Saturday, February 21, 2009

What to do about the Banks

The more I think about it, the collapsing market value of big US banks may render the brouhaha over nationalization moot.

The government could simply make the following clear

1) There will be no more sweetheart capital injections into the big banks

2) They can be bought by the government at a reasonable premium to current trading price or they can fend for themselves

We can let the shareholders take it from there.

My guess is that they will force management to take the deal. If they don't it is because management can convince the shareholders that the bank can make it own its own.


In this scenario the government probably overpays for Citi for example, since the stock is probably intrinsically worthless and only trades above zero on the possibility of more government injections. However, right now Citi only costs $10B.

While that's not nothing, it may be a small price to pay to avoid a national food fight over whether the government is unjustly seizing private interests.

Once the bank is fully owned by the government it can be recapitalized. Now the government can inject as much money as it wants and all the profit winds up coming back to the government.

In theory we don't even have to change management. We don't have to do anything at all that disrupts the day-to-day operation of the bank. We are merely changing shareholders, something that happens everyday with bank employees or customers thinking much about it.

13 comments:

Anonymous said...

I guess I'm confused. What would be the purpose of a takeover by share purchase if the point is to formally discharge the debts or otherwise engage in a bankruptcy type proceeding? The bank is insolvent, so it could be taken over any time for free.

thanks,

vachon

smalltownlawyer said...

Well, now I am confused, Mr. Smith, is it give no more bailouts and just takeover, or is it guarantee no bank will fail and transfer bank's obligations to the taxpayers?

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