Creeping Socialism?

Its a real dilemma. Some of the biggest & best known names in American banking are, well . . . ready for foreclosure. They've failed. You can still call up your broker (assuming he or she is still employed) and buy stock in either Bank of America (where I started my career) or Citigroup, but the obvious question would be, "Why bother?" In the last year, B of A has lost 84.36% of its value and Citigroup has lost even more: its down by 87.30%. In the last 30 days alone, they're down by 53.29% and 48.44% respectively. Bank of America's market capitalization is a measly $39.9 billion dollars. Citigroup's an even more pitiful $16.9 billion. These were, once upon a time, the largest and most powerful banks in the world. To put that in further perspective, Citigroups' losses for 2008's fourth quarter totaled $8.29 billion. Another two quarters of equally stellar results and there's no equity left at all. Bank of America isn't much farther behind.

If there are any two banks in the U.S. that are really "too big to fail", its these two. But what are you gonna do? No investor, outside the Alzheimer's Investment Club would willingly put their money into these banks' common shares. Enter the U.S. Treasury and its "tag team" partner, the U.S. Federal Reserve System. Investors of Last Resort. When no one else will pony up, there are always these two. I can't see that there is any real choice on this one. The problem is, though, government bureaucrats make really bad bankers. Not that the bankers themselves have done so well. Those of us in China can attest to the fact (yes, a fact) that government owned and controlled banks are subject to political pressure and can all too easily make lending & investment decisions supported by political reasons alone. If you remember "Crony Capitalism" in Southeast Asia (remember the Asian Financial Crisis?) and the mess that Chinese banks have only slowly & recently emerged from, you know what to expect. Of course it won't be exactly the same, but its not a strategic plan that will warm the hearts of anyone who wants a healthy banking sector in the U.S.

The experience of the big four Chinese banks may, ironically, provide a model. Industrial & Commercial Bank of China (ICBC), Bank of China, China Construction Bank, and the Agricultural Bank of China were, for much of their history, part of the Peoples' Bank of China, China's central bank. As such, they were firmly under the control of the central government of China. And, as such, they made most of their loans based on government policy and had little (if any) independence. Predictably, operating results were nothing to brag about. Non-performing loans (NPL's) were difficult to isolate from the rest of the loan portfolio, but ranged anywhere from 20% to close to 50%, depending on who you asked and how you defined "non-performing". That's not sustainable. Today, after years of hard work cleaning up bad loans, selling them off to state-mandated "bad banks' (using one of Washington's latest buzz words) and revamping the management standards of each of the four, the portfolios are much more manageable. Indeed, all four have gone public and, in the process, have become much more disciplined.

My point is not that B of A & Citi should model themselves after the big four Chinese banks. But the Chinese banks do provide a lesson: there is an afterlife for state-owned banks. And while government ownership is not a formula for banking success, the Chinese banks recent history shows clearly that poorly managed banks can be cleaned up and learn to be disciplined financial firms. They can also go public and, in doing so, "go private" -- private in the sense of not being owned by the government. Current Citi & B of A shareholders & bondholders placed their bets long ago on bank management that was doing little more than rolling dice. They lost. If taxpayers are going to have to foot the bill, taxpayers deserve to reap the rewards. Calling it Socialism or Nationalization is not a useful excersize. Let's call it what it is: financial & economic necessity. The sooner the U.S. gets on with it, the sooner the problems can be solved and the sooner the banks can be returned to where they belong: in the private sector.