Nationalize Failing Banks?

Institute for Public Accuracy
February 23, 2009

In the last few days, many Americans have been surprised by the sudden willingness of Republicans, such as "Lindsey Graham, Alan Greenspan, John McCain and a bevy of scholars and publicists on the payroll of the Peter G. Peterson Institute" to endorse bank nationalization, write Thomas Ferguson and Robert Johnson in a new article out on The Nation website, "Nationalize Failing Banks? Think Twice."

Ferguson and Johnson remark that "the contrast with Franklin D. Roosevelt, who began his New Deal by promising to drive the money changers from the temple, is obvious and daunting: Here come money changers and their confidants advising us to buy the temple. (Greenspan now works for a hedge fund that likes to bottom fish.)"

What's up, they ask?

Firstly, "much of the wind in the sails of this new push comes from private equity firms [such as] Blackstone, or their political allies, mostly, though not entirely within the Republican Party. Just like everyone else, private equity firms are now having trouble lining up financing. But taking over firms -- like banks -- is what they do for a living."

They also suggest that "not only private equity firms, but many hedge funds, are exulting over the Obama administration's heady talk of 'public-private partnerships' that would help the government dispose of the bad assets that it would take over from the banks."

Ferguson and Johnson suggest that temporary bank nationalization is still a good idea for dealing with the crisis, because it protects taxpayers and works fast. Rather like single-payer health insurance, "the great advantage of the scheme is its simplicity. It tackles the main problems head on. It gets the toxic assets -- all of them -- off the books of the banks at once. And it minimizes ultimate costs to taxpayers.

"Here nationalization's advantage is decisive: while the banks convalesce, the people of the United States take temporary ownership. That means that when the banks finally become healthy again, some trillions of dollars from now, the public's shareholdings can be sold back to private investors at a profit, just as the Swedes did in the 1990s.

"The difference with Hank Paulson's TARP is night and day. This time the financiers actually get rid of their junk assets, because the government sweeps them all into a 'bad bank' that it controls. And there are no tortuous arguments about how to value the distressed assets, because they are already owned by taxpayers. As Joseph Stiglitz has emphasized, the mare's nest of management and stockholder interests that conflict with the public's interest are swept aside."

But Ferguson and Johnson do see potential problems. They argue that "it would be the height of folly for the public to pay to fix the system, only to sell it back into the hands of a tiny financial oligarchy in a position to keep buying both political parties and control regulators...."

They are available for a limited number of interviews.

Ferguson is professor of political science at the University of Massachusetts, Boston, and the author of Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems. Johnson was formerly a managing director at Soros Funds Management and chief economist of the Senate Banking Committee. Part one of their "Too Big To Bail: The 'Paulson Put,' Presidential Politics, and the Global Financial Meltdown," appears in the next issue of the International Journal of Political Economy.

A nationwide consortium, the Institute for Public Accuracy (IPA) represents an unprecedented effort to bring other voices to the mass-media table often dominated by a few major think tanks. IPA works to broaden public discourse in mainstream media, while building communication with alternative media outlets and grassroots activists.

Keep Private Equity Away From Our Banks

By Andy Stern, The Wall Street Journal
July 7, 2008

The recent efforts by Congress and the Federal Reserve to facilitate capital injections by private-equity firms into banks may seem like a welcome development. But a closer look reveals that all that glitters isn't gold.

A growing number of ailing banks and thrifts need cash fast – and private-equity funds are anxious to deliver. With built-in cash cows in the form of mortgages, credit cards and accounts subject to an endless array of fees and interest-rate hikes, banks are a ripe target for private-equity firms seeking returns of 20%-30% or higher over relatively short periods.

But short-term capital infusions from private-equity funds will only make the banking crisis worse, by encouraging risky behavior and abusive banking practices.

It's hard to imagine private-equity funds resisting the urge to double down on the tactics banks have used to drive profits in recent years – unfair lending practices, higher fees, and exorbitant interest rates on credit cards and other consumer products. Are America's working families prepared to absorb that kind of risk?

Private-equity firms have made a lavish living on making big bets when no one is looking. Unlike banks and thrifts – which are regulated, transparent and generally publicly owned enterprises – private-equity firms operate in secret, virtually free from regulation. They use tax loopholes around carried interest – and deduct interest payments on the debt they use for buyouts – to extract huge profits from the companies they buy. Private-equity profits are built on big risks, and taking advantage of lax regulation – the very problems that led to the subprime and credit crises.

Shareholders are also paying the price for private-equity investments in banks. Texas Pacific Group's (TPG) recent investment in Washington Mutual (WaMu) massively diluted shareholder stakes by handing 50.2% of the company to TPG and its partners. While the deal – crafted in secret without shareholder input or approval – has already put $50 million in transaction fees in the pocket of TPG, WaMu shareholders have seen their stock value fall to $5.38 a share, the lowest level in 16 years (a nearly 90% drop in the last year alone).

The thrift's shareholders, including the SEIU Master Trust, showed their disapproval by stripping CEO Kerry Killinger of his title as chairman of the board. Mr. Killinger's pick of TPG over a merger with JPMorgan Chase may have saved his job, along with those of other failed executives. But the shareholder-led revolt sends a clear message that the match between private equity and banks is likely to be rocky.

The trend toward private-equity investments and the new risks it introduces to the system could also significantly increase taxpayer costs. TPG chief David Bonderman cherry-picked the good part of American Savings – eventually selling the thrift to Washington Mutual for a fourfold profit – and saddled taxpayers with its bad debts. Rest assured that if taxpayers wind up bailing out troubled banks, private-equity firms will be first in line for the biggest share.

Private-equity firms are now hatching a plan to provide a backdoor entry for sovereign wealth funds to U.S. retail banks. David Rubenstein, chief of the Carlyle Group, argued in an April speech that troubled U.S. banks are tempting investment targets because "sovereign wealth funds can't do certain things because of their foreign status . . . private-equity groups can join forces with the funds to facilitate transactions." No one's arguing that the U.S. should be closed to investments from sovereign wealth funds. But offering pieces of our financial infrastructure to foreign governments poses a threat to national security.

The Service Employees International Union is asking Congress to hold hearings reviewing the TPG-led, $7 billion investment in WaMu, and the $7 billion private equity-led investment in National City Corp. Lawmakers must look closely at these capital injections into the heart of the nation's financial infrastructure from unregulated, secretive sources.

In the short run, banks have other, more public options for raising badly needed capital – including from existing shareholders or by merging with a stronger bank. Already, banks such as Wachovia and RBS have raised capital by issuing new stock. Troubled banks should also look to banks with stronger capital ratios for merger and buyout opportunities. This would deliver new stock and cash, while giving the failed management of the existing bank a one-way ticket out of the boardroom.

Ultimately, private-equity funds have no place in the country's retail banking system – and lifting regulation and oversight is the last thing policy makers should be considering. We need regulation and policy changes that provide more safety, soundness and transparency in our banking system.

Regulators, shareholders and taxpayers must think about how to solve the crisis in a real way – not through stopgap measures that enrich private-equity firms while our nation's banks go belly up.

Mr. Stern is international president of the Service Employees International Union.

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