02.05.09

Nationalization Now

Obama has criticized bankers for their "shameful" actions. CNBC anchor Dylan Ratigan says his next step should be to wipe them out completely.

Ever since the Bush administration and Congress disastrously doled out the first wave of TARP money to failed financial institutions, the American people have reacted with rising indignation to each subsequent abuse of bailout money (see bonuses, jets, stadium-naming perks, fancy dinners, etc.). Our new president called the exorbitant bonuses banks pay their workers "shameful" and capped executive salaries for banks that receive TARP funds at $500,000. However, President Barack Obama has failed to acknowledge that, whether he likes it or not, he is now the de facto chairman of these banks and we the taxpayers are the investors. It is past the time for the president to assume his job as the chairman of our taxpayer-funded financial institutions on behalf of the American public.

First, Obama must end the game being played right now in Washington and Wall Street over whether or not we should nationalize failed banks. This game was finished before the World Series ended in October. Nationalization won. As it is, there are only two choices for who can run our banks:

Choice A: The same executives who stuffed their pockets with bonuses while running their companies into the ground and leaving taxpayers to foot the bill. (Some of these bankers, as recent disclosures of internal communications from ratings agencies suggest, may have engaged in prosecutable fraud.)

Obama must end the game being played right now in Washington and Wall Street over whether or not we should nationalize failed banks. This game was finished before the World Series ended in October. Nationalization won.

Choice B: New bankers appointed by and answerable to the president. These bankers must provide short-term management of troubled holdings. They must act in a fully transparent manner (why take chances?) and expect overall compensation and perk policies in line with other government agencies. Believe it or not, such bankers willing to do their patriotic duty really do exist—men like Gary Parr, the deputy chairman of Lazard; Rodgin Cohen, the pre-eminent banking lawyer in America and the head of Sullivan & Cromwell; and J. Christopher Flowers, who earned billions of dollars while managing distressed banks in Japan.

Once Obama has new bankers in place, he can begin implementing responsible receiverships. As with previous bank failures, this will require wiping out shareholders while protecting deposits. This is, obviously, bad news for shareholders, but unfortunately there is no other equitable solution. The bank receiverships would be able to write down a given bank's toxic assets and auction them off at fire-sale prices, if need be. The receivers could then refloat the banks in smaller pieces, allowing the government to quickly get out of the business of salary caps and lending standards.

The receivers could also resolve questions like what to do with Citi Field (or any of the other 44 potential TARP companies with stadium naming-rights deals). For example, Citi could keep its name on the new New York Mets stadium for advertising purposes. But the receiver could auction off perks, like the luxury boxes that come with a stadium sponsorship. (Much like New York City recently did with its city-owned Yankee Stadium luxury suite.) An added benefit of nationalizing banks is that we will be able to permanently dissolve those that are "too big to fail." We need to enforce a limit on the size of these entities so that, when one of them inevitably collapses, it does not bring down the entire economy with it.

Unfortunately, both the media and our politicians seem intent on leaving banks in the hands of the executives that destroyed them. The arguments that they use to defend the status quo are invariably flawed:

1. The banks didn't even want to take the money! Well, fine. If Henry Paulson forced banks to take TARP money, then they should just give it back now. They can return to paying out bonuses until the cows come home (or the shareholders wake up). Just don't come back to the taxpayers if this plan fails.

2. But the taxpayers are eventually going to make money on the banks! That's true (hopefully), but if they're such a good investment, why not put your own money in them now? There's enough private capital to sustain the banking in this country. The problem is there aren't enough good deals to entice investors. By nationalizing the banks now, we can use public money to repair the banks to the point where private investors will want to take them back over.

3. These banks perform a vital service! So do the other, smarter banks in this country that don't need taxpayer money. And so will the new banks that the government spins off from these failed banks. Better yet, we'll be able to trust these banks not to run off with taxpayer dollars or to pay ridiculous bonuses. There is a reason why, in Monopoly, even though the banker isn't paid for his services, everyone watches him closely.

4. There will be panic and a run on banks! Considering that some of these banks have essentially gone bankrupt and everyone behaved pretty orderly, I think we'll be OK. For the majority of people, the most noticeable difference will be that the name on their ATM cards will change, which everyone is used to anyway.

5. We need to protect the franchise, the workers, the New York City tax revenue etc.! It is terrible that many bankers who had no hand in the mortgage mess will lose their jobs, but if we're really going to spend taxpayer dollars to keep them at their desks, wouldn't it be better to pay them to do something more useful, like be teachers? These are, after all, smart and capable people. Also, spending taxpayer money in order to maintain tax revenues is not exactly what you would call a sustainable approach.

Instead of trying to just use stimulus money to get us out of this mess, President Obama needs to start fixing the underlying issues that caused the crisis in the first place. The quickest and easiest place to start is with our current banking system. Restoring America's confidence in its banking system must be the goal of any bailout, not simply the hope that printing more money will somehow patch up the design flaws in our economy. We have only two choices: Take the pain and fix it the right way or make the same mistakes all over again.

Dylan Ratigan is anchor and co-creator of CNBC's Fast Money. Dylan also co-anchors The Call and Closing Bell. Ratigan served as a global managing editor at Bloomberg News until March 2003. Before moving to television, Ratigan wrote for Bloomberg News.