Nationalize Now

[RedEarth]

By Barry Ritholtz - January 26th, 2009, 7:12AM We’ve been repeatedly noting that the fastest, fairest, cheapest, most efficient way out of the current credit and financial mess is Nationalization.

As we have seem over the past few weeks, the country’s biggest banks — Bank of America and Citigroup — are deteriorating rapidly. They will need far more bailout money beyond the $350 billion of taxpayer cash and guarantees they have already received.

Note that the money already dumped into the black holes of these two financial institutions far exceeds their net worth. And in exchange for this foolish investment, taxpayers have received just 6% of Bank of America, and 7.8% of Citigroup. This is absurd. How a 120% of a company’s market cap yields a single digit ownership stake is beyond my comprehension.

The solution to the banks problems, as well as this ridiculous investment posture, is relatively simple: Nationalize the banks, appoint new management, give them 6 months to spin out 10% of each of the separate viable pieces, with the taxpayer retaining the rest as passive investors. For Bank of America, they can spin out 5 major pieces: BoA, Merrill, Countrywide, a Toxic holdings company, and a Good holdings company. The derivative exposure gets wiped out, put into the toxic holding section.

Stock holders get nothing; Since bond holders would receive some pro-rata share in a liquidation, they get a convertible preferred in the new debt free firm, as well as an opportunity to lend to the new banks at an generous convertible rate.

......

The current bailouts have shown themselves to be expensive, ineffective, and replete with Moral Hazard and other corrupting abuses. Not only are we wasting vast sums of money, but all too often, we are rewarding the incompetent management teams that created the mess in the first place. Its time to move past them.

Nationalize Now.

http://www.ritholtz.com/blog/2009/01/nationalize-now/

[patrice]

1. We're giving OUR money to people who are investing it in FOREIGN competition,say goodbye to our jobs

[Donnachaidh]

2. Citi just took delivery on a 50 MILLION dollar corporate jet

I think we need to nationalize these bastards NOW.

[HamdenRice]

3. Agree completely. What is the market cap of BOA and Citi now?

Anyone? Anyone? Bueller?

It certainly makes no sense to provide an amount in bailout money for any bank that is greater than that bank's market cap.

That's why nationalization is better. I'm not sure, though, that the stockholders should get nothing if market cap is positive.