Nationalisation is now a distinct possibility if further capitalisation and bailout failed to save the big banks from insolvency in US. But bank itself do not fail for lack of capital, rather a complete loss of confidence can cause a bank run and subsequent collapse. Banking system cannot survive without confidence, just like religion is not possible without faith. If confidence is lost completely even after all means of recapitalisation, then the only resort left is nationalisation. In simple term, it means the banks is effectively own by the country.
For a country which has champion free market and denounced socialism and communism, nationalisation will be the bitterest pill for the US to swallow. Many American must have remembered big countries like Egypt, India, China and Cuba under Nasser, Indira Ghandi, Mao and Fidro Castro respectively. When these leaders adopted socialism, all key enterprises were forcibly acquired by the states under nationalisation. Many American assets were confiscated through this means especially in Cuba.For this experience, many American anti-socialism and conservative politicians will be dead set against this action. However if the American do nationalise the banks, it is purely an economic imperative. It is important to note that, those nationalisations described earlier were totally politically motivated.
The likely candidates of this excercise are Citibank and Bank of America. Crushed my mountain of toxic assets, paralysed by lack of capital and deserted by investors, these once mighty institutions are just struggling to perform the basic functions of lending and underwriting. The only reason they are still alive is because taxpayers were propping them up with billions. Otherwise, they would have follow Bear Stern and Lehman Brothers to the graves.
Nationalisation has been on the mind of policy makers for some time. The fear was felt by the financial market a few days ago. Those holding substantial stakes cannot sell without triggering bigger fall have to worry of potential loss and money tied down for a very prolong period. Another problem is how to proceed. Actually the US treasury department has already taken over Mortgage giants Freddie and Fannie under word ‘conservatorships’. Perhaps, again US is ingenious in coining words to soft sell the idea of nationalisation.
From the financial perspective, nationalisation of the banks may not be a very big political nightmare for the president and the policy makers. It addresses the problems of not having to price the toxic asset, allow the bank to lend without fear and tackle the confidence factor. But this will take a great leadership skill of Obama to convince the Congress and the American public that this may be the only way to prevent the disintegration of the US banking system.
What does all this have to do with me as a Singaporean? GIC and Temasek have stakes in both Citibank and BofA. IF both these banks do get nationalised, it will means that the stakes will be further diluted as US government would has to inject more money into the banks. We may be compelled to sell back the stakes at very ridiculously low values at a great loss. It will be delisted from the stock exchange and thus there will be no ‘market value’. Technically, the value of these investment are ‘worthless’. This means this investment will have to be kept ‘under the pillow’ for a very long time. After all, they always said these are long term investment. It is not wise to speculate on the outcome of long term investment as the outcome may well be very profitable.
The lesson learnt from this economic crisis is that banks cannot be left to their own devices, barking up all the financial innovations, paying exorbitant bonuses and so on. Surely, regulators have to work harder and maybe take a page from Singapore MAS.
-----------------------------Living to see the world----------------
No comments:
Post a Comment