Truth About Value

Members of the media are artificially distorting the debate about bank nationalization. Recently articles have claimed that discussions about possible bank nationalization are depressing the stock prices of several troubled financial institutions. While technically correct, this view point is very misleading.

Several big banks (Citigroup, Bank of America, etc...) are currently in terrible shape. Even after huge capital injections from the federal government they are still in trouble. If the government had not used TARP and other tools to prop up some of the worst-managed banks, they would have gone bankrupt months ago. Without a new round of bailouts (through direct capital injections or indirect injections by purchasing toxic assets for more than they are worth) most of these banks will go bankrupt.

As a result, the stock from these banks are currently worthless. The companies are insolvent. Their debt is greater than the value of their assets. The only reason these stocks are currently worth anything is that some traders are betting that the government will provide them with billions of more dollars. It is not the talk about nationalization which has sent prices down, it is the lack of talk about more bailouts. In fact, it was only earlier talk about massive bailouts which has kept prices artificially high.

Would Nationalize By Any Other Name Not Sound So Scary?

Never have I seen an idea move so quickly from the fringe to the mainstream. While three months ago only a few people were even discussing the possibility of nationalizing some of the failed banks, it is now getting serious coverage. Some Republican lawmakers and publications like the Economist and Newsweek have started to openly talk about the possibility.

The fact that at least a few of the worst banks will be nationalized now seems inevitable. Already some banks have received more TARP money than they are now worth. President Obama has even acknowledged that Sweden's nationalization of their banks in the 90's is so far the best model for how to deal with the problem.

It seems that the greatest obstacle to nationalizing the banks is the term nationalization. For decades, the right has turned both socialism and nationalization into four letter words in American politics. This means that Obama's most important objective in dealing with bank crisis is to invent a new name for nationalization. Below is a list of my favorites. Do not be surprised to see one of these names (or something similar) picked up by the White House in the coming weeks:

Structured Bankruptcy
Managed Bankruptcy
Managed Restructuring
Receivership
FDIC Takeover
Temporary FDIC Directorship
Temporary FDIC Management
FDIC Directed Reorganization
FDIC Restructuring
Reorganization
Managed Reorganization
Forced Reorganization
Managed Liquidation
Directed Management Reorganization