Banks and the Dreaded N-Word

What is it about ‘Nationalization’ that makes it such a loaded word in the US? You can spot a politically loaded word if

• The media gleefully uses [word] in its headlines, the opposition in Congress and interviews.
• The government refuses to acknowledge that they have any plans to [substitute with loaded word] and come up with new words to describe what they are doing.
• In all this, the public has only a vague idea about what is going on.

‘Bailout’ was one such word. Remember George Bush refusing to admit that what the federal government was doing amounted to a Bailout. Here’s an earlier post of mine on Bailouts.

Well, Nationalization is the latest politically loaded word.

Just so we understand what we are talking about, here’s how the Economist describes Bank Nationalization.

This involves several steps: ascertain which banks are insolvent, take them over, sever the most toxic assets and sell them over time or hold them to maturity. The good parts would be sold to the public or a strategic buyer as quickly as is feasible. These healthy banks would be fit to lend, benefiting the overall economy. The taxpayer may even avoid losses.

There are many supporters of Nationalization – Paul Krugman and Nouriel Roubini – to name just a couple. Many pundits object to calling it ‘nationalization’ and prefer the word ‘conservatorship’ or ‘temporary nationalization’. Naturally, since Nationalization has entered the lexicon of politically loaded words, less politically damaging alternatives will be explored.

Ben Bernanke doesn’t believe they will be headed down the path of Nationalization.

Nationalisation to my mind is when the government seizes the bank, zeroes out the shareholders, and begins to manage and run [the] bank, and we don’t plan anything like that.

President Obama, as you can expect from the man, speaks to us as adults who don’t pretend to understand high finance.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.

Meanwhile, the latest at Citigroup is that the feds have converted their preferred shares into common equity effectively giving them 40% of the voting stock in the company. . ‘Creeping Nationalization’ is what some people are calling it.

Over there in the UK, the government under certain conditions could now be said to own more than 90% of the RBS. As a friend of mine, who works in investment banking business for RBS quips – It was a dream of my father, a civil servant in India, that I should follow in his footsteps and become a civil servant. And so I have, albeit for the British government.

The thing I don’t get is, why is ‘nationalization’ such a loaded word in the US? Perhaps it is my formative experience in the Indian business environment that makes me quite comfortable with the notion of public sector banks. But to my deformed way of thinking it seems like today Joe Public should be concerned about things in this order:

1. 1. Is my money in the bank safe?
3. 2. We are pouring tax dollars, some of which are mine, into these banks because we need healthy banks to support the economy. Are we trying to minimize the cost of the bank bailout?
5. 3. This recession could be long and deep. W need to return banks to health and get credit flowing again before the economy recovers. Are we doing the right things to hasten a recovery?
7. 4. America is about capitalism. Business must stay in private hands.

You can have a substantive, rational debate about #1 to #3, but there is no argument against #4. At this time, it seems, #4 above is trumping #1 to #3 combined.

President Obama says in the same interview

Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

I can understand that nationalization comes with huge administrative problems – how do you decide which banks are insolvent and need to be nationalized, the need to nationalize all of them together or see their share prices go to zero, how does the federal government manage so many banks even if it is for the time they are stripped of their toxic assets and then privatized again. And since, while you are cleaning up the banks you still have to run their business, this is no doubt a mammoth undertaking. It should give the administration pause, if not make them sick to the stomach just thinking about it.

But I don’t understand the ‘cultural’ thing – the resistance to nationalization that comes from the notion that it is against American values. I believe that you will find that the American public is much smarter. They may not understand what a ‘preferred convertible share’ is, but they will understand and support a program that fixes something that is essential to fix before the economy can recover.

Meanwhile, I have put some of my cash into CDs at SBI New York. It took many, many phone calls for us to confirm that the CD deposit had indeed been accepted. When we finally got to the right person, she didn’t check in some computer or anything prosaic like that. Instead, she shouted “Arre Vidya Pradhan ke CD ka kya hua?” Ah…the joys of dealing with an Indian public sector enterprise right here in America!

You may laugh, but there’s one thing I know – my money is safe with a public sector bank. Until, of course they Privatize Indian banks. Privatization – there’s another politically loaded word.

Photo Credit JasonBechtel