Why is nationalization a better choice than the more typical FDIC Receivership? Already this year, the FDIC has taken control of 13 banks, compared with 25 all last year. The way this happens is that the primary regulator declares the bank insolvent, and it names the FDIC as receiver. In the case of a state-chartered bank, a state agency makes the call. In the case of a national bank, chartered under federal law, the primary regulator makes the call. There are administrative procedures for making this appointment. Neither the regulator nor the FDIC has to go to court and get a judge to do the appointment, or to supervise the receivership.
The Ocala National Bank was closed by the Office of the Comptroller of the Currency. The Corn Belt Bank and Trust Co. was closed by the Illinois Department of Financial and Professional Regulation, Division of Banking. The FDIC was aware that the banks would be closed, and it was ready with a plan. For Corn Belt Bank, the plan was to sell the deposits (other than brokered deposits) and certain assets to another bank. The buyer paid a premium for the deposits, and apparently paid the face value of the most of the assets. The remaining assets will be sold when possible by the FDIC.
This is a streamlined and cheap procedure. But the FDIC is straining at the seams with the steadily increasing number of failures. The New York Times reports that the FDIC is currently trying to unload some $40bn worth of assets, and is having a real problem doing it. Some of the loans are sold at internet auctions. Real estate and other collateral are sold by local agents. And, of course, we are moving to privatization:
And — in the most closely watched tactic — the F.D.I.C. is negotiating a series of billion-dollar deals with private equity partners who will take over huge batches of loans in exchange for a chunk of the sale proceeds.
The biggest bank closed this year had assets of $1.7bn. Last year saw a couple of huge failures, IndyMac and Washington Mutual. WaMu was sold outright to J.P. Morgan Chase for a premium to deposits and assets. IndyMac was sold in a complicated transaction, which is leaving the FDIC with maybe $25bn in assets the private buyer wouldn’t take.
IndyMac is pretty big, but its securities portfolio was $6.9bn, all of which was sold in the transaction. Compare that with Citibank (page 87): its trading portfolio is $202.8bn. The bank’s trading portfolio alone is 29 times bigger than IndyMac’s. But Citibank is part of Citigroup, and on a consolidated basis, the trading portfolio is $457bn. This really is a lot of money. And it is complicated. It isn’t just a bunch of bonds: here is the mix:
|In millions of dollars|| September 30,
|U.S. Treasury and federal agency securities||$ 36,090|
|State and municipal securities||17,893|
|Foreign government securities||60,401|
|Corporate and other debt securities||106,593|
|Mortgage loans and collateralized mortgage securities||38,242|
|Total trading account assets||$ 457,462|
That portfolio ought to give anyone pause. Someone needs to monitor and take care of it when the bank is taken over, regardless of how it is done. And remember, Citibank is just one unit of Citigroup, and no one knows how the $202bn portfolio of the bank is related to the $457bn portfolio of the whole group. In fact, probably only insiders know exactly how inter-related these entities are. And here’s an interesting factoid, the total liabilities in the trading account for derivatives, netted out, are $103.4bn (page 135). Derivative assets are shown at $92.9bn. Hmmm, looks like a net loss on derivatives of $10.5bn just waiting. Or is this just another example of exactly what it means to be too big to fail: ordinary people can’t figure out the financials.
The bankrupt Chicago Tribune Company owns a bunch of newspapers and media businesses, and it owns the hallowed Chicago Cubs. These businesses are somewhat related, but it would be fairly easy to sell off the discrete business units. Money businesses aren’t like that: we have no idea of the interrelationships of these entities and the intertwining of their securities. So just ask yourself: what would happen if we jerked Citibank out of Citigroup?
Nationalization starts to make a lot of sense, doesn’t it? We take Citibank from Citigroup by getting voting control over it, appoint a public board of directors, replace management, and then start the unraveling process. Publicly.
We get our team monitoring things, instead of the current crop of failures. Them we fire. Publicly.