Got That (Not So) Slow Sinking Feeling

Can you spell "nationalization?"

Seems that folks at RBS are possibly going to learn how very soon - or at least their shareholders might. Thus, the stock was down 67% today. RBS is likely going to report the worse loss ever in British history, over $40 billion. Now that is saying something. In return, the U.K. is backstopping it conditioned upon RBS committing to lending six billion pounds to creditworthy customers. And the next step could be nationalization. I think at the moment that nationalization is the preferred step, but more on that later.

Let's also put aside for now the challenge these days in finding creditworthy customers and concentrate on the wisdom of the lending requirement. I agree there are some companies out there needing credit, needing to roll over debts, needing lines of credit, needing letters of credit, and so forth and so on. Credit is a necessary lubricant in modern business. Plenty of good businesses rely on it daily to support their business model. Top notch companies have debt. So what is wrong with requiring RBS to lend?

It makes little sense to me for them to take an insolvent institution and prop it up with a gun to its head to lend. Just nationalize it and if lending is needed use government funds to do that lending and then wind it down and sell off the good pieces. Mind you, you need to keep it on life support long enough to study the knock-on effects of winding it down as the CDS market is complicating the heck out of doing what is right. But there has to be a way to do it. Today there is not nearly enough business out there for all these financial institutions. If we start propping them all up, we will be doing so for many years to come and we cannot afford to do so. Better to make some hard choices now and remove some competition from those that should survive.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLtny16knr.s&refer=home

By the way, it seems I am not the only one with this opinion.

http://www.economist.com/blogs/freeexchange/2009/01/why_not_nationalise.cfm
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5549589.ece

I know this gets into the whole debate about how how anti-capitalistic the whole nationalization process is, but there are two sides to that story too. How much more anti-capitalistic is it subsidize these companies with taxpayer money and build moral hazard? Interfluidity makes a good case for how nationalization is not a bad thing even for a capitalistic society.

http://www.interfluidity.com/posts/1222502979.shtml

Now Bronte Capital has a different take on the nationalization gig, arguing for the company and shareholders to have time to find the capital on their own. I have two problems with this "due process" approach to nationalization. First, if they are knocking on the government's door they have already probably exhausted other means for raising capital. Second, most of these companies are already on the brink when they come to the government. They do not have weeks left to look for more capital. And when people find out that they went to the government for money, they are in over-night deep doo doo. Nice concept though.

http://brontecapital.blogspot.com/2009/01/slogan-for-new-administration.html

In any event, this all leads up to some comments I have been getting. I have been asked about a good price point to get into Citigroup, BofA or JP Morgan. I do not give advice on individual stock investments. All I can do is point out that nationalization is in the cards and with the new Administration, you know the chances. Just ask the shareholders of RBS. You decide for yourself, but I would rather gamble in Vegas where I better know the odds. I do expect added pressure on U.S. financial institutions in the short term, for whatever that is worth.

Disclosures: None