Around the Street: Nattering about Nationalization
Will they or won't they? Amid continued talk of the nationalization of big U.S. banks, investors were trying to sort out some conflicting signals, including press reports on Feb. 23 that Citigroup (C) is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, with the U.S. winding up holding as much as 40% of Citi's common stock. Meanwhile, the Treasury Dept. reiterated its preference that banks should remain in private hands.
What should investors make of all this? Here is a selection of insights on nationalization—and other key topics—from Wall Street strategists and economists on Feb. 23, as compiled by BusinessWeek and Standard & Poor's MarketScope staff.
The Markets Want Answers
Kim Rupert, Action Economics: Global markets continue to be roiled by the certainty of the recession and the problems in the banking sector, but perhaps more so by the uncertainty over the rescue plans and their ultimate cost. Fears of bank nationalization were on everyone's mind last week and will figure prominently in this week's action, especially with U.S. Treasury Secretary Tim Geithner expected to announce details of President Barack Obama's rescue plan.
Look for more tales of woe from global data releases, while supply [of newly issued Treasuries] will remind us of the massive costs of the rescue effort.
Why Nationalization Would Be Disastrous
Richard Bove, Rochdale Securities: The advocates of nationalization suggest that it would only occur for a "short time." The use of the words "short time" are theoretically meant to ameliorate the blow that nationalization would create. However, if the banking industry was nationalized for only 15 minutes, that would be enough time to (1) wipe out the total investment of common and preferred shareholders in the industry and (2), depending on what nationalization means to its proponents, wipe out the debt holders' stakes in these companies. Plus, (3) it would also raise questions as to whether the depositors had any rights to their money above what is guaranteed by the FDIC. Proponents of nationalization might argue that this view is extreme.
However, if the purpose of nationalization is not to recapitalize the industry, ridding it of its most onerous obligations, why would it be done? At present the obligations of the nation's largest banks are backed by a number of lending mechanisms and guarantees, so nationalization is not needed to create a backing for the banks' obligations. Moreover, if these debt and deposit obligations were not wiped out, the U.S. government could not afford to nationalize the industry. At present the total debt of the U.S. is $10.5 trillion. The portion of that debt in public hands is $5.8 trillion.
A Few Bright Signs
Tobias Levkovich, Citigroup: The recent declines in equity markets on the back of awful economic data, dissatisfaction thus far with government policy efforts, and bank nationalization concerns have created a new sense of uncertainty that has left most investors dazed and unsure of what to do next. Safety trades into the U.S. dollar, gold, and Treasuries have been the result, but those options seem stretched. While it's still early, there are a few legitimate signals coming from data that contend some gradual improvements are in the making for the second half of the year. The investment community does not seem to be looking for clear signs of economic growth quite yet but rather a signal that the descent won't continue to spiral ever lower with no circuit breakers to prevent an economic collapse.
When comparing stocks to Treasuries, the attraction of equities seems compelling, but this is also true vs. other investments including corporate bonds and precious metals. Indeed, various metrics such as sentiment and implied earnings growth continue to support the case for upping equity allocation, including recent awful performance over the past decade.… To be fair, many fixed income investors argue convincingly for more bond investment, especially since highly leveraged hedge funds can no longer step up in a deleveraging world. Thus, a fascinating asset allocation battle has ensued. Rather than slug it out, it seems most reasonable to let the numbers do the talking, which supports adding to stock portfolios.
Bank Lending Increases
Tony Crescenzi, Miller Tabak: New data released late [on Feb. 20] by the Federal Reserve for the week ended Feb. 11 indicate that new loans and leases at the nation's commercial banks increased $14.4 billion, to $7.164 trillion, the third gain in four weeks and the highest level of loans in this category in 7 weeks. While the latest tally is about $108 billion below the peak in October, the peak tally was about $350 billion more than in August, primarily because commercial paper issuers had turned to banks for money, drawing on their credit lines when the commercial paper market froze. The Fed stabilized the CP market, leading to a drop in bank loans, until recently.
Data on bank lending remain key to watch for signs of thawing in the credit crisis. The data are released every Friday in the Fed's report on the assets and liabilities of commercial banks. More important in the immediate period ahead is whether the Fed is successful in reviving the asset-backed securities market, where virtually no credit is flowing.