark Twain said, “There are many scapegoats for our sins…” But it’s time to look out for the larger good.
Thinking about nationalisation of collosal US-based banks like Citigroup, Bank of America, Wells Fargo, et al a few months ago would have been a laughable idea. But not any more! If you are an advocate of nationalisation for these banks, you have a good chance to be treated as a rock star among economists. Don’t believe it? Well, ask Doctor Doom then. Ah sorry, Professor Nouriel Roubini (the real name), who specialises in predicting gloom and is in real high demand these days! He is getting support from unthinkable fronts; first Lindsey Graham, the Republican senator, and then Alan Greenspan, the erstwhile Fed boss. Greenspan was even quoted saying to a media house, “It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring.” But unfortunately the man who matters, Fed boss in charge Ben Bernanke, does not seem to be very fond of the idea. He just squashed the option in the Senate Banking Committee meeting saying, “We don’t need majority ownership to work with the banks. We have very strong supervisory oversight. We can work with them now to get them to do whatever is necessary to restructure, to take whatever steps are needed to become profitable again, to get rid of bad assets. We don’t have to take them over to do that.” Interesting, isn’t it? If he thinks his ‘strong supervisory oversight’ can do the magic, what was it doing till now? Warming the benches, till Bernanke included this ‘oversight’ in the playing 11 perhaps?!
Moreover, while Bernanke is planning to ‘work with them’, he is forgetting that these are the people whom the government has given stimulus packages recently, only to be asked for more. And the funniest of all is that these mammoth banks now are not even worth the amount given to them under the bailout schemes. The case of Bank of America is a real eye opener in this case. The US government has already infused $158 billion ($40 billion in cash and $118 billion in support of the bank’s debts) into it. And guess what its value is today? Well, don’t try hard because it’s even lesser than your wildest of imaginations, a pitiable $25.5 billion (total market value calculated as per February 25th closing price), less than one sixth of the package awarded to it within the last six months!!!
What Bernanke urgently needs to do is to shed his arrogance and take a lesson from his British counterpart. The UK government nationalised Northern Rock Bank last year itself, passing a legislation that offered the shareholders next to nothing in compensation. And this despite the fact that the bank had substantial book value. Professor Tim Congdon, former economic adviser to the Conservatives, told 4Ps B&M, “The justification was that the bank had difficulty in financing its assets because of the breakdown of the international wholesale funding market, and so was dependent on loans from the state to continue in business.” And see the result of that ruthless action! People now are hopeful that Rock can play a major role in UK’s duel with the financial turmoil.
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2009
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
The Most Revolutionary Concept In Education PLANMAN CHE CENTRE FOR HIGHER EDUCATION, Supported by IIPM India’s Leading B-School
Detail of all IIPM branches
IIPM Admission Detail
IIPM INTERNATIONAL - NEW DELHI, GURGAON & NOIDA
IIPM - Admission Procedure
IIPM, GURGAON
IIPM : EXECUTIVE EDUCATION
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