Friday, February 20, 2009

How could a bank nationalization / reorganisation work?

Misha over at had some good questions about US bank nationalisation.

OK my 2 cents worth on what would be a less bad outcome - as opposed to what may happen.

1. Are all US government guarantees of bank debt null and void? They should be. At a minimum, taxpayers are currently on the hook for $300 billion of Citigroup's debt and $100 billion of Bank of America's debt.
Answer- Yes guarantees null and void for banks restructured. Let them bid for company if they think the debt is worth more than the money buyer’s offers for the assets.

2. Are we going to end up creating another banks that is "too big to fail" out of this mess?
Answer- Possibly depends who well sell them off to - how about selling bit off to different bidders (I would assume they are current better managed and solvent banks) depending on what they want and what they're willing to pay

3. Will stock holders and preferred shareholders both be wiped out?
Answer - Stock holders - yes wiped out - they would have already been so if not for government intervention. Preferred - depends on what you sell it for just like bankruptcy - if asset values don't cover debt as is likely then then wiped out.

4. In a normal bankruptcy process one might expect to see significant changes in management. Will the nationalization process allow the clowns who wrecked these banks to stay in control? For how long? Under what capacity? And what person or committee gets to decide those questions?
Answer- You sack the head honchos to start with - you sell off the parts, who keeps their jobs depends on the new owners, they presumably will be cutting.

5. Will the CDS liabilities be wiped out in entirety regardless of consequences? Clearly they should because otherwise taxpayers will be footing the bill. Unless this is spelled out I suspect measures will be taken to protect Goldman or whoever else is on the right side of those CDS and derivative contracts.
Answer- I don't understand the logic about canceling existing contracts other than it was an unregulated market out of control and it's costing the relevant parties an incredible amount of money. Canceling contracts selectively on this scale sounds a dangerous precedent.

6. What kind of bidding process will be put in place and in what time frame for the assets of the banks? Who decides and why?
Answer - Bigger scale suggests it may take longer than normal FDIC workout. That's why you need some extra government involvement. I don't know if this means 1 week or 1 year. In the interim the government body responsible (FDIC+help) takes control but you do business as usual (well usual in a sane world).

The way I see it you go as close to the best current model that actually works in the real world in the US (i.e. FDIC workout) and beef it up and give it more time so the scale isn't such an issue. If you try something new you don't know what may go wrong.

In addition get in there and investigate and make a few prosecutions where management has been negligent or dishonest. This serves both for moral hazard purposes and makes taxpayers feel better for making up any shortfall on the asset sale.

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