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Urgent Stock Market Message

U.S. $2 Trillion Bank Nationalization Proposal from Geithner

Politics / Credit Crisis Bailouts Jan 29, 2009 - 06:53 AM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleBarney Frank once again is leading the way in a mad rush to do something, even though his track record in such cases is a perfect zero. Please consider Lawmakers Weigh Bad-Bank Plan

Top U.S. House and Senate Democrats are taking a wait-and-see approach to the Obama administration's potential plan to create a "bad bank" to buy up toxic assets, though there remains a sense of urgency for policy makers to put something in place fast.

"It has to be done quickly," said House Financial Services Chairman Barney Frank (D., Mass.), when asked Wednesday about the concept. "There are a variety of ideas, and this is something they should focus on."

There has been increasing chatter in Washington that policy makers plan to dedicate some portion of the roughly $350 billion remaining from the TARP to buying up troubled assets. The approach could be twofold: allowing the government to purchase the assets through a "bad bank" and then guaranteeing the assets against further losses.

The bad-bank portion of the program could involve the government creating an entity to purchase the assets from financial institutions, while raising money by selling government-backed securities.

Shares of banks and other financial companies jumped in response to the reports of the plan. Wells Fargo & Co. shares were up more than 25% in afternoon trading. Shares of two banks that have required two bailouts from the government, Citigroup Inc. and Bank of America Corp., were up more than 15% and 10%, respectively.

The rescues of Citigroup and Bank of America could provide a partial model for policy makers. In both cases the government, and by extension taxpayers, are on the hook for billions of dollars of potential losses after the banks take the first hit. The Citigroup rescue alone included protection for more than $300 billion in assets.

Mr. Frank said one benefit of creating an entity to buy up the assets would be that the government could be more aggressive in dealing with foreclosures. Because a major portion of the toxic assets the government would likely own are mortgage-backed securities, it would give policy makers leverage when trying to implement foreclosure-mitigation plans that have been stunted by MBS investors unwilling to agree to rework the terms of struggling mortgages.

It has to be done quickly

How many Barney Frank nightmares do we have to endure just because they "Have to be done quickly"? Frank himself is bitching about how Pauslon spent the first $350 billion. Yet time was of such essence he helped ramrod the bailout bill through Congress, then complained about the results.

Another Day, Another Bailout

In yet another waste of taxpayer money U.S. Moves to Bail Out Credit Union Network

In the latest effort to prop up a sector of the finance industry, federal regulators on Wednesday guaranteed $80 billion in uninsured deposits at the powerful institutions that service the nation's credit unions -- a maneuver that shows how the economic crisis continues to ripple across the U.S.

Regulators also injected $1 billion of new capital into the largest of these wholesale credit unions, U.S. Central Federal Credit Union of Lenexa, Kan., after the firm on Wednesday posted an unexpected $1.1 billion loss for 2008. U.S. Central serves essentially as a main clearinghouse for the others in the network. ... Rest By Subscription

New Bank Bailout Plan Could Cost $2 Trillion

Inquiring minds are reading how the New Bank Bailout Plan Could Cost $2 Trillion

Government officials seeking to revamp the U.S. financial bailout have discussed spending another $1 trillion to $2 trillion to help restore banks to health, according to people familiar with the matter.

President Barack Obama's new administration is wrestling with how to stem the continuing loss of confidence in the financial system, as it divides up the remaining $350 billion from the $700 billion Troubled Asset Relief Program launched last fall. The potential size of rescue efforts being discussed suggests the administration may need to ask Congress for more funds. Some of the remaining $350 billion of TARP funds has already been earmarked for other efforts, including aid to auto makers and to homeowners facing foreclosure.

The administration, which could announce its plans within days, hasn't yet made a determination on the final shape of its new proposal, and the exact details could change. Among the issues officials are wrestling with: How to fix damaged financial institutions without ending up owning them.

My Translation : Officials are wrestling with how to privatize the gains and socialize the losses.

The aim is to encourage banks to begin lending again and investors to put private capital back into financial institutions. The administration is expected to take a series of steps, including relieving banks of bad loans and distressed securities. The so-called "bad bank" that would buy these assets could be seeded with $100 billion to $200 billion from the TARP funds, with the rest of the money -- as much as $1 trillion to $2 trillion -- raised by selling government-backed debt or borrowing from the Federal Reserve.

My Comment : It is idiotic to force banks to lend because few credit worthy borrowers have no reason to borrow.

The administration is also seeking more effective ways to pump money into banks, and is considering buying common shares in the banks. Government purchases so far have been of preferred shares, in an effort to both protect taxpayers and avoid diluting existing shareholders' stakes.

My Comment : Protect the taxpayer? There is no one between the sun and Pluto who believes the taxpayer is being protected. When can we stop this ridiculous charade?

A Treasury spokeswoman said that "while lots of options are on the table, there are no final decisions" on what she described as a "comprehensive plan." She added: "The president has made it clear that he'll do whatever it takes to stabilize our financial system so that we can get credit flowing again to families and businesses."

My Comment : There may be a bunch of options on the table, but not a single one is viable.

Treasury Secretary Timothy Geithner said Wednesday that he wants to avoid nationalizing banks if possible. "We'd like to do our best to preserve that system," Mr. Geithner said. But given the weakened state of the banking industry, with bank share prices low and their capital needs high, economists say the government probably can't avoid owning at least some banks for a temporary period.

My Translation : Geithner is doing his best to wreck what little semblance of capitalism we have left. Geithner is the worst of Obama's picks.

But buying common shares raises the likelihood that weaker banks will become largely government-owned. Bank share prices are so low that any sizable government investment in a bank would give the U.S. effective control of it.

Another option under discussion is insuring some of the assets against further losses. That is the route the U.S. has taken in its rescues of Citigroup Inc. and Bank of America Corp. Insuring the assets would limit the amount the banks could lose but wouldn't remove the securities and loans from their books. The government would cover any losses in the assets' value beyond agreed-upon levels.

Charles Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia University, said that approach is preferable since it leaves the assets in private hands while giving investors confidence to put money into the institution.

"You have to eliminate prospective stockholders' concern that there's a bottomless hole at the banks," Mr. Calomiris said. "Getting them off the books solves that problem, but insuring against the downside would have a huge positive effect and might end up costing nothing." Charles Calomiris is yet another socialist clown looking to socialize the losses and privatize the gains straight into the hands of the recklessly greedy bank executives that helped create this mess. This appears to be yet another Terminal Case Of FIV .

Only a complete fool could think that guaranteeing debt while having no stake in the gains might cost nothing.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

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