Banker bonuses

[Darius871]

Darius, I'm with you man. You may want to add bold to the block caps for your next stating of the blatantly obvious...

-Arrian

Actually Ben's 100% right, we SHOULD give the shareholders "fair compensation." It'd go precisely like this:

Uncle Sam: "Oh, so your share's worth $0 on the open market since [Bank X] is insolvent?"
John Q. Shareholder: "Yep, bummer dude."
Uncle Sam: "Fine then, here's your $0 to make you whole!"

[Agathon]

Fine, then let them fail.

If they are insolvent and cannot be saved, why are they being nationalized?

Because they want to save capitalism. If the banking system fails, then how will credit be allocated throughout the economy? New banks won't just appear overnight, fully ready to take over.

Look at it this way: if the water utilities went bust, then it would be very easy for them to be sold to new operators. But if the banking system goes bust, how will anyone be able to raise the credit to buy the old banks? When the water utility goes bust, it doesn't mark a lack of confidence in water, but when all the banks go bust it means a complete lack of confidence in the means of distributing credit throughout the economy.

[Darius871]

Look at it this way: if the water utilities went bust, then it would be very easy for them to be sold to new operators. But if the banking system goes bust, how will anyone be able to raise the credit to buy the old banks? When the water utility goes bust, it doesn't mark a lack of confidence in water, but when all the banks go bust it means a complete lack of confidence in the means of distributing credit throughout the economy.

You assume it's more systemic than it is. A number of American banks remain solvent, plus the Chinese and many oil importers still have more domestically useless U.S. dollars than they know what to do with. There will still be sources of credit, just at much higher interest rates.

[Agathon]

See: "too big to fail."

Which, of course, is too big to exist. So not only should they be nationalized temporarily, they should be broken up when they are re-privatized.

-Arrian

Then they'll just reform and/or metastasize again. Regulation will not stop them, because in the end they will simply lobby until the regulations are removed, or more likely remove themselves to polities where they can bully the regulators more efficiently.

Capitalism is an inherently self-destructive system.

If the banks are broken up and privatized, we'll be here again in 15-20 years, possibly quicker.

[Ben Kenobi]

IF THEY'RE INSOLVENT AND THEREFORE WOULD FAIL WITHOUT NATIONALIZATION ANYWAY, THEN WHY COMPENSATE IN THE EVENT OF NATIONALIZATION?

Why bother nationalizing them if they are worthless? Obviously the businesses do have value, which is why changing the management makes them profitable again.

If the businesses were completely worthless, they would be allowed to fail. They aren't which is why they are getting bailed out.

That's why they are going the nationalization route because they can pick up the assets for a song and screw all the stockholders over. Flip it and then flip it back, make a good profit. It's a great scam.

[Agathon]

Why bother nationalizing them if they are worthless?

Because the market has failed. The market isn't pricing the existence of the banks properly. In essence, the market is saying that having a properly functioning banking system is not a worthwhile use of our resources. That's why the banks are failing.

But anyone can see that this is ridiculous. Hence, someone has to say "stop".

[Kidlicious]

That is all.

[DanS]

Che: Seems pretty obvious why you couldn't get things done. You wouldn't even have corporations (corporations by definition limit liability).

[Darius871]

Why bother nationalizing them if they are worthless? Obviously the businesses do have value, which is why changing the management makes them profitable again.

If the businesses were completely worthless, they would be allowed to fail. They aren't which is why they are getting bailed out.

No. The nationalization would of course involve huge infusions of cash to keep operations running and eventually, after extensive and expensive auditing, the treasury's absorption of bad assets (and their related losses) before fresh IPO's, not just "changing the management." Nationalization involves spending money that insolvent banks otherwise wouldn't have at their disposal.

Do you seriously think a bank with debts far in excess of assets & cashflow could somehow be saved by "changing the management"? No, they'd go into bankruptcy, and since creditors automatically have priority in either restructuring or liquidation, stockholders (whether voting or nonvoting) would be immediately wiped out. That's how it works.

It's very simple. [Severe insolvency's necessity of bankruptcy] = [$0 share value] = [$0 compensation warranted in the event of nationalizations limited to insolvency]. Tell me what I'm missing.

[Ben Kenobi]

BS. First of all, any intelligent investor should have enough sense of systemic risk and history to know that temporary nationalization of at least some banks is a very real possibility in the event of severe financial crisis.

Any sensible investor, once the first TARP bank is nationalized and the stockholders are screwed, will immediately sell all shares they have in any TARP bank, because they cannot trust the government to respect their property.

This is why the government should, if it chooses to nationalize one of these banks, at least provide some compensation to the stockholders. This way the government prevents a ripple effect from people pulling out all their money from the TARP banks, which the government needs people to do in order to mitigate the problems associated with the financial crisis.

The investors can go and say, ok, even if they do choose to nationalize, I'm going to get something.

Secondly, since only insolvent banks would be nationalized, and since insolvent banks would otherwise have to go bankrupt, the nationalization would only be in lieu of bankruptcy, meaning you lose nothing!

I lose everything.

First, if a business is insolvent, let it fail. Screw this "too big to fail". Nationalization is like paying money to get raped. You get taxed by the government to prop up failing businesses, and then you lose all that you put into the business. If the business fails, that's it. I'm not going to be paying money to keep it going AND watch my shares get destroyed at the same time.

That much should be obvious. If the bank's insolvent, your choices are either A) bankruptcy or B) nationalization, but in either case shareholders get hosed. I don't think anybody here is suggesting that solvent banks should be nationalized.

We don't know which are solvent and which are insolvent. All of these banks have good assets which is why they've been nationalized to sift the gold from the garbage. At least with a bankrupcy there's no bull**** like the government stealing all the assets from the company, and then flipping it around to sell it for a song to someone else.

I didn't say that, you did. I said that those who retain shares despite a policy they oppose are as responsible for their own losses as those who supported said policy. That doesn't mean "OMG SELL EVERYTHING NOW!!!1" but rather the past tense "you should have sold off in an orderly and gradual fashion years ago when the writing was on the wall, but you didn't, so here's the result."

Nationalization means that every TARP business fails ASAP. So the government has a choice. Placate skittish investors here, or watch everything go down.

A) Aren't you the one who just said a selloff panic should be avoided? B) Who would be stupid enough to buy shares that are 100% sure to be torched?

What it basically says is that we are going to give warning in advance, and prevents an immediate sell-off of all the other TARP banks.

Warning, we are going to nationalize.

Selloff

Nationalization.

vs.

Nationalization.

Investors screwed.

Investors selloff all TARP banks.

[Ben Kenobi]

No. The nationalization would of course involve huge infusions of cash to keep operations running and eventually, after extensive and expensive auditing, the treasury's absorption of bad assets (and their related losses) before fresh IPO's, not just "changing the management." Nationalization involves spending money that insolvent banks otherwise wouldn't have at their disposal.

Nationalization is only done when the government feels it can make sufficient return off the company once things turn around. If they were truly insolvent, then they wouldn't be nationalized. Sooner or later, the government expects to get paid off.

Do you seriously think a bank with debts far in excess of assets & cashflow could somehow be saved by "changing the management"?

Yes, it's possible. It may not succeed, but if you changed the management and other things went well, you could save a company far into debt. It really depends on the situation.

No, they'd go into bankruptcy, and since creditors automatically have priority in either restructuring or liquidation, stockholders (whether voting or nonvoting) would be immediately wiped out. That's how it works.

That's a cost of doing business.

It's very simple. [Severe insolvency's necessity of bankruptcy] = [$0 share value] = [$0 compensation warranted in the event of nationalizations limited to insolvency]. Tell me what I'm missing.

Share value of the TARP companies is not 0. They may have debts over their assets, and deficit greater then their cash flow, but that doesn't mean there isn't some value in the company. So long as it has some assets on hand, it has some value.

[Darius871]

Any sensible investor, once the first TARP bank is nationalized and the stockholders are screwed, will immediately sell all shares they have in any TARP bank, because they cannot trust the government to respect their property.

This is why the government should, if it chooses to nationalize one of these banks, at least provide some compensation to the stockholders. This way the government prevents a ripple effect from people pulling out all their money from the TARP banks, which the government needs people to do in order to mitigate the problems associated with the financial crisis.

The investors can go and say, ok, even if they do choose to nationalize, I'm going to get something.

If you're worried about a "ripple effect" of massive selloffs, A) that's precisely why talk of nationalization is presently mere rumor and in practice it'd have to be done quietly and quickly and B) if shareholders had some sort of warning inducing them to sell, why would the rest of the market not have the same information and therefore NOT BUY? You can't have a selloff without buyers, ergo you can't have a selloff of stock that all know is on the verge of being nationalized, i.e. worth $0.00.

I lose everything.

First, if a business is insolvent, let it fail. Screw this "too big to fail". Nationalization is like paying money to get raped. You get taxed by the government to prop up failing businesses, and then you lose all that you put into the business. If the business fails, that's it. I'm not going to be paying money to keep it going AND watch my shares get destroyed at the same time.

Don't you realize what a ridiculous hypocrite you are? One second you say Uncle Sam should "compensate" shareholders for their "property's" "value," but then out the other side of your mouth you say "let them fail," which will mean wiping out the stockholders. So the options you present are 1) let people get $0 for their stock in bankruptcy, or 2) pay them $0+X for that same stock. Do you have any idea how contradictory that is?

Nationalization means that every TARP business fails ASAP. So the government has a choice. Placate skittish investors here, or watch everything go down.

I don't see any problem with the assumption that each bank which chose to accept TARP funds already perceived itself as insolvent. Do you think a confidently solvent bank would be stupid enough to advertise to the market that they needed TARP money?

What it basically says is that we are going to give warning in advance, and prevents an immediate sell-off of all the other TARP banks.

Warning, we are going to nationalize.

Selloff

Nationalization.

vs.

Nationalization.

Investors screwed.

Investors selloff all TARP banks.

Dude, I hate to be captain obvious again, but IF the government were to "warn" the world that they're going to nationalize X, Y, and Z, WHO IN THEIR RIGHT MIND WOULD BUY STOCK IN X, Y, OR Z, KNOWING THAT IT'D BE THEREAFTER MADE WORTHLESS BY NATIONALIZATION? YOU CAN'T HAVE A SELLOFF WITHOUT BUYERS!

[DanS]

Darius: The utility of this part of the discussion is apparent. Time to move on.

[Kidlicious]

It's like Ben thinks rich people have a right to be rich no matter what happens.

[Ben Kenobi]

If you're worried about a "ripple effect" of massive selloffs, A) that's precisely why talk of nationalization is presently mere rumor and in practice it'd have to be done quietly and quickly

If it's done 'quietly and quickly', investors will lose trust in the government, and will treat the TARP label as "we will nationalize your ass", and get out.

B) if shareholders had some sort of warning inducing them to sell, why would the rest of the market not have the same information and therefore NOT BUY? You can't have a selloff without buyers, ergo you can't have a selloff of stock that all know is on the verge of being nationalized, i.e. worth $0.00.

Someone like JPMorgan, perhaps? Anyone who is "too big to fail" would love to buy up a company for less then the existing assets available, knowing that the feds have them backstopped.

Don't you realize what a ridiculous hypocrite you are? One second you say Uncle Sam should "compensate" shareholders for their "property's" "value,"

Yes. If I want to take over a business I have to pay the existing market price for the shares, and sometimes more or less depending on the particular takeover. I don't see why the government doesn't have to do the same.

but then out the other side of your mouth you say "let them fail," which will mean wiping out the stockholders. So the options you present are 1) let people get $0 for their stock in bankruptcy, or 2) pay them $0+X for that same stock. Do you have any idea how contradictory that is?

No, it's not contradictory at all. 0 + X ensures that investors do not retaliate against the TARP bubble. If the business fails all on its own, like I said, it's a cost of doing business.

I don't see any problem with the assumption that each bank which chose to accept TARP funds already perceived itself as insolvent. Do you think a confidently solvent bank would be stupid enough to advertise to the market that they needed TARP money?

It depends on how corrupt the management is, and if they really care about the business.

If I'm a manager and I'm guaranteed a pension regardless of whether the company crashes or burns, TARP is like another trip to the piggy trough.

Dude, I hate to be captain obvious again, but IF the government were to "warn" the world that they're going to nationalize X, Y, and Z, WHO IN THEIR RIGHT MIND WOULD BUY STOCK IN X, Y, OR Z, KNOWING THAT IT'D BE THEREAFTER MADE WORTHLESS BY NATIONALIZATION? YOU CAN'T HAVE A SELLOFF WITHOUT BUYERS!

Someone who's too big to fail, has every interest in getting bigger at the expense of the feds.