Nationalize them?

Last week's economic numbers don’t change my projection that weaker economic conditions should give way to a more stable period towards the end of the year. However, watch for a nationalization of banks (RBS and Citi to lead the way?) as it would have unprecedented consequences to the markets and the overall economy. It would be impossible to predict what would happen if the govt. decides to buy banks. Too many questions would arise: Would they buy the top banks only or the entire financial system? Would they move all the “bad loans” to one bank (good bank/bad bank theory), would they create a holdings company? Political risk is just too hard to quantify because it can’t be measure by looking at fundamentals…

My best friend and I talked last night about things the government could have done when the first TARP money was released…in my opinion 2 things could’ve helped: 1.- backstops for the largest banks and 2.- changing the Mark-to-Market accounting rule; both would be temporary measures.

1.- Backstops mean that a bank (Citi for example) would only be responsible for X amount of money reported in a quarterly loss and the government would take the rest. This would have given much more certainty to the markets and avoid having these banks come back for 2 - 3 more rounds of capital injections. The assets that the government would take over would very likely repay as predicted so us tax-payers wouldn’t be stuck with worthless assets.

2.- The mark-to-market rule is simply not helping right now. Banks are required to post huge losses in part based on huge writedowns they need to make as some assets have depreciated so much in value. I understand that under normal circumstances mark-to-mkt makes sense, but in this case a panicking financial market cannot possible determine what an asset is really worth. Instead asset value should be determined by calculating the probability that these assets (primarily mortgages) would not default.

Have a good day

Rod