What Happens When Banks Are Nationalized

by: Zubin Jelveh October 09, 2008    
Zubin Jelveh

Zubin Jelveh

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Thanks to the fantastic and timely recent IMF paper and database on historical financial crises by Luc Laeven and Fabian Valencia, we can identify other instances in which a government took equity stakes in major banks as part of a recapitalization program.

This has happened five times since 1970, according to Laeven and Valencia: 


 Finland Jamaica Japan Korea Norway
Crisis date (year and month)
 		 Sep-91 Dec-96 Nov-97 Aug-97 Oct-91
Recap cost to government (gross) (as % of GDP)
 		 8.63% 13.90% 6.61% 19.31% 2.61%
Recovery proceeds (% of GDP)
 		 1.72% 4.95% 0.09% 3.50% 2.00%
Recap cost to government (net) (as % of GDP)
 		 6.91% 8.95% 6.52% 15.81% 0.61%
Fiscal cost net (%GDP) 11.08% 38.95% 23.91% 23.20% 0.60%
Output loss during period t to t+3 59.08% 30.08% 17.56% 50.10% 0.00%

In none of the cases did the government earn a profit from its move. The best return was in the case of Jamacia's 1996 crisis where the government earned 4.95 percent of GDP on the assets it had purchased, but the cost of the recapitalization was 13.90 percent of GDP.

Overall, total recapitalization costs ranged from 0.6 percent of GDP to 15.81 percent. For the US, that range translates into $85 billion to $2.2 trillion.

Total net fiscal costs ranged from 0.6 percent of GDP to 38.95 percent. For the US that ranges translates into $85 billion to $5.5 trillion.

Economic output loss over a three-year period following the onset of the crisis ranged from 0.0 percent to 59.08 percent.

In four out of the five cases, Laeven and Valencia point to financial liberalization as a key cause.

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This article has 17 comments:

  •  
    Oct 09 05:26 PM
    The weblog nakedcapitalism found a good study of over 120 credit crisis / housing or stock market bubbles.

    Here is a quote from that:

    The episodes of credit crunches and housing busts are often long and deep. For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tend to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half.

    And here is the source link:

    www.nakedcapitalism.co...

    As a comparison my own rather elementary calcualtions indicate that housing prices will decline about 50% from the Summer 2006 top, the DOW will hit 7000 points and if the present and future US government keeps on buying bad debt it might be up to 4 trillion US$ in 'bad debt' that has to be bought.....

    If I could I would bring you better statistics & I am not a hypochonder. I am a realist!

    Reply | Link to Comment
  •  
    Oct 09 05:44 PM
    People are complicating the obvious when they talk about all of this. The core problem is simple, and the solution is simple. Core problem: too much credit. The average American is tapped out. Why? 30-40% of their gross goes to Fed taxes. That's the first hurdle. Then they face the others -- state, local, property, sales taxes, etc. Hardly any discretionary left after that, so they turn to credit. The solution: we've GOT to lower that first hurdle...DRAMATICALLY.

    The solution the government has been pursuing, and continues to pursue, is *more credit*...more socialism by ever-bigger government, as it buys *private* debt and assets...and attempts to clear the way for easier credit again! It's a big ramp-up of spending and debt!! The absolute opposite of what is needed.

    Kill the debt problem by drastically lowering that first hurdle, and you *automatically* get consumer spending going again -- it will help many with their mortgage payments, thereby resolving a good portion of that...and also help with additional discretionary spending. And not only *without* the moral hazards of the government socialist big-spending "solution"..... with an *increase* in the justness and moralness of the economic structure!! Because giving people back more of what is theirs is **ALWAYS** the right thing to do!!

    C'mon people, let's get on our Senators and Reps to rethink all this and CHANGE DIRECTIONS!!
    Reply | Link to Comment
  •  
    Oct 09 06:05 PM
    Good article, you have done a lot of research!
    Reply | Link to Comment
  •  
    Oct 09 06:41 PM
    Simple reasoning indicates that DJI headed to 7500 (based on removing the gains since the housing bubble) but can go below 4000 when you factor in the positive (self-enhancing) feedback of the continued loss of capital and credit (unless the Feds can stop that from happening). The only floor is found near 2000 under a global meltdown scenario. Recovery under the worst case scenario is greater than 10 years. Be careful with your funds and your clients funds.
    Reply | Link to Comment
  •  
    Oct 09 06:42 PM
    I love the no-taxes idea.

    What absolute idiocy.

    The only institutions that are working are government institutions and this lunatic decides the answer is to de-fund those.

    It is just amazing to me the mental gymnastics people will go through just so they don't have to admit that the private financial system has simply failed because of fraud and mismanagement.

    Everybody else is to blame because the smart guys of Wall Street and The City cannot possibly be to blame - by definition. After all, they went to those good business schools.

    They have "merit".
    Reply | Link to Comment
  •  
    Oct 09 08:30 PM
    dlaw, I agree with you.
    Reply | Link to Comment
  •  
    Oct 09 08:54 PM
    dlaw,

    yes the are certainly working alright, THEY DON'T HAVE TO BE PROFITABLE!

    question for you: Did GSE's (fannie/freddie) and easy money serve as a catalyst for this problem?

    I need you to answer this before I can reason with you
    Reply | Link to Comment
  •  
    Oct 09 08:54 PM
    hmm...yeah...well how do explain the simultaneous nature of this global crisis? at the same time, similar economic events around the world...

    interesting that it is only happening in countries/zones with central banks, no?

    and yes fraud/greed can be relied upon.
    Reply | Link to Comment
  •  
    Oct 09 11:01 PM
    The Dow plunged 'cause the banks do not want the equity stake.
    Reply | Link to Comment
  •  
    Oct 09 11:41 PM
    dlaw,

    SocCan'tCom will be calling on one of them there 'private' firefighting companies (ala Gangs of NY) when his house is burning down. And of course that 'private' firefighting company responding to his call will have its performance benchmarked by the industry association it belongs to, which in turn provides self-regulating oversight to its paying members. Sounds good to me. Where do we all sign up?
    Reply | Link to Comment
  •  
    Oct 10 01:42 AM
    It's hard to say what would be a better solution, nationalizing banks or letting the big financials go under and spiral cross-defaults which would ultimately cause government bail outs over and over. more, when you say the Dow is sold off because it doesn't want equity stake.. would you rather see it at 13 cents and cause more global turmoil and cross defaults??????? -distressedvolatility....
    Reply | Link to Comment
  •  
    Oct 10 12:26 PM
    To Socialism Can't Compete! I answer that Capitalism Wont Compete.

    Alexander Hamilton, the founding father of our economic system, did NOT believe in the revolutionary ideas of Adam Smith and instead believed in good old Mercantilism or what we called protective tariffs.

    So for almost 150 after his death, and certainly all through the 19th century, America refused to compete with the rest of the world and erected protective tariffs instead. We even FORMALLY refused to recognize the patent rights of other countries, including even book copyright laws. Charles Dickens complained bitterly that he couldn't make any money in America because his books were all pirated here.

    In the twentieth and twenty first centuries, China, Japan and Korea have all done (and do) the same while America complains but buys their stuff even though they wont buy our stuff.

    And yes, I believe in free markets and no, I'm not a closet socialist.

    I'm just reporting the facts, captain: Capitalism Wont Compete (it's far too dangerous.)
    Reply | Link to Comment
  •  
    Oct 10 01:04 PM
    @carey_jim: There are good reasons for protective tariffs! They can cut both ways. So it's not de-facto a refusal to compete -- tariffs can also be used to force other countries to compete on fairer terms, rather than under-cutting on labor because of their lower standard of living, or fascist governments that create cheap labor conditions and exploit their own people. Or do you deny that the loss of so many jobs overseas has helped kill the American middle class and helped bring us to this point? That and the excessive taxation have brought the American worker to ruin!! And we are now paying the piper.
    Reply | Link to Comment
  •  
    Oct 10 03:16 PM
    SCC-

    excessive taxation have brought the American worker to ruin!! you say?

    Pre-1929 it was laizzez-faire attitudes towards regulation, tax-cut mentality and ever-greater disparity between the haves and have-nots that were major contributors to the depression era. Sound familiar?

    The Current Mess in fact did start with the 1999 repeal of a depression-era law (Glass-Steagall) that served to keep a check on commercial lending and re-packaging financial products into incomprehnsible paper that was constantly re-sold. Sound familiar?

    And if you can get your head out of FOX Noise talking points about Freddie/Fannie, and if you really want to look at who was repackaging the clean mortgage paper into CSE's look no further than the same investment company that was the key reason for the passage of Glass-Steagall -- JP Morgan and the rest of the Investment Banking community. They were doing exactly the same thing they did in 1932 -- re-packaging debt into complex instruments and re-selling.

    Now for some shocking realities:

    1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.

    2. In terms of inherited wealth only 1.6% inherit moe than $100,000. 91.9% receive nothing. Yet the "death tax" is the highest priority on the ultra-conservative agenda.

    Now for some sobering reminders during a period where taxes were raised not so long ago:

    Under Clinton we enjoyed a $287 Billion SURPLUS that's now an ever-growing DEFICIT that at last peek was nearing $700 Billion and national debt that has grown from $5.7 Trillion to $10.2 Trillion in just seven years.

    It wasn't because Clinton was an economic genious. He simply chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).

    Where was FDR when we needed him 28 years ago, when this Milton Friedmanesque, neo-conservative insanity began?
    Reply | Link to Comment
  •  
    Oct 10 03:18 PM
    I'm just saying that "capitalism" is little more than a rhetorical device. It doesn't exist except in some peoples' imagination.
    Reply | Link to Comment
  •  
    Oct 14 11:15 AM
    carey_jim,

    so capitalism and economics doesn't exist? you put your money on Santa Claus, and I'll take capitalism
    Reply | Link to Comment
  •  
    Oct 17 03:30 PM
    Hey dozer.

    Would you please define what you mean by capitalism? Every good definition has its theoretical backdrop.

    I understood carey-jim's point. When you adopt your own world view, then god forbid that facts obscure that blind obedience. If your world view matches my earlier post about the direction of capitalism in the last thirty years, the god protect your portfolio!
    Reply | Link to Comment
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