Comrade Greenspan wants us to seize the economy’s commanding heights.
O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.
The case for nationalization rests on three observations.
First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.
Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.
Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders.
Let’s be concrete here. There’s a reasonable chance — not a certainty — that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn’t remotely large enough to cover those potential losses.
Arguably, the only reason they haven’t already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they’re zombie banks, unable to supply the credit the economy needs.
To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.
But here’s the thing: the funds needed to bring these banks fully back to life would greatly exceed what they’re currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it’s basically putting up all the money, the government should get ownership in return.
Still, isn’t nationalization un-American? No, it’s as American as apple pie.
Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank’s bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that’s exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.
The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.
For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.
Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.
Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.
How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.
And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”
The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.
What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.
In a Daily Beast/CNBC exclusive, Charlie Gasparino reveals how Merrill Lynch’s CEO spent over $1 million and hired the Obamas’ decorator to redecorate his office last year—even as the firm faced a financial crisis.
UPDATE: Bank of America has just announced that Thain will leave the firm, less than a month after its merger with Merrill.
In early 2008, just as Merrill Lynch CEO John Thain was preparing to slash expenses, cut thousands of jobs and exit businesses to fix the ailing securities firm, he was also spending company money on himself, senior people at the firm say.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
Big ticket items included $87,000 for an area rug, four pairs of curtains for $28,000, a pair of guest chairs for $87,000 and fabric for a “Roman Shade” for $11,000.
The other big ticket items Thain purchased include: $87,000 for an area rug in Thain’s conference room and another area rug for $44,000; a “mahogany pedestal table” for $25,000; a “19th Century Credenza” in Thain’s office for $68,000; a sofa for $15,000; four pairs of curtains for $28,000; a pair of guest chairs for $87,000; a “George IV Desk” for $18,000; six wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a “Roman Shade” for $11,000; a “custom coffee table” for $16,000; something called a “commode on legs” for $35,000; a “Regency Chairs” for $24,000; “40 yards of fabric for wall panels,” for $5,000 and a “parchment waste can” for $1,400.
The documents also show that Thain signed off on the purchases personally. “Labor to relamp the six wall sconces” cost $3,000, and Thain authorized the payment of another $30,000 to pay the expenses Smith incurred in doing the work. Thain has hired Smith—whose celebrity client list includes Steven Spielberg, Michelle Pfeiffer, Cindy Crawford and Sir Evelyn de Rothschild—to design and decorate his private residences. They include a Manhattan apartment at 740 Park Avenue, and his 10-acre mansion in Rye, NY.
Thain was tapped to run Merrill Lynch as the firm suffered massive losses from investments tied to the depressed real estate market under his predecessor Stan O’Neal, who was ousted in late 2007. Those losses continued through 2008, forcing Thain and his management team to sell the brokerage firm to Bank of America in mid-September or face near certain liquidation as investors fearing further losses began pulling lines of credit and other financing.
Just last week, Bank of America announced that Merrill has suffered an unexpected loss of $15 million for the fourth quarter of 2008, nearly collapsing BofA’s purchase. Bank of America CEO Ken Lewis said that without $138 billion in government assistance, including the infusion of $20 billion from the federal government he would have pulled out of the Merrill deal, which was approved by BofA shareholders in early December.
Thain has come under pressure in recent weeks after several top executives at Merrill, including brokerage chief Bob McCann and investment banking head Greg Fleming, abruptly resigned from the firm citing differences with Thain. People close to Lewis say his relationship with Thain was further strained by the recent massive loss. Lewis himself has faced withering criticism for rushing the buy Merrill for $28 billion after less than two days of due diligence.
“I don’t want to convey to you that Ken was delighted in mid-December when he found out about the losses, in fact he was pissed at Thain,” one person at BofA who is close to Lewis told The Daily Beast earlier in the week. “He’s not doing anything about Thain now because it isn’t clear whether Thain should have told him sooner. So at least for now, Ken is sticking with Thain.” (A spokeswoman for Thain denied a rumor inside Merrill that Thain is poised to step down from the firm.)
It’s unclear how the disclosure of the personal expenses will effect now Thain’s position. Thain signed off on the purchases in January, people close to Merrill say, when Merrill was still an independent firm and when some analysts believed the company was poised for a rebound with Thain as the new CEO. Thain came to Merrill after a largely successful stint as CEO of the New York Stock Exchange, where he converted the not-profit entity to a public company. Before that, he was a long-time executive at Goldman Sachs, where he served as former CEO Hank Paulson’s No. 2.
Still others say spending so much company money on personal items shows incredibly bad judgment on the part of Thain since Merrill was in the middle of a financial crisis that ultimately led to its demise as an independent company. At the time, Thain was preaching the virtues of cost control, telling employees to reduce expenses including car services, entertainment and travel. In addition to the personal expenses on his office, documents show Thain paid his driver $230,000 for one year’s work, which included the driver’s $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay. Drivers of top executives are often paid about half that amount.
“If this is accurate it has shades of Dennis Kozlowski’s $6,000 shower curtain,” said investor Doug Kass of Seabreeze Capital Management, in a reference to former Tyco CEO Dennis Kozlowski who was convicted of fraud and is serving prison time for improperly spending millions of dollars on personal items. While there is no evidence that what Thain did is either illegal or of the magnitude of the spending by Kozlowski, Kass said “Merrill was on the fence and Thain came into save the company. It’s still a lot of money and there is no rationalization for something like this.”
Charles Gasparino appears as a daily member of CNBC’s ensemble. Gasparino, in his role as on-air Editor, provides reports based on his reporting throughout the day and has broken some of the biggest stories affecting the financial markets in recent months. He is also a columnist for Trader Monthly Magazine, and a freelance writer for the New York Post, Forbes and other publications.
Merrill Lynch CEO John Thain suggested to directors that he get a 2008 bonus of as much as $10 million, but the securities firm’s compensation committee is resisting his request, the Wall Street Journal reports, citing people familiar with the situation.
The committee and full board are scheduled to meet Monday to hear Thain’s formal bonus recommendations for himself and other senior executives of the New York company. The compensation committee is leaning toward denying the executives bonuses for this year, the Journal reports.
Shareholders of Merrill Lynch on Friday approved the securities firm’s acquisition by Bank of America to create the nation’s largest financial services company.
Thain argues he was instrumental in averting what could have been a larger crisis at the firm by contacting Bank of America about a tie-up, the same day Lehman Brothers filed for bankruptcy, the newspaper reports.
Members of Merrill’s compensation committee agree with Thain that the takeover was in shareholders’ best interest, but are weighing the fact that other Wall Street firms, such as Goldman Sachs, aren’t giving out bonuses to top executives, the Journal reports.
Once the merger of Bank of America and Merrill is completed, Thain will be in charge of the combined company’s global banking, securities and wealth management businesses. He won’t join the board of Bank of America.
Reuters points out that several other Wall Street firms –including Goldman Sachs, which did better than Merrill this year– will not be giving out bonuses to top executives this year. Though Thain’s company was sold to Bank of America this year, Thain argued that it could have been worse.
Thain has said he deserves a bonus because he helped avert what could have been a much larger crisis at the firm, people familiar with his thinking told the WSJ.
Members of Merrill’s compensation committee agree with Thain that the takeover is in shareholders’ best interest, but believe it would be foolish to ignore strong public sentiment against large compensation packages, the paper said, citing people familiar with their thinking.
Illinois Governor Rod Blagojevich announced Monday that he is asking all Illinois government agencies to suspend business with Bank of America. Blagojevich contended that Bank Of America received a multi-billion dollar bailout from the government and should accordingly restore credit to the Republic Windows & Doors company in Chicago.