BILL GROSS: NO NATIONALIZATION
Bill Gross doesn’t like the idea of nationalizing the banks.
Question: What do you think about nationalizing the banks?
Answer: I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.
Bill Gross pains me. He really does. He seems to be making a career out of leaning on Congress, the Treasury, and the Fed. It kinda disgusts me if for no other reason than he lines his own pockets at taxpayer expense.
Our banks are in a heap of mess precisely because institutional depositors didn't give a rats ass about what bank management was buying to put on the left side of bank balance sheet. It would probably do a world of good to cut the feet off C's, BAC's, and WFC's institutional creditors. Everyone would learn ya gotta think before you go out and fund bullshit loans to people who can't pay.
I don't want to see the gov't running the banks. I want to see bank creditors taking serious haircuts as equity is wiped out and balance sheets are remarked. It ain't over, not even close.
It's hard to take Gross seriously with regards to nationalization because his firm is heavily invested in MBS and everything the government has their hands in. He is beyond biased. He's watching his AIG, C, & BAC bonds tank and he's digging his heels in to protect to his firm's positions. I respect his opinion here, but it's hard to take him seriously due to the bias.
I should add: nationalization is a loaded and vague term. These banks should really just be allowed to fail under the FDIC. Call that whatever you want. Nationalization, socialism, controlled capitalist darwinism….I could care less. We have a very sick patient on the table. My preference is to be proactive and attack the problem at the root rather than let it linger and hope it just goes away eventually. That's basically what Japan did. Our approach to economics is all too often reactive rather than proactive. That is a very flawed way to approach problems.
Barry Ritholtz explains the issue of nationalization very succinctly here: http://www.ritholtz.com/blog/2009/02/nationalizat…
Awesome post/comments, very much agree with you. It's so funny, it's almost like the gov't is trying to draw out the pain-process as long as possible. It's insane. SPX 610, here we come.
I just don't think they know what they're doing. Barney Frank (no financial background & arguably helped cause this mess by transferring FNM/FRE oversight in 2000), Tim Geithner (former NY watch dog who watched this mess implode in his backyard), Hank Paulson (arguably had more to do with causing this mess than anyone as he ramped up GS leverage and innovation in an attempt to ramp up EPS) and Ben Bernanke (god bless him, but he is nothing more than an academic) are not qualified to deal with this problem….If you had a heart attack tomorrow would you feel good knowing that a resident was performing the heart transplant? Yeah, me neither.