Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19
The Unknown Tech Stock Transforming The Internet - 10th Sep 19
More Wall Street Propaganda - 10th Sep 19
Stock Market Price Structure Still Suggests We Are Within Volatile Rotation - 9th Sep 19
Stock Market Still Treading Water - 9th Sep 19
Buying Pullbacks in Silver & Gold - 9th Sep 19
Government Spending - The High Price of a "Free Lunch" - 9th Sep 19
Don't Worry About a Recession - 9th Sep 19
Large Drop in Stocks, Big Rally in Gold and Silver - 9th Sep 19

Market Oracle FREE Newsletter

The No1 Tech Stock for 2019

Bankrupt Banks Defacto Nationalization

Companies / Nationalization Jan 23, 2009 - 03:13 PM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticlePrivate bank stockholders aren't so much being crowded out as thrown out the window...

NOW, I'M NO banking analyst, but that gap on my resumé is starting to look like a very good thing indeed.

For who'd want to be stuck with the title "Banking Stock Analyst" now the banks are all broke...? Unless you already wanted to work for government anyway.

"When the Treasury tells a bank to pay a penny a share versus its old dividend, you know who's calling the shots," says Jon Bruss, an old-hand banker and founder of Fortress Partners Capital Management in Wisconsin according to Bloomberg.

"It may not be de jure nationalization but I think it's de facto nationalization."

Ignore the italics; state-control by law is coming regardless – soon and everywhere.

Starting in the US, Larry Summers' letter to law-makers last week guarantees nationalization by default, by making good on the myth that private investors control how publicly-quoted corporations behave. They therefore deserve an absolute loss of capital investment, if not a full public flogging, starting with zero return. And no return means zero risk capital.

Promising to be the very best head of Barack Obama's National Economic Council he ever could be, Summers vowed to cap and cancel dividends to banking stock-holders if their bank requests two dollops or more of federal assistance. So as the last fortnight's trade shows, those banks crying "Help!" will only see whatever risk-capital still remains flee...meaning the state will have to step in with more aid again...guaranteeing no return-on-investment to free-market cash...sparking a last panic out of the bank's issued share capital...leaving the feds to step in and acquire the whole bank.

Private investment isn't being crowded out, in short, so much as thrown out the window. But it's not just this capital re-structuring which will surely end with outright state ownership. Standing surety for depositors' cash makes it a dead-cert as well – or so we guess here at BullionVault – for all but the smallest, most boring (and therefore most innovative!) groups.

Deposit insurance is one thing, and a very fine thing the FDIC represents too – that post-Depression vow of well-meaning bureaucrats to abolish all day-to-day risk in money, creating untold risk instead in home loans, investment banking and consumer credit over the next 60 years. But stumping up hard cash in the event of a bank-run would now be quite another joy-ride entirely. Because one run would beget more runs elsewhere. And meeting the cash call all in one go would bankrupt the entire state at a stroke.

For example, household cash balances at UK banks now total almost £1 trillion ($1.35trn) – nearly twice the London government's entire 2008 budget. Other financial firms are owed a further £880bn by the banks. Non-financial firms hold £375bn on deposit. So in the event of a banking collapse, full nationalization would seem the cheap option (short-term, at least) ahead of paying out on the FSCS (the UK equivalent of the FDIC). Meeting the statutory promise, with little or no cash cushion to help, the British state would need to find something like 1.8 times a full year's GDP. A fire-sale of "assets" would only cause a further meltdown in stocks, housing and credit. Trying to raise the cash by selling new gilts would prove risible. (The UK's going to have trouble raising £118bn for its operational deficit alone in 2009.) Whereas deferring the hit, by taking it onto the state's balance-sheet for some indefinite settlement, at least keeps the sovereign solvent today.

And what does that world look like? Iceland is first to find out, that tiny island of 305,000 souls. Its banking sector – with risk "abolished" and thus merely transmuted, just like everywhere else – built up what looked like assets worth some €100 billion by 2007 (around $130bn, both at then and today's exchange rates). Yet the central bank only had €2 billion in foreign currency reserves, as the Wall Street Journal noted last autumn, "meaning it was effectively unable to fill its role as lender of last resort" when foreign lenders – the true deus ex machina for any national economy – baulked at fresh loans.

Come the crunch, Iceland's banks found themselves without a back-stop. The safety-net of government aid simply didn't exist...the holes between the strings were too big...and in a nation of just 305,000 people, the problem all governments face became plain to see. Because the Treasury, state, government, sovereign – whatever you want to call that leviathan supposed to exist outside of the day-to-day flux, secure and securing against all possible outcomes – is only ever identical with the population. National resources can never be greater than the nation itself.

Or as Abe Lincoln almost said, "Government of the people, for the people and by the people just keeps coming back to...umm...the people!"

Defending bank savers against bank default means using bank savings as their own guarantee. Because where else will the money come from? Now the risk of default stands so plainly in front of the entire industrialized world, it sure won't come from that rare beast known as banking-stock shareholders. Those few stock-holders still in are being chased away.

Fancy a loan, comrade?

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules