The New N Word: Nationalization

Call me Inga:

When I was in college, I worked at a local electronics store. Through a chain of corporate takeovers, they eventually wound up in the hands of the now defunct Circuit City. Sent to the company HQ in Richmond, Virginia for advanced training, I went out to dinner with a group of locals. When one of the white dudes at the table casually used what we used to call “the N word,” I — quite literally — ducked under the table.

Instead of gunshots, there were peals of laughter. The black guys thought it even more amusing than the white guys. Ain’t it funny, the NY Jew was stunned at the use of that word. I said something to the effect of “Where I come from, dems fightin words.”

No matter. We now have a new N word today, and its Nationalization.  Why the word is so fearful and loaded is beyond my comprehension. As Bloomberg’s David Reilly writes, “The nationalization debate is a smoke screen. We’ve already nationalized the big banks. Let’s just accept it and move on” — and I could not agree more.

OK, so how do we move beyond the N word?

Instead, why don’t we call it by a more accurate, precise, and less scary name: FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

That is an accurate description of what occurred with Washington Mutual (WAMU) now part of JPM Chase, and Wachovia, now part of Wells Fargo. The Feds step in, seamlessly transfer control of the assets to a new owner, while simultaneously wiping out the debt, the shareholders, and giving a huge haircut to the bondholders.

Let’s look at each of these in turn:

• FDIC mandated: What does that mean? Well, by law, the FDIC is required to handle the liquidation or reorgs of insolvent banking institutions. We have prevented that normal process thru the application of trillions of dollars in bailout monies;

• pre-packaged The entire process is mapped out in advance so as to make it fast and seamless. WAMU depositors did not notice a single change over the weekend their FDIC mandated, pre-packaged Chapter 11 workout, government funded reorganizatio occured. The only observable difference was that WAMU customers were no longer charged an ATM fee when they went to Chase ATMs, as it was now the same company;

• Chapter 11 The full bankruptcy protection applies — meaning employees still get paid, secured creditors do not suffer, and debtor in possession financing (DiP) is available to the bank;

• government funded The source of the DiP funding;

• reorganization Just what it sounds like — new board of directors, management transitions out to a new team, recaptalized, bad debt taken off of the books, toxic assets spun out.

What emerges is a clean bank, no debt, well capitalized, and free of deadly toxic assets. You can see why so many people would find this state of affairs utterly objectionable.

In all seriousness, I understand the objection by shareholders — already down 90% — who would be wiped out by this. I fail to see the merit in the save-the-banks-at-any-cost arguments so many are proferring and preferring.

If the choice is between going Swedish or turning Japanese, you can call me Inga . . .

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Previously:
Why Are Banks So Different From Autos? (December 9th, 2008)
http://www.ritholtz.com/blog/2008/12/why-are-banks-so-different-from-autos/

Time to Get Swedish (January 23rd, 2009)
http://www.ritholtz.com/blog/2009/01/time-to-get-swedish/

Favoring Nationalization Are . . . (February 20th, 2009)
http://www.ritholtz.com/blog/2009/02/favoring-nationalization-are/

See also:
Bank Investors Left to Read Entrails for Guidance
David Reilly
Bloomberg, Feb. 25 2009
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_reilly&sid=axsmjkDYWDsg