Toxic credit? Try bad credit personal loans!
Toxic credit means that banks need bad credit personal loans of their own.
Hugo Dixon reports for CNN Money that the U.S. is fighting the nationalization of its banks. As I see it, one of the reasons for this is that snide talking heads will come out and decry such socialism. But considering how much trouble toxic debt is causing for America’s banks, perhaps a holding company mentality is needed to eat up the poison and keep the banks alive.
Shareholders are happy with the bailout cash, but taxpayers get nothing for the trouble. It’s their money being thrown around, but there’s no guarantee that the same people who drove the banks aground in the first place won’t do it again. Don’t leave the kids the keys to the liquor and gun cabinets, I say. No personal loans with bad credit for the irresponsible, either.
Only a “modest” discount
President Obama’s plan, according to Dixon, is to “buy mandatory convertible preferred shares in any bank that fails a stress test.” This plan is going into effect now. This will be changed into ordinary shares if necessary for the bank’s survival. So, the government may end up owning these banks, even if it doesn’t want to call a spade a spade.
To some, it seems that doing this would kill value for the shareholders. Yet Treasury Secretary Geithner maintains that “the price at which the new capital would convert into ordinary shares would be a modest discount” to the share prices as they stood on February 9.
Will America become a Socialist nation?
Dixon goes on to show how this might work. Citibank’s share price on 2/9 was $3.95, while Bank of America’s was $6.90. That’s double In both cases, that is roughly double where the stocks stood on the Friday before. Exchanging the government’s $45 million stake in each would still be a huge dropoff for the shareholders on a per share basis. Government would end up with 68% of Citi and 51% of BofA. But, says Dixon, “if the banks’ ordinary capital is wiped out, selling shares to taxpayers at twice Friday’s price will seem a positive bargain” for them. Whatever the case, this problem needs a solution, because bad credit personal loans for bad bank behavior cannot continue.
Nationalized banking systems have a mixed bag of results. They work sometimes, but they usually fail and/or fall by the wayside. Some form of tighter regulations may be a better way to go, because whether some people like it or not, a competitive capitalist system will out perform a socialized one nearly every time, provided that it gets reigned in to the point where they really do depend on customers rather than just playing the stock market.