Saturday, February 14, 2009 0 comments ++[ CLICK TO COMMENT ]++

Look for bank nationalizations to happen by the middle of this year

I think the US government is just waiting for the opportunity to nationalize the insolvent banks.

A lot of people who are not familiar with politics don't realize that you cannot do certain things even if you think it's right, until the opportunity is there. Many market participants, who likely don't understand politics, were critcizing Ben Bernanke and Henry Paulson last for not doing anything significant until the middle of last year. Well, I think it was Paulson (or maybe Bernanke?) who said that a big chunk of the stuff they were considering would have been impossible earlier in the year. Actions such as the large large capital injections (TARP) or the FedRes intervening heavily in various markets would have been difficult to pull off. Politicians, as well as the general public, have a lag when it comes to economic or financial events and that's one of the reasons you cannot get approval in a timely manner.

Similarly, I get the feeling that the Obama administration is contemplating nationalization of the insolvent banks--this wouldn't be a hard sell to their left-leaning voter base--but are waiting for the opportunity. The whole notion of stress-testing with seemingly inusufficient bank examiners brings back bad memories of the rating agencies stress-testing the monoline bond insurers a while ago. It seems like a slow process with vague goals. For instance, the conclusions supposedly won't be made transparent except for those that are insolvent, or something like that (this obviously won't improve the trust of financial institutions, especially if rumours of further problems at the remaining financial institutions continue.) I think they are just waiting for the banks to run into serious issues or for their stock to completely collapse, and then they will probably do something.

I think a sell-off in the stock market by, say, summer will provide the opportunity to the US government. Although what I am saying is pure speculation, I'm working on the assumption that there is a reasonable probability of some of the megabanks being nationalized by the middle of the year.

(But if the world economy, and more importantly bank balance sheets, improve within the next 6 months, this situation may be avoided. Several bullish commentators have pointed out that the economy of China has been improving, along with several key commodity prices, and so are seeing recovery around the corner. I'm more skeptical and think it is a sucker rally. This is a seasonally strong period and we really need to wait until May and see how things unfold. Ambac and MBIA, two possibly insolvent monoline bond insurers, will be reporting numbers within the next three weeks and that will give a good indication of the potential losses for the banks. Monolines, in some sense, are at the front line of the credit bust and typically indicate potential problems elsewhere in the financial sector. In this case, I would like to see how MBIA does since it has high exposure to commercial real estate. In the last two years, most of the losses reported by banks have been with residential real estate. We are seeing commercial real estate deteriorate and if it ends up being really bad, banks are going to have very serious trouble that may not be priced in by the market.)


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