"*Ideally, the government would have one or more potential CEO’s “on call” as a nationalization approached. The ability to announce a strong new CEO at the same time as the nationalization would considerably alleviate fears of chaos at the nationalized bank(s) and of immediate politicization.
The strength of the CEO would go a long way towards indicating the government’s intention of being an active investor, but not the direct manager of the bank. Take the case of Jamie Dimon, the CEO of J.P. Morgan Chase, whose already strong reputation rose considerably over the course of the crisis. He has been open in admitting that Morgan’s relative performance was so good, not because it performed well, but because it performed less badly than its key competitors' "
Excerpts from ~
Bank Nationalization: A Survival Manual - Douglas J. Elliott – Brookings Institute
Putting the full weight of the government behind the actions. This will be a momentous step if it is taken. The success of the seizures may well determine whether the recession ends soon or turns into a true nightmare that will be remembered for decades.
The beginning would be one of the most dangerous and promising moments. The President will need to be front and center in explaining and supporting the action, while the appropriate regulators and Treasury officials each play their proper roles. Ideally, key Congressional leaders would quickly show their support.
There are many definitions of “nationalization.” Here it will refer to a federal takeover of a bank where the government takes full, or nearly full, ownership and chooses to actively play the role of controlling shareholder.
***
This paper is designed around 15 essential steps to minimize the damage to taxpayers and the country in the event of a nationalization. These are:
Step 1: Decide the criteria for nationalization, including the legal authority to use
Step 2: Determine which large banks meet these criteria
Step 3: Choose when to act
Step 4: Calculate the size of the hole to be filled and ensure funds are available
Step 5: Decide how to allocate the losses between taxpayers, shareholders, and creditors
Step 6: Design a preliminary exit strategy
Step 7: Create an ownership structure for the government’s stakes
Step 8: Line up a few key managers
Step 9a: Announce the nationalization(s)
Step 9b: Shore up confidence in the rest of the banks
Step 10: Create a sound financial base; institute a good bank/bad bank structure
Step 11: Make the necessary managerial changes
Step 12: Announce a new strategic plan
Step 13: Implement the new plan
Step 14: Sell the government’s stake over time
Other analysts think that nationalization is all but inevitable.
***"It's very hard when you get to this point not to do that," said Adam Posen, the deputy director of the Peterson Institute for International Economics, a free-market research center. Posen thinks that nationalization is losing its stigma, and he envisions scenarios in which the government could seize the nation's 50 largest banks.
Tomorrow's problems go far beyond housing.
"Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value," Roubini wrote. "Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages."
***The government will need to make its criteria clear to the financial markets in order to avoid undue panic among creditors and investors who own stakes in other banks that are not being taken over.
(See Step 9b for more.)
Dr. Nouriel Roubini would have produced enough additional losses to give serious weight to the argument for nationalizing a number of the major banks.
We will not know for some months which economists are correct, leaving us with a critical question. Should we start nationalizing when and if we discover there is a 30% chance it will prove necessary, a 50% chance, a 75% chance, or what level?
In addition to the overarching timing question just discussed, the government will also want to think through the exact timing of a seizure, which could be affected by other economic or political events, upcoming quarterly financial reports, etc
Step 4: Calculate the size of the hole to be filled and ensure funds are available
The next step is to determine the need for funds to be infused into the bank(s) upon nationalization. The bank needs to be on a sound financial basis as quickly as possible after the nationalization, preferably from the beginning. (Tarp Funds? Is that where the money went, getting ready to nationalize?)
**Step 6: Design a preliminary exit strategy
The government should have a general plan for how to exit the banking business before deciding on nationalization. This plan would be a key determinant of a number of other decisions. There appear to be four broad plans to choose from, with innumerable variations:
Plan A: Keep the bank operating and try to maximize the sale value over time
Plan B: Keep the bank in government ownership for the long haul
Plan C: Liquidate the bank as quickly as possible: sell any viable pieces quickly and shut down the rest
Plan D: Break up the bank into smaller pieces which would continue operating
Step 8: Line up a few key managers
*Ideally, the government would have one or more potential CEO’s “on call” as a nationalization approached. The ability to announce a strong new CEO at the same time as the nationalization would considerably alleviate fears of chaos at the nationalized bank(s) and of immediate politicization. The strength of the CEO would go a long way towards indicating the government’s intention of being an active investor, but not the direct manager of the bank.
Take the case of Jamie Dimon, the CEO of J.P. Morgan Chase, whose already strong reputation rose considerably over the course of the crisis.
He has been open in admitting that Morgan’s relative performance was so good, not because it performed well, but because it performed less badly than its key competitors
***Step 9a: Announce the nationalization(s)
The announcement itself is worth very careful consideration. Among the key issues are:
Maintaining confidentiality until the takeover. As will be discussed in Step 9b, it will be necessary to make a comprehensive announcement that reassures a number of different constituencies, including the stakeholders in other large banks who may fear nationalization as well.
Having the information leak out piecemeal in advance would present a grave risk of panicking the markets and possibly forcing premature action. Banking regulators have a very good history of maintaining confidentiality, but they have never faced a challenge this formidable, both in terms of the financial impact of a takeover and in terms of the number of policymakers and advisors who ideally would be involved.
Making a clear case for the actions. It has proven to be very difficult to explain the various steps in the financial rescue packages in a way that resonated with all key constituencies, including: the public; Congress; the banks; and the broader financial markets.
The Administration and the various regulators will need to have a clear, compelling set of justifications for their actions, which will be a true challenge. For example, there are multiple overlapping arguments put forward by advocates of nationalization. The government needs to choose among them, since it is unlikely that the actual takeover policies chosen will be consistent with all the different potential rationales.4
Putting the full weight of the government behind the actions. This will be a momentous step if it is taken. The success of the seizures may well determine whether the recession ends soon or turns into a true nightmare that will be remembered for decades.
The beginning would be one of the most dangerous and promising moments. The President will need to be front and center in explaining and supporting the action, while the appropriate regulators and Treasury officials each play their proper roles. Ideally, key Congressional leaders would quickly show their support.
***Step 9b: Shore up confidence in the other banks
Nationalizing one or more of the nation’s largest banks is likely to catch a number of observers by surprise. There is a real risk of a “run” on those of the remaining banks that are perceived to be weaker.
It is possible that there would be a run by depositors, although the FDIC retains great credibility and nationalization may be seen as effectively adding a full government guarantee of deposits, whether or not such an action is announced.
The greater risk is that there is a chain reaction of panic. The share prices of other weak banks may plummet from already low levels. In the past year or so, we have seen such price declines lead to withdrawal of support from other key constituents, including trading counterparties, creditors, and customers.
The negative publicity surrounding those actions might lead to deposit runs, which could be exacerbated by the feeling that the newly government-owned banks are a safer place to keep money.
Even if such a panic did not cause additional bank failures, it would likely further dampen lending and other risk-taking at the remaining banks. The weaker ones could become totally preoccupied with preserving their independence by shoring up their capital ratios and otherwise reducing their risk exposure.
***It is therefore very important that the government make clear its comfort with the remaining large banks. This should not extend to guaranteeing immunity from a future seizure, but should provide real confidence that such an action is unlikely to be necessary.
*** Links - Banking Reform ... Plan Moving Forward ...
