BAC and C - Nationalization or Bailout?

**minlita** · 02-21-2009 08:49 PM

Friday nationalization fears drag down bank shares:
- Citigroup (C): C shares tumbled to their lowest level since early 1991 during the regular session. C closed at 1.95 (-22.3%) and in After Hours trading shares climbed 15% to $2.25, in heavy volume.
- Bank of America (BAC) recovered most of its losses to finish Friday down just 3.6%. BAC closed at 3.79 (-3.6%) rose 9% in After Hours trading (closed at 4.13) and topped volume movers with more than 8.2 million shares exchanged.

Now it's time to go back to 2 options:
1 - Nationalization
It may be necessary to nationalize some banks for a short time (a temporarily nationalization), and then spinning them back out
The list of those people in favor of nationalization, our longstanding recommendation for the biggest banks in the financial sector, continues to grow even among some Republicans.
Bailouts cost money (chinese money), there has to be a limit on the bailouts at some point, or we will suffer much bigger problems resulting from a dollar collapse.
2 - Bailout
Recapitalizing the banks is necessary, but it will be costly — and the more current investors share in those costs, the less that burden must be borne by taxpayers.
And any form of nationalization would probably mean the removal of current executives. So it would not reward bad behavior and mismanagement.
That’s exactly what many observers believe previous bailouts, namely the Bush administration’s Troubled Asset Relief Program, have done.
Investors can't seem to shake the notion the U.S. will seize control of a big bank. But experts don't think that's likely.
Bank nationalizations: Don't bet on it - Jan. 22, 2009

Nationalization (also known as deprivatization)
The act of transferring ownership in various segments of the economy from the private sector to the public sector. Nationalization often occurs when a government attempts to maintain the stability of its critical infrastructure during periods of economic distress.
Nationalization generally occurs in the areas of transportation, electricity generation, natural gas, water supply and healthcare because governments want to ensure these sectors are functioning properly so that the country can continue to run smoothly. In addition, electrical, natural gas and hydro companies tend to be monopolies, and governments will often want to have control in these areas to ensure that consumers have access to these essential services at a reasonable cost.

What is nationalization?
Known as the right of eminent domain, this process is usually accompanied by the payment of compensation. By contrast, the concept of nationalization is a 20th cent. development that differs from eminent domain in motive and degree; it is done for the purpose of social and economic equality and is usually, although not always, applied as a principle of communistic or socialistic.
The term nationalization has been used to cover a range of very different outcomes like outright takeover of troubled firms, such as when the Treasury Department put mortgage giants FNM and FRE into conservatorship.
What Bank Nationalization Really Means - WSJ.com

For those in favor of nationalization, this 6 questions need addressing:
1. All US government guarantees of bank debt null and void? Taxpayers are on the hook for $300 billion of C debt and $100 billion of BAC debt.
2. Are we going to create another banks "too big to fail"?
3. Are stock holders/preferred shareholders both be wiped out?
4. Is nationalization process allowing former managers who wrecked these banks to stay in control? For how long? Under what capacity? And what person/committee decides those questions?
5. CDS/derivative contracts liabilities will be wiped out? They should because otherwise taxpayers will be footing the bill. Unless measures will be taken to protect Goldman or others.
6. What bidding process will be put in place and in what timeframe for the assets of the banks? Who decides and why?

You will be affected if your bank is nationalized
1 - Cash, CD and Other Savings held in the bank or its subsidiaries
FDIC (FDIC is backed by the US government) protectes up to the authorized limits ($250,000). it�s good to have couple of bank accounts to immediate access to cash while a nationalized bank is being taken over.
2 - Shares invested in the Bank Stock
Shareholders are the biggest losers in any nationalization, this is why C and BAC fell so sharply friday, common and preferred shareholders will be wiped (like in FNM and FRE).
3 - Mutual or Exchange Traded Funds that have investment in C or BAC
If they are financially focused funds they will take a big hit (review your fund holdings to make sure that they are not too financially centric)
In a cross sector diversified fund the impact will be less due to smaller financial sector exposure.
4 - 401K or IRA Plans that have invested in the Bank
If your 401K plan has money invested in a fund then you will be affected like all other fund holders (see 3) and take a hit to your 401K or retirement account.
5- Bondholders (corporate bonds sold by the company to bondholders to raise money)
MAY be protected if the government honors debt obligations. This will vary on bank-by-bank basis.
6 - Brokerage and Wealth management customers
C and BAC have brokerage and wealth management operations (not part of the core banking functions).
The government will likely sell these off to private operators because they are profitable and have low risk (so easy to sell).
7 - International Investors and Customers
The Bank would be nationalized in America and operate as a separate entity for international purposes and eventually sold off to companies in the host country.

Nationalization in United States
1917: All U.S. railroads were nationalized as the Railroad Administration during World War I as a wartime measure, but were returned to their private owners almost immediately after the war.
1939: Organization of the Tennessee Valley Authority entailed the nationalization of the facilities of the former Tennessee Electric Power Company.
1971: The National Railroad Passenger Corporation (Amtrak) is a government-owned corporation created in 1971 for the express purpose of relieving American railroads of their legal obligation to provide inter-city passenger rail service. The (primarily) freight railroads had petitioned to abandon passenger service repeatedly in the decades leading up to Amtrak's formation.
1976: The Consolidated Rail Corporation (Conrail), another government corporation, was created to take over the operations of six bankrupt rail lines operating primarily in the Northeast; Conrail was privatized in 1987. Initial plans for Conrail would have made it a truly nationalized system like that during World War I, but an alternate proposal by the Association of American Railroads won out.
2001: In response to the September 11 attacks, the then-private airport security industry was nationalized and put under the authority of the Transportation Security Administration.
2008: Some economists consider the U.S. government's takeover of the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association to have been nationalization.
On September 7 2008, the U.S. Treasury announced it would take control of Fannie Mae and Freddie Mac. The move marked the largest such takeover in the United States in decades.

List of people in favor of nationalization
Alan Greenspan FT.com / US / Politics & Foreign policy - Greenspan backs bank nationalisation
Gordon Brown http://www.bloomberg.com/apps/news?p...=aCKRyD7vWfnE&
Joseph Stiglitz Commentary: How to rescue the bank bailout - CNN.com
Paul Krugman Economics and Politics - Paul Krugman Blog - NYTimes.com
Alan S. Blinder, Princeton http://www.nytimes.com/2009/01/25/bu...my/25view.html
Nassim Taleb James Saft | Journalist Profiles |
Nouriel Roubini washingtonpost.com
J. Bradford DeLong Grasping Reality with Both Hands: Time Not for a Bailout, But for Nationalization...
Dennis Gartman Dennis Gartman on Gold, Oil, Government and the Economy -- Seeking Alpha
Chris Whalen Analyst: "Nationalization" of Citi and BofA Inevitable in 09: Tech Ticker, Yahoo! Finance
Jeff Matthews Jeff Matthews Is Not Making This Up
John Mauldin Thoughts from the Frontline
Matthew Richardson Nationalize the Banks! We're all Swedes Now
Dylan Ratigan Nationalization Now - The Daily Beast
Nicholas Kristof (New York Times) http://www.nytimes.com/2009/02/12/op...12kristof.html
Richard Parker (Newsweek) History: Why Nationalization Isn't Un-American | Newsweek Business | Newsweek.com
Michael Hirsh (Newsweek) Hirsh: Why We Should Break Up the Big Banks | Newsweek Voices - Michael Hirsh | Newsweek.com
David Reilly (Bloomberg) Bloomberg.com: Opinion
Blodget (Silicon Alley) Can We PLEASE Just Fix Banks The Right Way?
Willem Buiter (FT) FT.com | Willem Buiter's Maverecon | Time to take the banks into full public ownership
Adam Posen (Peterson Institute for International Economics) McClatchy Washington Bureau | 02/19/2009 | Nationalizing troubled banks may be the only answer
Jeff Macke If the British Empire Wasn't Too Big to Fail, Neither is Citigroup - Minyanville
Sen. Lindsey Graham Sen. Graham says bank nationalization an option | U.S. | Reuters
House Speaker Nancy Pelosi http://www.nytimes.com/2009/01/26/bu...y/26banks.html
Republicans (just some) Even Republicans may back U.S. bank nationalization | Top News | Reuters
Todd Harrison Freaky Friday Potpourri: How Will the Market React to Nationalization? - Minyanville
Karl Denninger YouTube - White House Press Secretary Defiles The Office of The President
naked capitalism naked capitalism
Eddy Elfenbein (Crossing Wall Street) http://www.crossingwallstreet.com/ar...omme_to_swe.ht
Bronte Capital Bronte Capital: We are not close to being Swedish yet
Roger Ehrenberg, Information Arbitrage Information Arbitrage: Nationalization Isn't a Dirty Word
Felix Salmon Why Nationalization is the Best Alternative - Finance Blog - Felix Salmon - Market Movers - Portfolio.com
Interfluidity (Nationalize Like Real Capitalists) Nationalize Like Real Capitalists | The Big Picture
Urban Digs Financial Black Hole: Close To Nationalization? ? Manhattan Real Estate: New York City Real Estate Tips
Matthew Richardson
Dylan Ratigan (CNBC, Daily Beast)
Elizabeth Warren, TARP Oversight Panel
Josh Rosner
Jack McHugh
Bill King
Jesse Eisinger, Conde Nast Portfolio
Aaron Task (Yahoo Tech Ticker)
Mark Gongloff (WSJ)
Paul Vigna (Dow Jones)
Mark Gongloff (WSJ)

List of people opposed of nationalization
Ben Bernanke Bernanke Rejects Nationalization, Defends Actions
Meredith Whitney, Oppenheimer Video - CNBC.com
Deroy Murdock (NRO) Just Say ‘No’ to Bank Nationalization by Deroy Murdock on National Review Online
Hale Stewart Hale "Bonddad" Stewart: The Problems of Nationalization Still Remain
Tyler Cowen Marginal Revolution: Why bank nationalization is a last resort
President Obama
Tim Geithner
Lawrence H. Summers
George Soros
Larry Kudlow
James Cramer

**eddie** · 02-22-2009 08:12 AM

Bank 'stress tests' to start soon

"Initial plans for the stress tests were announced Feb. 10 as part of Treasury Secretary Timothy Geithner's bank stabilization plan, but a source close to Obama administration Saturday for the first time linked the tests to additional government support for large banks." The person, speaking on condition of anonymity, said if institutions are found to need additional capital, financial authorities will provide them with an "extra cushion of support."

Dodd hinted last week that some big banks not passing the stress test might need to be "NA..........." (don't want to use the word, it is like a curse for an investor

) . However, this source is now hinting at additional support for weak banks, rather than "NA......." .

If this could be confirmed officially, we could see a nice rebound for the banks in the coming week.

**minlita** · 02-22-2009 07:19 PM

U.S. bank stress tests to show capital needs: source

Sun Feb 22, 2009 4:24am EST

By David Lawder

WASHINGTON (Reuters) - Financial regulators will soon launch a series of "stress tests" to determine which of the largest U.S. banks should get bigger capital cushions in case of a deeper recession, a person familiar with Obama administration plans said on Saturday.

The person, speaking on condition of anonymity, said if institutions were found to need additional capital, financial authorities would provide them with an "extra cushion of support."

Banks are expected to receive additional information about the tests in the coming week from regulators.

The largest U.S. banks are "well capitalized" for current conditions, the source said, but the Obama administration wants to ensure they can withstand a more severe economic climate and play an important role in helping restart the flow of credit.

Initial plans for the stress tests were announced on February 10 as part of Treasury Secretary Timothy Geithner's bank stabilization plan, but the source on Saturday for the first time linked the tests to additional government support for large banks. That person did not specify what form any extra capital cushion may take.

Little is known about the form of the stress tests, but the person described them as "consistent, forward looking and conservative."

The Obama administration tried on Friday to ease market fears the government was poised to nationalize some large banks that are struggling with losses and a lack of confidence, notably Citigroup and Bank of America.

Bank shares fell sharply, with Citigroup plunging 22 percent to below the $2 fee of a typical automated teller machine, or ATM, and Bank of America trading around the $4 level.

White House spokesman Robert Gibbs said on Friday, "This administration continues to strongly believe that a privately held banking system is the correct way to go."

That was quickly echoed by a statement from the U.S. Treasury.

INVESTORS LOSE CONFIDENCE

Citigroup and Bank of America have each received $45 billion in government capital in recent months and guarantees against losses on portfolios of illiquid mortgage assets -- aid that now exceeds their market value.

With investors losing confidence in the sector as recessionary losses on real estate and commercial loans mount, analysts say the government may have to do more to prop up the largest banks.

But rather than opting for a sweeping takeover, the government may act more incrementally, demanding a little more control every time Bank of America or Citigroup seeks more capital, analysts said.

Major interventions in financial institutions, such as Bear Stearns 11 months ago, American International Group in September and a second-round investment in Citigroup, occurred just after major drops in share prices made it clear they could not raise private capital.

The government "will try to do everything they can before they nationalize banks, but they may ultimately do it," said Lee Delaporte, director of research at Dreman Value Management, which has $10 billion under management.

"The bank stocks are telling you nationalization is going to happen," Delaporte added.

Thus far, the Treasury has put up about $235 billion for banks largely by purchasing only preferred shares to avoid diluting common shareholders. Under Geithner's revamp, those injections could come in the form of shares that could be converted to common equity if necessary.

The lack of detail in Geithner's bank plan, particularly about a $500 billion to $1 trillion public-private fund to soak up toxic assets, has fueled investor concerns that bank takeovers could become an option. Geithner did not specify how much money would be earmarked for bank capital injections under the plan, which mapped out how the second $350 billion of the $700 billion bailout fund would be spent.

Geithner has devoted $50 billion to modify troubled mortgages and $100 billion to support a $1 trillion Federal Reserve asset-backed securities lending facility aimed at unblocking frozen consumer credit markets.

Lawmakers have pressed Geithner on whether and when he will return to seek more funding to shore up the banking system. Geithner told Congress on February 11 that as the "design elements" of his plan were fleshed out, he would have a better handle on the ultimate risks and costs for the program.

(Additional reporting by Dan Wilchins in New York; Editing by Peter Cooney)

**d300** · 02-22-2009 08:58 PM

minlita,

Will the premarket for monday give us a headsup on what will happen to C and BAC?

http://www.marketwatch.com/news/story/Report-Citi-talks-feds-increase/story.aspx?guid={9C420F15-993C-4BF5-AC4C-20AD3F660274}&dist=hplatest

Report: Citi in talks with feds to increase government stake
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Last update: 8:30 p.m. EST Feb. 22, 2009
Comments: 53
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C 1.95, -0.56, -22.3%) is in talks with federal officials for the U.S. government to expand its ownership of the bank, according to a report in the online edition of the Wall Street Journal, citing people familiar with the situation. The report said that while the talks could still fall apart, discussions center on the government ending up with as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, the Journal reported its sources have said. The proposal was made by Citigroup to its regulators, according to the report, which also noted the Obama administration hasn't indicated if it supports the plan. End of Story

**minlita** · 02-23-2009 05:18 AM

Bank 'stress tests' to start soon

"Initial plans for the stress tests were announced Feb. 10 as part of Treasury Secretary Timothy Geithner's bank stabilization plan, but a source close to Obama administration Saturday for the first time linked the tests to additional government support for large banks." The person, speaking on condition of anonymity, said if institutions are found to need additional capital, financial authorities will provide them with an "extra cushion of support."
Dodd hinted last week that some big banks not passing the stress test might need to be "NA..........." (don't want to use the word, it is like a curse for an investor ) . However, this source is now hinting at additional support for weak banks, rather than "NA......." .
If this could be confirmed officially, we could see a nice rebound for the banks in the coming week.

Hi Eddie! Take a look at this video:

Andrew Sullivan Believes Stress Tests Will Lead to Nationalization of the Banks:

Andrew Sullivan, appearing on the Chris Matthews Show, predicted that that President Obama would end up nationalizing several major banks, and that the stress tests for these financial institutions that Treasury Secretary Geithner has proposed are the first step in explaining to the American public, for which nationalization is a charged word, why this has to happen.
Two senior Republicans, Senator Lindsay Graham of South Carolina and Representative Peter King of New York said this morning that nationalization of the banks must remain an option.

Watch Sullivan's prediction below.

YouTube - Andrew Sullivan Believes Stress Tests Will Lead to Nationalization of the Banks

**eddie** · 02-23-2009 06:09 AM

Lets roll .............

Bloomberg.com: Worldwide

Just some clarification about how the above will play a role in everything -

Turning the preferred into common would instantly save the bank money it sorely needs, and would bolster a key measure of the bank's capital strength by more than 70 percent instantly.
Converting preferred shares to common would mean the government would give up dividend income and some protection if a bank went bankrupt.

**minlita** · 02-24-2009 09:34 AM

Originally Posted by eddie

Lets roll .............

Bloomberg.com: Worldwide

Just some clarification about how the above will play a role in everything -

Turning the preferred into common would instantly save the bank money it sorely needs, and would bolster a key measure of the bank's capital strength by more than 70 percent instantly.
Converting preferred shares to common would mean the government would give up dividend income and some protection if a bank went bankrupt.

Joshua Rosner is Managing Director at independent research consultancy Graham Fisher & Co and advises regulators and institutional investors on housing and mortgage finance issues. Previously he was the Managing Director of financial services research for Medley Global Advisors. In early 2003 Mr. Rosner was among the first analysts to identify operational and accounting problems at the Government Sponsored Enterprises, in the third quarter of 2005 Mr. Rosner identified the peak in the housing market, In October of 2006 Mr. Rosner highlighted the likely contagion from structured securities and credit markets into the real economy.

~~~

Citi View
February 23, 2009
Joshua Rosner
646/652-6207
jrosner -at- graham-fisher.com

Discussions about the stress test continued over the weekend � they were inextricable tied to Citi rumors. We should hear new details this week.

Unfortunately, I expect that the market will find the approaches too complex, to opaque, too reliant on complex instruments and, therefore, too obvious in their attempts to deny the dire reality of the situation - a few large banks won�t be able to survive.

Instead of doing the straightforward thing and getting it behind us, I expect the Administration to continue, a now long tradition, of pushing the problem to another day and thus will allow losses to rise materially even from here. I don�t believe this is done with improper intentions but rather as a result of a lack of personnel with appropriate experience in capital markets and in
resolving bad institutions.

While conversations in Washington and Wall Street are posited as discussions about �the banks�, they continue to ultimately appear to be discussions about Citi. It is true that as Corporate loan losses rise to record levels (I estimate late Q3) and construction loans head that way as well (Q2/Q3), the conversation will be about a few more large institutions. Up to this time, everything we have done seems to have been done with Citi forefront in Treasury�s mind. This only supports the view that our approach should be to get ahead of the curve on the largest and most complex resolutions so we have some experience and so that we have fewer resolutions to juggle 6 months from now.

Unfortunately, all indications are that the government continues to argue that they �can�t dilute the equity holders too much or the companies would never be able to raise capital in the private markets�. Oh, the absurdity� they are toast! They are not going to be able to raise private capital. They need to be cleaned out and resolved. Buyers will always come back to invest in an attractive company with good prospects. Nothing we do, short of resolving and restructuring it, or truly abusing the taxpayer, will ever result in an attractive investment opportunity in a Citi whose prospects are bright.

Then officials say �but if we issue public cease and desist orders to these sick large banks (Citi), as is the regular way to demonstrate a degree of control, it would spook the markets�. Are you kidding, have you looked at where the indices are or where the relevant stocks are trading? The markets are way ahead of policymakers. Only cutting off the head of the beast would calm markets at this point. The faster we demonstrate a willingness to kill the terminally wounded the sooner the viable will begin to trade based on fundamentals and not faulty assumptions.

Addressing Citi is not as complex as people (mostly within the NY Fed and Treasury) argue it is.
Part of the problem is the visceral and gut reaction people have to the word �nationalization�. We must remember that word, like love, means different things to different people. The FDIC �nationalizes� depository institutions every week - they seize them and either do open market sales of the viable
businesses to strategic buyers (sometimes with imputed bridge financing) or they wind down the institution. During this process the law requires a parent holding company to act as a source of strength to its depository.

We could do this with Citi. Yes, it is a larger scale than typical but it is achievable. As a friend said �let the FDIC be the FDIC�. Depending on the capital we need to provide up-front we should expressely wipe out or dilute - on a dollar for dollar basis - the equity, we can then provide 6-9 months of bridge financing which would finance operations while it was being sold off in pieces. We could then begin to auction off business units. As this process unfolds it will become clearer how large the losses will be after considering depositors and secured debt holders. As the process goes on the Company will become smaller and more manageable and investors up the capital structure will have more insight into the value of their preferred or debt investments. Depositors are insured, as are certain debt holders, the government would be wise to say this every time they walk out in public.

There are only a couple of large banks that are likely to find themselves in such a critical condition that they might be handled this way - making the process manageable. If we provided bridge funding to acquirers of some of their units some of those buyers might actually become healthier. Remember, this doesn�t even necessarily mean that the government will replace existing management at this time. Prior to the current, failed, approach to Fannie and Freddie, the managements of those companies rant
them under a very effective consent decree for several years. That is the management template.

I must add that, unlike the usual public process of proposed rulemaking which puts forward and idea and then seeks public comments to be considered and incorporated into the, this Treasury continues in the opaque and secret manner of the last Treasury. They hold secret meetings with select
interested parties, as they are doing today and tomorrow on the modification plan, and thus create an unleveled playing field. More importantly, this approach is precisely the reason that they are not trusted and that the markets are selling off.

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