FacebookTwitterGoogle+RedditEmail

Is Nationalization Inevitable?

by PETER MORICI

The Obama Administration is on track to nationalize the nation’s largest banks, unless it alters policy and creates a Bad Bank to absorb commercial banks’ mortgage-backed securities.

The housing market and banks are caught in a vicious cycle.

The market is glutted by builders with too many new homes, speculators unloading vacant houses, banks with repossessed properties, and homeowners seeking relief from mortgage commitments.

As housing prices fall, more homeowners with adjustable-rate-mortgages cannot refinance when their rates reset, and others, simply discouraged, default. Supply increases again, perpetuating the spiral of falling home values, mortgage defaults, and bank losses on mortgage-backed securities.

To cover losses, banks should raise new private capital by selling additional stock. But investors, seeing no end to falling home prices and bank losses, have pushed down share prices to levels making it impractical for banks to raise capital.

The TARP has aggravated the problem.

When first approved by Congress, Treasury was to buy mortgage-backed securities from the banks, but it ultimately determined it was not possible to assess their values. Instead, Treasury used TARP to inject capital into banks, purchasing warrants convertible to bank shares, and left banks to work out their problems.

As losses mounted, so did Treasury’s equity stake and involvement at Bank of America, Citigroup and several other banks. Many investors fear sweeping nationalization is inevitable, and have become even more reluctant to purchase bank stocks.

Those fears will continue until the mortgage-backed securities are removed from the banks’ balance sheets or their potential damage neutralized. However, Treasury Secretary Geithner’s proposal to create a public-private investment fund to value these assets and mitigate their consequences is vague and hauntingly reminiscent of the strategy the original TARP was forced to abandon.

As housing prices fall, the banks will have no place to go but the government for the capital to cover losses, and their ownership will pass into government hands, first Citigroup and then others.

Economists, whether employed by banks or the Treasury, cannot reasonably estimate the ultimate value of mortgage-backed securities and the losses banks will take until the number of defaults and foreclosures is known, and that is the trap that snares the market.

The number of foreclosures cannot be divined without knowing how far housing prices will fall, and the drop in housing values cannot be estimated without knowing the number of defaults and how many houses will be dumped onto the market.

A federally sponsored “bad bank,” or “aggregator bank” could purchase all of the mortgage backed securities from commercial banks at their current market-to-market values on the books of the banks. It could determine the number of defaults by performing triage on mortgages—deciding which homeowners if left alone will pay their mortgages, which if offered lower interest rates and moderate principal write downs could reasonably service new loans, and which must be left to fail.

Implementing those standards and necessary mortgage modifications across the entire market would, at once, limit the number of defaults and determine how much housing prices will ultimately fall. That is something the individual banks cannot accomplish acting independently.

The Bad Bank could be capitalized with $250 billion from the TARP, and it could raise additional capital by selling $250 billion in shares, and another $500 billion to $1 trillion by issuing bonds. The commercial banks could be paid for their securities with 25 percent in shares and the rest in cash.

By sweeping all the mortgage-backed securities off the books of the banks and limiting losses on those securities, the Bad Bank would earn money collect payments on the majority of mortgages that ultimately pay out and sell off repossessed properties at a measured pace. Like the Savings and Loan Crisis Resolution Trust, and the Depression- era Home Owners’ Loan Corporation, it would likely make a profit.

Relieved of the mortgage backed securities, the banks would not be trouble free—they still have auto loans and credit card debt to repent. However, having huge deposits and vast networks of branches, they would be worth a lot to investors again, and could raise new capital, repay their TARP contributions and write new mortgages.

The bankers could then go on their merry way, until a few decades hence, they once again determine their salaries should support the lifestyles of rock stars and create financial products to pay them.

My son plans to study finance. He can solve that crisis.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

More articles by:

CounterPunch Magazine

minimag-edit

Weekend Edition
August 26, 2016
Friday - Sunday
Louisa Willcox
The Unbearable Killing of Yellowstone’s Grizzlies: 2015 Shatters Records for Bear Deaths
Paul Buhle
In the Shadow of the CIA: Liberalism’s Big Embarrassing Moment
Rob Urie
Crisis and Opportunity
Charles Pierson
Wedding Crashers Who Kill
Richard Moser
What is the Inside/Outside Strategy?
Dirk Bezemer – Michael Hudson
Finance is Not the Economy
Jeffrey St. Clair
Roaming Charges: Bernie’s Used Cars
Margaret Kimberley
Hillary and Colin: the War Criminal Charade
Patrick Cockburn
Turkey’s Foray into Syria: a Gamble in a Very Dangerous Game
Ishmael Reed
Birther Tries to Flim Flam Blacks  
Brian Terrell
What Makes a Hate Group?
Andrew Levine
How Donald Trump Can Still be a Hero: Force the Guardians of the Duopoly to Open Up the Debates
Howard Lisnoff
Trouble in Political Paradise
Terry Tempest Williams
Will Our National Parks Survive the Next 100 Years?
Ben Debney
The Swimsuit that Overthrew the State
Ashley Smith
Anti-imperialism and the Syrian Revolution
Andrew Stewart
Did Gore Throw the 2000 Election?
Vincent Navarro
Is the Nation State and Its Welfare State Dead? a Critique of Varoufakis
John Wight
Syria’s Kurds and the Wages of Treachery
Lawrence Davidson
The New Anti-Semitism: the Case of Joy Karega
Mateo Pimentel
The Affordable Care Act: A Litmus Test for American Capitalism?
Roger Annis
In Northern Syria, Turkey Opens New Front in its War Against the Kurds
David Swanson
ABC Shifts Blame from US Wars to Doctors Without Borders
Norman Pollack
American Exceptionalism: A Pernicious Doctrine
Ralph Nader
Readers Think, Thinkers Read
Julia Morris
The Mythologies of the Nauruan Refugee Nation
George Wuerthner
Caving to Ranchers: the Misguided Decision to Kill the Profanity Wolf Pack
Ann Garrison
Unworthy Victims: Houthis and Hutus
Julian Vigo
Britain’s Slavery Legacy
John Stanton
Brzezinski Vision for a Power Sharing World Stymied by Ignorant Americans Leaders, Citizens
Philip Doe
Colorado: 300 Days of Sunshine Annually, Yet There’s No Sunny Side of the Street
Joseph White
Homage to EP Thompson
Dan Bacher
The Big Corporate Money Behind Jerry Brown
Kollibri terre Sonnenblume
DNC Playing Dirty Tricks on WikiLeaks
Ron Jacobs
Education for Liberation
Jim Smith
Socialism Revived: In Spite of Bernie, Donald and Hillary
David Macaray
Organized Labor’s Inferiority Complex
David Cortright
Alternatives to Military Intervention in Syria
Binoy Kampmark
The Terrors of Free Speech: Australia’s Racial Discrimination Act
Cesar Chelala
Guantánamo’s Quagmire
Nyla Ali Khan
Hoping Against Hope in Kashmir
William Hughes
From Sam Spade to the Red Scare: Dashiell Hammett’s War Against Rightwing Creeps
Raouf Halaby
Dear Barack Obama, Please Keep it at 3 for 3
Charles R. Larson
Review: Paulina Chiziane’s “The First Wife: a Tale of Polygamy”
David Yearsley
The Widow Bach: Anna Magdalena Rediscovered
FacebookTwitterGoogle+RedditEmail