Good Luck Pricing That Fire Sale
By Eric Oberg
RealMoney Contributor
2/25/2009 1:57 PM EST
I just want to build a little bit on what Jim Cramer and others have said regarding how dangerous wholesale nationalization of banks would be. These folks who are calling for the toppling of all the banks have simply not thought everything through. OK, so let's kill Bank of America (BAC - commentary - Cramer's Take), Citigroup (C - commentary - Cramer's Take), Wells Fargo (WFC - commentary - Cramer's Take) ... what happens then? What happens to our capital-formation process and flow of funds? Who is deciding to lend, who is committing capital -- and on what basis? I am not so sure nationalization is the wonder drug some people seem to think it can be.
We absolutely have problems, I'm not saying we don't, but wiping the board clean isn't in the realm of the best possible solution set. The damage has been done, folks. Be assured that shareholders have felt the pain at these troubled institutions. Changes are coming, don't worry. I have no problem with the injection of capital and someone saying, "Look, you'll have to knock that stuff off, clean that up, unwind that, put that up for sale, etc.," but I do not think we want wholesale nationalization. Let's put aside these larger questions of who is making decisions and moral hazard, and focus simply on the practical for a moment.
The issues with both the savings-and-loan/RTC analogy and the Swedish model (which was largely co-opted from the handling of the S&L crisis in the US) is one of scope and scale. Sweden had a small handful of important banks, and they essentially "good bank/bad bank"ed two of those -- very manageable. With the S&Ls, these were largely regional institutions operating on a much smaller scale. Back then, securitization was the takeout strategy -- we were able to package loans into diversified pools and sell them off.
Today, many of the problem assets are themselves pieces of securitizations, and the various fragmented interests involved make this situation much harder to manage. And we're now talking about much larger institutions that are globally systemic, and those stand alongside thousands of regional institutions. With both Sweden and the S&L's, you had only a small fraction of counterparty exposures in the form of derivative contracts. (I remember one thrift that called us to help value a single swap they had on with Drexel -- one swap! Today that number could be in the hundreds, even thousands between two counterparties.)
Let's just look at the manpower entailed with nationalizing these banks. Let's say we now have 5,000 FDIC staffers. OK, Citi has, what, about 300,000 employees around the globe? 100 different countries, six broad geographic regions, organized across four broad business lines, each with many complex components (Citi's Global Consumer Business is split between U.S. and International, both encompassing credit cards, auto loans, student loans, residential real estate loans, small- and middle-market business loans, etc.). I guarantee you it would take at least 1,000 staffers just to get their arms around the situation.
And what are we going to do, pull the guy off the community bank beat and say, "Here, you go through the FX forward book" or "Take a gander at the synthetic CDO book" or "You go through consumer loan book in Non-Japan Asia." How do you even parachute in and marshal a reporting structure across an entity like that? Now, we want to do the whole thing all over again with BofA--which at this point is still probably three entities trying to meld together -- BAC, Countrywide and Merrill.
AIG (AIG - commentary - Cramer's Take) will look like a cakewalk in comparison ... if most of the problems AIG had were at the AIG Financial Products entity -- I think that unit had only a few hundred people, if that. But at a bank like Citi, you'll want to look at the consumer portfolio, the commercial portfolio, the trading portfolio, the PE portfolio, the swaps businesses, the FX forwards, the mortgage portfolio, the SIVs, the unfunded lines... It is so big that if you put an entirely new management team of the "financial supermarket" in a room sans reports, they could probably only think of 80% of potential hot spots. Just as the management team of a regular supermarket couldn't tell you what is on each and every shelf.
This is why so many people are calling for nationalization -- they are licking their chops to buy assets in a nationalization. Good stuff will be sold cheap, and I am not even talking about the structured assets that are part of the problem: it will be things like the consumer franchise in Latin America ... simply because it would be impossible for a new oversight team to catch everything. And although recouping money is one aim, it is not the central aim in a nationalization. It will be a gigantic fire sale in an effort to make the entity less unwieldy and resell the bank as quickly as possible; the government will not hold out for the best price -- lots of "stuff" will sell to the first bidder, so they can be free of it and move on. There are some great businesses that would be sold off without much thought. This would be a value transfer from the nationalized entity into private equity hands, pure and simple. Who wins in that scenario? Certainly not the taxpayer.
Somewhere, Mr. Glass and Mr. Steagall are saying, "I told you so..." |
