1st (and Only) National Bank of America

by Ron Daly

While everyone was concentrating on GAC and the speakers the last couple of weeks, something VERY troublesome was bubbling up in the banking sector. The groundwork for a brand new bank - the “1st National Bank of America” was being put in place. I know you’re thinking walking around in the cold here at the GAC junket has killed a few brain cells. Maybe I’m a pessimist? Or worry too much? But think about how the banking and credit union industries would be changed if this starts at the top of a very slippery slope and then rolls downhill through the system. 

Here’s your assignments... take a read of these articles and play “what-if?”

1) The Associated Press article “Gov’t looks to quell nationalization fears”

2) The Economist article “Banks under Stress” asks "Is it Time to Nationalise Citigroup and Bank of America?"

The writing on the wall is pretty clear here. The price for taking TARP money is the oversight and the ownership that the money brings. As an industry, we can’t be naive in thinking that we can take the money with no strings attached. Chip Filson wrote “Taking the King's Schilling” back in October it pretty much lays it all out for the layman to understand.

Case in point - I’ve been in a few venture capital meetings in my 10-year private sector career looking for capital or reporting on how the invested capital is producing. Believe me, they call them vultures for a good reason! The capital investors call the shots, they expect returns, they expect you to do what they want, if you are lucky enough to still be around to run the operations after you cash the check. You’ll market and sell what they want to get their money back.

Is Uncle Sam going to be any different? Want your board member replaced by a government official or Congress appointee? They could very well own every bank and credit union in the country if this snowball starts rolling down the hill. Finally, who do you think will own the corporate system after the NCUA money is sent over? Is that a new slippery slope or the same one Citibank and Bank of America are standing on?

Guess we’ll find out soon enough.

Comments

[Harumph]

The CUNA economists agree that some nationalization will take place with the stress tests <http://www.cutimes.com/News/2009/2/Pages/Economists-Bank-Nationalization-Likely.aspx>. It is unlikely that any nationalization will snowball across all banks and credit unions, though. Such alarmist claims only aggravate the situation and make an already panicky industry more panicky.

[Ron Daly]

HARUMPH- thanks for the post and disapproving comments are always welcome. I’m not an alarmist (my office mates roared about that and were calling me “chicken little” all day). I’m simply bringing in an extreme scenario that is obviously out there for everyone to think about and discuss.

It’s interesting that the CUNA economists agree that some nationalization will occur with the stress tests of banks. We have a small agreement in one scenario that no one really knows what is hidden in the portfolios and balance sheets of the banks and a few will be government owned. “What-if” models change with each new piece of information gained. How would the remaining banks score on the tests in a continued declining economy? What if the U.S. can’t turn this around quickly and 10 of the top 20 banks fail the new stress test? Toss in AIG back at the table looking for billions more in help. One can only guess how the banking industry and insurance industry are intertwined. I’m guessing the folks handing out TARP money might overreact and take drastic measures. Anyone that took TARP money might be in the regulatory crosshairs and fair game for the ones calling the shots.

Is there any way for the credit union industry to get itself out of this mess without taking it down the TARP road?

[Elliott]

We are standing on flat ground or standing on a slope. There is a critical threshold the government will cross when it decides to nationalize a bank, a fundamental shift in mentality. There is a fuzzy line down the middle called "preferred shares," but other than that, we are looking at two worlds: one where FIs don't get nationalized, and one where they do.

Once the government puts its foot firmly in this second world, Ron is right in that no FI is truly safe. Maybe this claim is alarmist, but that doesn't mean its wrong and it sure as heck doesn't mean we aren't going to have to confront the idea sooner or later. I pick sooner.