Legal Commentary

Santelli, Cerberus And Nationalization

By Big Tent Democrat

A clownish CNBC "on-air personality" (I take the phrase from a Chicago Tribune article), Rick Santelli, acted a fool the other day, ranting against help to homeowners in distress (WH spokesman Robert Gibbs rightly dismssed Santelli as someone "who does not know what he is talking about." But today, the NYTimes has an editorial that touches the actual issue with a needle. The editorial asks:

If Chrysler is really on track for a turnaround and all it needs is some financing to get over a bad patch in sales and debt markets, why doesn’t Cerberus Capital Management, which owns 80 percent of the company, put up the money itself? Why should taxpayers have to take the risk? That’s what private equity funds like Cerberus are supposed to do. . . . It seems the secretive private-equity fund is willing to gamble on Chrysler’s survival with the taxpayer’s dime, but not its own.

(Emphasis supplied.) [More...] This argument is available, of course for the distressed financial sector as well. If Citibank, Bank of America, et al, are worth saving, why doesn't private equity step in and save them? Or to put it in Santelli's parlance, do we live in "Communist Cuba?" Of course, the difference between individuals needing relief to avoid becoming homeless (oh by the way and demolishing the housing market) and handing out hundreds of billions of dollars to wealthy investors so they can go gamble at the dogtrack is patent to anyone above the intelligence of a Santelli. But this discussion leads us to the big one - nationalization.

The new euphemism for the issue is bank stability, but I think it applies to automakers with equal force. A NYTimes article reports:

The Obama administration will begin taking a hard look at the financial condition of the country’s 20 biggest banks this week to judge whether they could hold up even if the downturn worsens further than policy makers already expect. These reviews of the banks’ books, known as “stress tests,” are heightening a dilemma for Obama aides about how candid they should be about the health of banks like Citigroup and Bank of America. The tests are expected to take several weeks.

Bank shares were pummeled last week, partly because of rumors that the government might nationalize some of the banks. Officials consider many of the top 20 banks “too big to fail." On Monday, the administration reiterated in a statement that it thought banks should remain private but also offered some reassurance that it would support the banks as needed.

(Emphasis supplied.) This is rather insane. These banks are not too big too fail. They have already failed. Bank shares were not pummeled last week, they were pummelled the past year. In May 2008, Citi was trading at 25. Today it trades at 2. Oh, in case you are wondering, last week it was trading at 3. Long term Citi shareholders have already been wiped out. Short term vultures are counting on the government to make them a bundle.

In the NYTimes story, the government is reported to say:

“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth . . . Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments."

There is one way to do that now - nationalization. Citi, Bank of America and other such financial institutions (and the troubled automakers as well) have to go into "government receivership" (that is a pretty phrase for temporary nationalization) and when the financial crisis and these institutions are stabilized, the government can return them to the private markets.

After all, as Rick Santelli says, this is not Communist Cuba.

Speaking for me only

Full post as published by TalkLeft on February 23, 2009 (boomark / email).