By Any Other Name, it’s Still the Same

Jose D. Roncal


Nationalization. The word makes one shudder!  It might even drudge up old images of the hammer and sickle or Mao’s men marching in khaki uniforms!  We’ve already mentioned the subject of nationalizing some of the nation’s banks on this blog, but it seems there is much more to say.

There is a real stigma attached to that word, but as David Reilly of Bloomberg noted, “The nationalization debate is a smoke screen. We’ve already nationalized the big banks. Let’s just accept it and move on.”

We think he might be right. Washington Mutual (WAMU) is a case in point.  How did it become part of JP Morgan Chase?  Or how did Wachovia meld into Wells Fargo? Here’s how: the Feds simply grabbed the reins of one bank and transferred control of the assets into the hands of the other.   In one fell swoop, the Feds wiped out the debt, the shareholders, and a sizable chunk of holdings from the bondholders.

What actually took place?  Normally the FDIC is in charge of directing the liquidation of an insolvent bank’s assets.  But the trillions of dollars the government (the taxpayers) funneled into the banks via the bailout packages, skipped right over the FDIC’s role.

It isn’t as if those reorganization transactions were last minute decisions.  The whole process was meticulously choreographed well in advance.  And WAMU was shielded from any Chapter 11 filings and negative headlines. On the surface, it was clean and simple.  WAMU customers went to bed one Friday night, and Monday morning they woke up as Chase customers.


The only noticeable difference was that when they called in to check their balances, they got a cheerful recorded message with the good news that they were all Chase customers now! Congratulations!  You are now part of a well-capitalized clean bank with no debt or any of those pesky toxic assets.

Do you think that would have been possible without some pre-planned mandated government funded workout?  Of course not! When a new board of directors and new management takes over, when bad debts are wiped clean of toxic assets, and when it’s all being done in the background, how does that not smack of nationalization?

What exactly is in store for the “official” nationalization plan?

Here is what we know so far:  The government will guarantee the debt issued by the banks, absorb losses of some of their toxic assets and take ownership stakes through preferred stock in exchange for giving the banks a quick shot of emergency cash.

Basically the Big Four—Citi, Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co will be part of something known as the government’s (our) off-balance- sheet vehicles. That essentially puts the government (us) in the driver’s seat.  

What you might not be aware of is that new accounting rules are working their way through the system that address those off-balance sheet entities.  It basically says that if the government has the controls, which it will, it’s the government’s right to control it.


That’s why the government, regardless of how it might couch what defines actual ownership, has, in effect, already nationalized the banks—at least temporarily.  It remains to be seen whether that turns out to be a good thing or bad, whether it turns the tide or not.

Meanwhile, the public doesn’t know what to think of the idea, other than to naturally suspect the worst. And since perceptions and emotions are the driving force behind the Dow, the market hasn’t been able to find an even footing—certainly not as it pertains to bank securities.

Before things begin to right themselves, before investors can make rational decisions about trading in bank securities, they have to fully understand what the implications of nationalization are.  Judging from the market doldrums, if the concept of nationalization actually does represent a positive turning point, then that message is not getting through.

If the government actions were to create some stability, the financial crisis is far from over. We still think it’s in everybody’s interest to do what’s necessary to get the banks back on more solid ground.  Even then, the financial crisis will be far from over.

But at least, tell us exactly what’s in store for an official nationalization of the banking industry.

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About the author

José D. Roncal is a truly global executive with over 20 years of experience in international business and finance, having worked and travelled frequently in six continents