Government Takeover of Banks and Businesses

U.S. Will Invest $250 Billion in Banks

October 14, 2008

Reuters - The United States will pump $250 billion into its banks, following similar measures in Europe, but data showed the threat of recession has not been banished even if a financial sector meltdown has. About half the total likely to go to the top nine US banks to get them lending to each other again, people familiar with the scheme said.

Federal Reserve Chairman Ben Bernanke said in an article in the Wall Street Journal that the measures constituted a broad attempt to end the crisis, which began with a US housing market collapse and now threatens industry and jobs worldwide. "These steps will allow us to restore more normal market functioning and encourage private capital to further support the reinvigoration of financial markets," he wrote.

The Treasury will buy stakes in Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of New York Mellon Corp, said two sources speaking anonymously. Media reports said State Street Corp and Merrill Lynch would also receive a capital injection.

Similar moves in Europe helped restore some confidence among investors on Monday.

• London, Berlin and Paris offered direct capital injections for banks and to underwrite lending between banks that has all but frozen, choking off funds that ultimately drive private business and industry.
• Germany approved a rescue plan worth up to 500 billion euros ($US679 billion).
• France put up a total of 360 billion euros.
• Britain, which has led the way with a twin blueprint of bank equity stakes and money market support, had already pledged 250 billion pounds to guarantee lending between banks and stumped up 37 billion pounds to buy into its troubled financial giants.
• Japan joined the global push, saying it could inject public funds into regional banks to make sure small firms can get cash while the Bank of Japan said it would hold an extraordinary meeting from 1130 GMT (2230 AEST) to consider ways of improving its operations to keep financial markets stable.
• Even the Gulf with its oil revenues is acting. The United Arab Emirates will pump 70 billion dirhams ($US19 billion) of emergency funding into its banking sector.

The New York Times said Citi, JP Morgan Chase, Bank of America and Wells Fargo would receive investments of $25 billion each. Goldman Sachs and Morgan Stanley will get $10 billion each.

Nine Banks "Partially" Nationalized

October 14, 2008

Can you get "a little" pregnant? Then how can a bank be "partially" nationalized? The U.S. government is dramatically escalating its response to the financial crisis by planning to invest $250 billion in the country's banks, forcing nine of the largest to accept a Treasury stake in what amounts to a partial nationalization.

News that European governments also planned to take stakes in their banks, and anticipation of new U.S. measures, unleashed a tremendous surge in U.S. stock prices yesterday, with the Dow Jones industrial average soaring to the biggest percentage gain since the 1930s, up 11.1 percent. It ended 936.42 points higher, the largest point gain ever, just days after the Dow had its steepest weekly decline in history.

The Treasury Department's decision to take equity stakes in banks represents a significant reversal, coming just weeks after Treasury Secretary Henry M. Paulson Jr. had opposed the idea. "In a momentous meeting yesterday afternoon in Washington, Paulson, flanked by top financial regulators, told the executives of nine leading banks that they needed to participate in the program for the good of the national economy," two industry sources said on condition of anonymity because they were not authorized to speak publicly.

So this is how it comes, yes? Not with dramatic speeches and chest thumping but in the silence of a well appointed government office where American citizens are told to hand over the private property of investors to virtual government control.

I am speechless with rage. Not one peep from "conservative" economists? Where are the op-eds? Who is defending the free market system? Us? A couple of thousand internet bloggers and writers and a few radio talk show hosts?

What would Paulsen have done if the bank execs said "thanks, but no thanks?" That's a chasm I choose not to have open beneath my feet thank you. If Bush can do this, what would a Barack Obama do in the name of this emergency? One shudders to contemplate it.

This won't stop at banks. If things get much worse, other industries will be sitting in Paulsen's office and given the choice of "doing what's right for the national economy" or...what? Anything is possible with this crew.

If it were simply a case of throwing the rascals out, that would be easy. But the entire government of the United States, save a few scattered souls in Congress , are evidently in favor of this switch to socialism. It makes one feel helpless when you realize that decisions being made now will have consequences that will reverberate the rest of our lives.

Have they all lost their minds?

How Paulson Nationalized the Biggest Banks in the U.S.

October 14, 2008

It took the Bush Administration longer than many experts believe it should have taken to get there, but today's big news is that the administration has finally arrived at the point many economists weeks ago urged it to get to: direct injections of cash into the banking system and in turn taking ownership stakes in some of the nation's largest banks.

The administration had to twist some bankers' arms to arrive at this point, since there were top banking executives who didn't want the federal government taking ownership in their institutions.

But banks aren't exactly in the strongest negotiating position right now. Nine of the nation's largest banks were told they didn't have a choice.

The move follows a landmark agreement among European countries over the weekend to follow Britain in partially nationalizing ailing banks and providing deposit insurance and other guarantees on loans between banks. All told, Britain, Germany, France, Italy and other countries poured $2.3 trillion into their banking sector, according to news reports.

The New Banking Superpowers

September 28, 2008

Business Spectator - A snapshot of the world's 20 biggest banks by market capitalisation reveals a lot about how the world has changed since the sub-prime credit crisis began to unfold a year ago. It shows a shift in banking power away from the United States to Europe and Asia. That trend is likely to be maintained as institutions outside the US step up their participation in the consolidation of the banking sector funded by high savings rates in domestic markets.


Note that JP Morgan Chase (which acquired Washington Mutual on September 25, 2008), Wells Fargo (which acquired Wachovia on October 12, 2008), and Bank of America (which acquired an additional 8.4 percent state in China Construction Corp. on November 18, 2008), are amoung the nine banks that were partially "nationalized" in October 2008. Note also that ICBC is majority-owned by the Chinese Government.

Australia's big four banks did not make the big bank league (see table above), but Commonwealth Bank of Australia sits just outside the top 20 with a market cap of $US49 billion. CBA is in good company. It is among five banks clustered around the $US50 billion market cap level including Mizuho Financial Group, Sumitomo Mitsui Financial Group, Credit Suisse and Credit Agricole.

CBA is in good company. It is among five banks clustered around the $US50 billion market cap level including Mizuho Financial Group, Sumitomo Mitsui Financial Group, Credit Suisse and Credit Agricole.

Bankers have traditionally measured themselves against each other by the size of their balance sheets. But that rule of thumb no longer applies in the wake of the $520 billion in sub-prime write-offs and various financial institution bankruptcies over the past 12 months.

Another popular yardstick for ranking the world's banks has been shareholders' equity. This measure has lost its lustre because of investor concerns about the potential damage to equity from further loan write-offs.

These days market capitalisation is a far better guide to the relative strength of a financial institution. A higher stock market rating usually goes hand-in-hand with higher quality management, better provisioning and sound funding arrangements.

US banks that would have made it into the top 20 a year ago are either no longer around or are the subject of takeover speculation. Wachovia, which a year ago had a market cap of $US105 billion, is struggling to remain independent. Washington Mutual, which a year ago had a market cap of $US62 billion, disappeared in the past week. Its best assets are now part of JPMorgan Chase & Co, which is trading near its record high. Bank of America, Wells Fargo and US Bancorp have kept the stars and stripes flying in the top 20.

A fourth US bank to make the list is Citigroup. However, it is a shadow of its former self. It is a prime example of why banks should not be ranked by either total assets or shareholders' equity. Its market cap of $US109 billion is about 20 per cent less than its total shareholders' equity at June 30 of $US136 billion. Its total assets would probably make it number one in the world but having $US2,100 billion in assets is not a great measure of worth in today's environment.

Citigroup is about half the size of the number one ranked bank by market cap, the Industrial and Commercial Bank of China (ICBC). In stark contrast to its American counterpart, ICBC is valued at almost three times its total equity.

ICBC is one of three Chinese banks in the top 20. The others are China Construction Bank (fifth with a market cap of $US158 billion) and Bank of China (eighth with a market cap of $US102 billion). ICBC managed to keep its distance from the sub-prime mess with a total exposure to troubled US mortgages of about $US1.92 billion and provisions against that of about $US700 million. It has expanded into South Africa with the purchase of 20 per cent of Standard Bank.

It is arguable that the Asian success story includes the world's second biggest bank by market cap, HSBC Holdings. Although it is listed and headquartered in London, HSBC has successfully expanded from its original base in Hong Kong into many Asian countries, the UK, the US, South America and Australia.

In Europe, the quiet achiever is the Spanish bank Banco Santander. It is named in most merger talks for troubled banks. Europe, however, has not been immune from the broader impact of the credit crunch with several banks disappearing from the scene including HBOS, a bank that a year ago would have ranked in or near the top 20 with a market cap of $US96 billion. HBOS is about to become part of Lloyds TSB.

That brings us to the list we didn't do: the world's fastest shrinking banks. Apart from HBOS, the list would include Northern Rock, Bradford & Bingley and Washington Mutual. Those queuing up to join include Wachovia and Fortis.

American Insurance Group (AIG) Nationalized

September 17, 2008

[The Fed] said the US Government would receive 79.9 per cent of AIG’s equity and the right to veto dividend payments – the Government is trying to diminish the level of moral hazard created by the rescue by ensuring shareholders and preference shareholders are punished in the process. The US has just nationalised one of its biggest private sector institutions...

Federal Government Takes Over Fannie Mae and Freddie Mac

September 7, 2008

The belief of the top leadership in China that the Americans do not know how to handle their banking and economic crisis looks more and more accurate. A person with very close links to China’s leaders revealed that their most immediate concern was the deteriorating US banking situation. His comments were the first intimation to the West of the deep concerns at the top in China.

In the 48 hours since publication of these comments we have seen a volley of illustrations of the chaos pervading US economic management – exactly what the Chinese fear.

The latest problems started when the Dow Jones publication Barron's stated that US government officials may have no choice but to effectively nationalise the US housing finance titans Freddie Mac and Fannie Mae, which could wipe out existing holders of the companies' common stock.

But the US Treasury responded that it had no plans to use its new authority to backstop the mortgage finance giants in this way...

The Chinese have invested in large quantities of Fannie Mae and Freddie Mac paper and stand to win if that paper is given US government backing. That does not please many Americans.

Does Congress Secretly Plan to Nationalize American Banks?

June 30, 2008

What I believe we are seeing is the nationalization of our banking industry. Don't feel like the Lone Ranger… it appears the central banks in other non-communist nations are doing the same thing, just using a different methodology. Since nationalization of privately owned business is a primary identifier for a communist system of economics, it certainly gives one pause for thought, doesn't it? It looks to me like government wants to turn consumer lending and checking accounts over to GMAC, while they give control of other banking functions to stock brokers.

Is the nationalization of the oil industry far behind banks? Or, is the Congressional suggestion that oil companies be nationalized just a good way to keep our “nationalization” radar focused on an industry other than banking? Who knows in that dirty jungle called Washington?

I believe there will be grave problems ahead for America's commercial banking industry, just as there were problems for the Savings and Loan industry when Congress created that problem. The proposed legislation could give the non-regulated, non-audited, non-bank banking industry of brokerage and equity investment houses control of commercial banks without the protections that banks, and thus, consumers, have via the supposed regulation of the Comptroller of the Currency, the FDIC, state regulators, the Federal Reserve, and others.

Of course, none of these agencies is doing what bank regulations require them to do to protect America's banks from precisely what is happening to them.