Senator Graham says bank nationalization an option in U.S.

February 18, 2009 by · Leave a Comment
Filed under: Economic News 

How about letting banks fail as an option?  Atleast this is the step in the right direction.  What I personally don’t want to see is the U.S. taxpayers, with myself included, being left with a bunch of bad assets and debt.  I was reviewing the Comptroller of the Currency’s report on the top 25 banks, look at page 21.  It is interesting looking at the banks total assets compared to liabilities.  On average including OTC derivatives, our 25 largest banks are leveraged 25 to 1, ouch!  The king of the mountain is JPMorgan with a whooping 70 to 1.   This is a scary situation, even a move of 2% can almost wipe out the capital that is securing these liabilities.  It is really sad that our regulators were asleep at the wheel on the derivative market.  If we are going to allow these types of instruments then we need to have reserve requirements to be held against losses.

News:

Nationalization is an option for dealing with troubled U.S. banks if they fail the U.S. Treasury’s “stress test,” Sen. Lindsey Graham said on Wednesday.

The Republican from South Carolina said other options in dealing with struggling banks included simply allowing them to fail, or having the government continue to inject capital into them, but he warned the continued capitalization approach “almost ruined Japan.”

“They (the Japanese) kept throwing good money after bad. I think that is what we’ve been doing quite frankly and we need to stop that,” Graham told Reuters in a telephone interview.

If institutions are truly “zombie banks,” he said, one option for the government “would be would be go in, take the bank over, restructure it, break it up, sell it, get the money back. And you can call that nationalization if you want to.”

The U.S. Treasury is expected in coming weeks to subject up to 25 banks with assets exceeding $100 billion each to “stress tests” to decide which banks need additional capital.

“We need to keep option three (nationalization) on the table for any bank that fails the stress test,” Graham said.

Graham, who is considered one of the more conservative members of the U.S. Senate, emphasized that he was looking for a “stabilizing outcome” for the U.S. financial system, “a surgical intervention versus a nuclear attack on the economy by the government.”

“I’ve never suggested that we nationalize every bank in America,” he said. But in the current crisis, the government should play a limited role. “I don’t believe in sitting on the sidelines, letting everything collapse, (like) Herbert Hoover.”

Graham said others were touting bank nationalization as an option, including Alan Greenspan, the former Federal Reserve chairman. In an interview published on Wednesday by the Financial Times, Greenspan said nationalization could be the least bad option left for policymakers.

Graham told Reuters the U.S. government had already spent over $40 billion to try and rescue Citigroup, but he said the bank’s worth currently was estimated at about half that. Likewise some $45 billion in taxpayer dollars had been spent on the Bank of America, but its value was estimated at only $25 billion, Graham said.

“Protect the taxpayer. Do not prop up zombie banks that are going to fail. Do something other than just give them money. Break them up and sell them, or let them fail,” he said.

Source: Reuters

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