Major Banks Will Be Nationalized Eventually: Wall Street's Dirty Little Secret

The dirty little secret that Wall Street does not wish you to understand is that the banking model which the US has had for the past twelve years was unsustainable, it is over and done, and banks must go bank to being banks, and not hedge funds.

Why doesn't the Street wish you to realize this? First and foremost, the days of big bonuses and big earnings are over. Banks will increasingly become, once again, institutions to support savings and lending, with insured depositors accounts as a major source of capital.

The leveraged days and market speculation for the big money center banks is over.

We no longer need big salaries to retain traders in the banks because they won't be doing much trading for their own accounts anymore. That will be left to the brokerages.

They won't be writing insurance, they won't be taking huge short positions in commodities, and they won't be to big to fail, at least not to this degree with single institutions threatening national solvency.

We need to strike a model of what wish to have as a national financial system, and begging to invest towards that, and not try to reflate a bubble that ought never to have existed in the first place.

Nationalization does not mean the banks will be run by the government. It means that they will be taken into receivership, broken up, and made once more into banks. Those which are not nationalized must be constrained by a new "Glass-Steagall" law limiting their ability to imperil the national economy for their own personal gambling interests.

That is the point that is being lost in this opaque analysis and muddled discussion. The Big Money Center Banks will be nationalized one way or the other. The only real variable is how much money they can take out of the system before it happens.


Bloomberg
Dodd Says Short-Term Bank Takeovers May Be Necessary
By Alison Vekshin

Feb. 20 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for “a short time” to help lenders including Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years.

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd said on Bloomberg Television’s “Political Capital with Al Hunt” to be broadcast later today. “I’m concerned that we may end up having to do that, at least for a short time.”

Citigroup and Bank of America, which received $90 billion in U.S. aid in the past four months, fell as much as 36 percent today on concern they may be nationalized. Citigroup, based in New York, fell as low as $1.61. Bank of America, based in Charlotte, North Carolina, tumbled as low as $2.53.

President Barack Obama’s administration is resisting the idea of nationalizing banks, said Dodd, a Connecticut Democrat. “They prefer not to go that way for all of the reasons that we’re familiar with in terms of the symbolic notion of nationalization of major lending institutions,” he said.

The Obama administration strongly believes a “privately held banking system is the correct way to go,” White House spokesman Robert Gibbs told reporters at a briefing today. “That’s been our belief for quite some time, and we continue to have that,” Gibbs said.

‘Leeway’ on Compensation

Treasury Secretary Timothy Geithner has “an awful lot of leeway” in interpreting the restrictions on executive compensation included in the economic stimulus bill and opposed by the banking industry, Dodd said today.

Treasury officials are still examining how to implement the new compensation restrictions and have not yet determined whether they will apply to participants in the administration’s rescue plan or only to banks and companies that get cash injections from the Troubled Asset Relief Program.

Compensation consultants including Alan Johnson, founder of Johnson Associates Inc. in New York, said the rules may be “catastrophic” to Wall Street’s talent base. The caps made top- producing employees “nervous,” and those who can find other jobs will probably leave, said James Reda, who heads a compensation firm in New York.

“I’m sort of stunned in a way that some people are reacting the way they are about all of this,” Dodd said. “At a time like this, everyone needs to pull in the same direction.”

Dodd also said he doesn’t want U.S. automakers to go through a prepackaged bankruptcy or a “forced merger.” General Motors Corp., Ford Motor Co. or Chrysler LLC risk liquidation with such actions, Dodd said on the broadcast.

Second Largest UK Bank RBS to be Nationalized

If you watch Bloomberg television you may have seen the Royal Bank of Scotland commercial advertisements which display some of the worst corporate hubris imaginable.

RBS is the second largest UK bank by assets, following HSBC. It is being taken over by the British government. Their bailout plan involves the dividend being cancelled, and top management losing their bonuses and jobs, among other things.

AP
RBS to be taken over by British government
By Emily Flynn Vencat
Friday November 28, 12:51 pm ET

Royal Bank of Scotland says British government will buy majority stake in bank

LONDON (AP) - The British government will take over Royal Bank of Scotland Group PLC with a majority stake of almost 60 percent after the shareholders of the nation's second-largest bank shunned an emergency share issue.

The 20 billion pound ($31 billion) rescue takeover, the result of a plan announced last month, means that dividends on common shares will be scrapped and top executives' bonuses will be canceled. Chief Executive Fred Goodwin has resigned and Chairman Tom McKillop, who last week personally apologized to shareholders for the 85 percent fall in the bank's share value, has said he will retire next year.

RBS's 1.8 trillion pounds in assets are topped among U.K. banks only by those of HSBC. Its operations around the world include Citizens Financial Group, a commercial bank holding company headquartered in Providence, R.I., and Greenwich Capital Markets, based in Greenwich, Conn.

Fears about the solvency of RBS intensified this year as the global credit crisis contributed to it writing off 5.9 billion pounds ($9.2 billion) in bad loans. A third of that was due to last year's ill-timed euro14 billion acquisition of part of Dutch bank ABN Amro.

The government's shares will be held by a company called UK Financial Investments LTD. Its charge is to maximize value for taxpayers and prevent politicians from making business decisions about the bank.

"The investment will be managed at an arm's length from government," the Treasury spokesman said.

The bank, which has indicated it could post its first ever annual loss this year, was forced to resort last month to the British government's bailout plan, which offered as much as 37 billion pounds to prop up RBS and two other U.K.-based banks, Lloyds TSB Group PLC and HBOS PLC. In all three cases, the government guaranteed to buy any shares not purchased by investors.

At the government's request, RBS announced a share issue a month ago at 65.5 pence a share. But because its share price has fallen by almost a quarter since then, investors knew the government, in its role as guarantor of the issue, would end up having to shoulder the full amount when the deadline expired Friday. The result is an immediate $5 billion pound paper loss for taxpayers.

Only 0.2 percent of the shares were taken up by investors, leaving the state with the balance and boosting its ownership stake to 57.9 percent. Three-quarters of Friday's 20 billion-pound government investment was in ordinary shares and the remainder was preference shares.

Shares in RBS fell 2.4 percent to 53.7 pence on the London Stock Exchange Friday as investors braced for dividend payments to be cut.

As long as the government owns preferential shares, its restrictions on dividends and bonuses will be enforced. The bank had already scrapped a cash dividend for the first half of the fiscal year 2008, paying instead a dividend in shares.

A Treasury spokesman, who declined to be named because of government policy, called the government's imminent purchase of the stake in RBS "the next step" in "a process that supports financial stability, protects ordinary savers, depositors, businesses and borrowers; while safeguarding the interests of the taxpayer."

The drastic fundraising plan comes on top of a 12 billion pounds rights issue by RBS earlier this year -- at the time the biggest ever rights issue in Europe.

RBS shares were above 380 pence last December, and above 200 pence as recently as Sept. 26.