On Wall Street
The banks cannot be left to their own devices
By Francesco Guerrera
Published: February 21 2009 02:00 | Last updated: February 21 2009 02:00
The game is up: within the next few weeks, if
not days, the US government will have to step in and nationalise one or more
The likely candidates to the dubious honour
of being owned by Washington Inc can be found at the end of a sad trail of
credit losses, management mishaps and share price collapses.
Come on down, Citigroup, Bank of America and
a motley crew of regional and community banks. Barack Obama, US president,
will have to draw on his vast oratorical skills to avoid using the N-word
but make no mistake: the authorities are going in.
Why am I so sure? Because, as the US banking
guy for the Financial Times, for the past year I have had a ringside seat to
the demise of the global banking sector.
The destructive blend of ineptitude, myopia
and greed that led to the crisis has made it impossible for piecemeal
solutions to work.
When commentators warn that a failure by the
latest US rescue plan would lead to a "Japanisation" of the financial
sector, they are missing the point. It is too late to worry about banks
turning into "zombies" - they already are. Crushed under a pile of toxic
assets, paralysed by wafer-thin capital cushions and deserted by fearful
investors, once-mighty institutions such as Citi and BofA are barely able to
perform basic functions such as lending and underwriting.
In fact, the only reason they have not joined
Lehman Brothers, Bear Stearns and Washington Mutual on the financial
scrapheap is because taxpayers have propped them up with more than $500bn in
cash injections and guarantees.
At this stage, some form of nationalisation
is both a political and financial imperative. On the political front, the
concept has won backing from unexpected quarters. This newspaper's account
of Alan Greenspan's conversion from icon of free-market liberalism to
proponent of a temporary nationalisation was mind-boggling.
To couple that with a similar U-turn by
Lindsey Graham, a Republican senator who has built a political career out of
his love of small government, was just astonishing.
The reality is that even the right wing of
the political spectrum realises that banks cannot be left to their own
devices while in receipt of federal funds.
From a financial perspective, nationalisation
of one or more banks - followed by a public offering once they are cleaned
up - need not be a socialist nightmare or, in the words of a
memory-challenged American banker, "an idea for fools and Europeans" (how
about AIG, Fannie, Freddie and IndyMac?).
Government control would solve two key
problems that have haunted policymakers since the start of the turmoil:
pricing of toxic assets and banks' unwillingness to lend.
Unlike current management, who live in fear
of further writedowns, Treasury would have little to lose in marking
troubled assets sharply lower. That, in turn, would make it easier to sell
them to private equity and hedge fund investors, or run them off.
The reason why Citi, BofA and others have
failed to unburden their balance sheets is that management have an incentive
to hope against all hopes that markets will get better. A similar paralysis
has affected lending decisions. Scared by the prospect of new defaults by
maxed-out consumers and businesses, lenders have shut up shop, thus
exacerbating the economic hardship they are trying to escape. By contrast, a
hands-on approach by government, coupled with its higher tolerance of
losses, would direct funds where the economy needs them.
The main question for the administration is
how to nationalise stricken banks.
That is where the much-maligned "Geithner
plan" offers a solution. For all its lack of detail, Mr Geithner's outline
does say to subject banks to a "stress test".
Wall Street executives have scoffed at the
idea, saying regulators constantly test their financial health. Yet, setting
a new hurdle gives the authorities an objective-looking yardstick to
sanction a takeover.
Banks will not like it - and Citi, for one,
is already agitating for yet another bail-out without nationalisation. But
as the financial chain comes under unprecedented strain, the time has come
to take out its weakest links.