Much ado has been made over the past week about the possibility that the US Government, by force or choice, may have to nationalize quite a few of its top commercial banks to preserve the financial system and markets. A lot of individuals, including Jim Cramer on The Today Show yesterday morning, were critical of the idea but if done correctly, nationalization of some US banks can yield the taxpayer pretty sweet returns, especially in a time where the government is trying to cut the deficit in half by 2013. Let me explain how…
Basically, the concept of the Troubled Asset Relief Program (TARP) was to purchase toxic, illiquid assets from banks, hold them for a period of time until the markets recovered and to sell them for a profit. The banks get rid of the toxic assets on their books, are able to lend again without fear of losses from further write-offs and liquidity problems there from, and return to profitability. The credit market unfreezes and consumers and businesses are able to borrow again and the American taxpayer makes a pretty penny when the assets are sold. What I am suggesting is that the concept behind TARP should be applied to whole banks and not just their toxic assets. It is banks that are toxic to the financial system right now and why, despite all the measures taken by the Federal Reserve to unfreeze credit, the system is still frozen like the Antarctic tundra. But then if global warming could possibly melt the tundra, certainly action can be taken to unfreeze the financial system.
Now I am not advocating that the US government manage these banks. That would be crazy! They should leave the management of the banks to specialists. However, by obtaining controlling interest – 50.1% of the voting shares – they can direct bank policy. The government would be able to instruct the bank to start lending again to businesses and consumers. The mistakes of the past are known and the banks would not be continuing their bad lending practices.
This is going to hurt the other 49.9% of shareholders unfortunately as share prices will likely take a beating. However, should they persist, great returns can be had when the economy turns the corner.
Nationalization is one of the few viable options that remain to unfreeze the credit markets and the US government should not be afraid to use it wisely to move its economy, and by extension the world economy, closer to that elusive recovery for which everyone is hoping and waiting.
POSTSCRIPT
A good long-term investment opportunity would be to invest in banks that are too big to fail, which the government would prop up no matter the cost, because they will return to profitability eventually. Share prices are dirt cheap right now and will remain so for some time to come so only invest if you have the money is available for a long time to come.
Basically, the concept of the Troubled Asset Relief Program (TARP) was to purchase toxic, illiquid assets from banks, hold them for a period of time until the markets recovered and to sell them for a profit. The banks get rid of the toxic assets on their books, are able to lend again without fear of losses from further write-offs and liquidity problems there from, and return to profitability. The credit market unfreezes and consumers and businesses are able to borrow again and the American taxpayer makes a pretty penny when the assets are sold. What I am suggesting is that the concept behind TARP should be applied to whole banks and not just their toxic assets. It is banks that are toxic to the financial system right now and why, despite all the measures taken by the Federal Reserve to unfreeze credit, the system is still frozen like the Antarctic tundra. But then if global warming could possibly melt the tundra, certainly action can be taken to unfreeze the financial system.
Now I am not advocating that the US government manage these banks. That would be crazy! They should leave the management of the banks to specialists. However, by obtaining controlling interest – 50.1% of the voting shares – they can direct bank policy. The government would be able to instruct the bank to start lending again to businesses and consumers. The mistakes of the past are known and the banks would not be continuing their bad lending practices.
This is going to hurt the other 49.9% of shareholders unfortunately as share prices will likely take a beating. However, should they persist, great returns can be had when the economy turns the corner.
Nationalization is one of the few viable options that remain to unfreeze the credit markets and the US government should not be afraid to use it wisely to move its economy, and by extension the world economy, closer to that elusive recovery for which everyone is hoping and waiting.
POSTSCRIPT
A good long-term investment opportunity would be to invest in banks that are too big to fail, which the government would prop up no matter the cost, because they will return to profitability eventually. Share prices are dirt cheap right now and will remain so for some time to come so only invest if you have the money is available for a long time to come.
