Bank nationalization: the secondary effects

In the article, “Is big bank complexity irreversible?”, I suggest that nationalization of certain big banks might be the only course for banks that have become too complex to manage, and that this would not be the end of capitalism.

However, nationalization of major US banks, as is now being contemplated by the Obama administration, will most likely deal a severe blow to Wall Street as a world financial center and consequently to the role of the US dollar as an international reserve currency.

Nationalization of Citicorp: what might follow

On March 20, 2020, Citicorp had total liabilities of $1.7 trillion, of which $762 billion were deposit liabilities. Of deposit liabilities, $464 billion were deposits in offices outside the United States.

Deposits in offices offshore are more than three times the capital of the bank. If these deposits move elsewhere, Citicorp will cease to be an important player in world financial markets.

There is nothing the US government can do to hold onto these foreign deposits if foreign clients decide to move their accounts elsewhere.

Now, let’s imagine that you are an officer of Citibank in, say, Jakarta. Most likely you’re not an American, but an Indonesian. You wake up one morning to find that you’ve become an employee of a bank owned by a foreign government.

Not only that, this foreign government has made a point of saying that bank officers shouldn’t be paid too well.

So here is what you might do. You call on a friend at HSBC and ask for a job. You say that you’ll be able to bring with you fifty or a hundred million dollars in deposits. Your local clients are already worried about Citicorp (the stock price falling and all that), and now there is the additional worry of having a foreign government reporting on their holdings. Why not change banks?

Would you want Uncle Sam to manage your assets?

Citicorp also has $298 billion in deposits in US offices. A lot of this money is from clients overseas who are hiding from their own tax authorities. These wealthy clients also have asset management accounts with the bank. Suddenly, they find that their banker is not Joe, in the private sector, but Mary, an employee of the US government and campaign worker for Barrack Obama.

The nice arrangement the client had set up to send bank statements to a drop at a law firm in the US (to keep their own government in the dark) no longer looks like a wise thing to do. After all, the US and their own government are in cahoots, trying to crack down on tax cheats.

So the client moves the account to a nice little community bank that never received TARP funds and is glad to have the business.

Loss of deposit and pressure on “bad assets”

As deposits flee nationalized TARP banks, there will be a call on bank assets to fund these withdrawals.

The assumption that bank deposits will remain unchanged after nationalization is unrealistic.

The government may find that it will be called on to put up more money to finance deposits being sent elsewhere.

Nationalization may not be such a smart move after all.

Unionization and forced loans

The Crash of 2008 happened because banks were making loans to people who should never have been given credit. Now Barney Frank is ranting that Citibank has not been making enough loans to the deserving poor. If Citicorp is now nationalized, who will place any restraints on injudicious lending?

Also, the labor unions to which Obama owes so much, now will have a rich field of potential members to sign up and enroll in their program of monthly dues. Will President Obama resist? It’s doubtful.

Political favoritism

The next step in the decline of Citicorp will be the inevitable government mandates that certain deposits be made only in government banks. For example, a builder bidding on a contract under a “stimulus” program will be asked to put up a performance bond in the government-controlled bank.

In time, the top positions in Citicorp will be held by government appointees and credit will be doled out on the basis of political favoritism. Of course, just as in other countries, this will make the government-controlled bank even less efficient that its private sector predecessor.

Inefficiency means a decline in business.

Good news for non-TARP banks

Those nice little community banks that escaped the clutches of TARP funding, will now be able to pick off the deposits from the TARP banks that have been nationalized.

The TARP banks will get smaller, while the non-TARP banks will get bigger.

The end of Wall Street

The big private US banks with headquarters in New York City have been the driving force in keeping Wall Street as a world financial center.

Some of these big banks have already disappeared. If others are nationalized, who would want to travel to New York to deal with a government bureaucrat that is not even a real banker?

And the non-TARP banks — the community banks, located away from New York in places the foreign client barely knows — these non-TARP banks will be still too small to provide the loans the international borrower is seeking.

So why not just go to London, or Hong Kong, or Singapore?

Nationalization of some TARP banks may not be the end of capitalism, but it might be the end of the supremacy of the US dollar. Life will go one in the community banks that, one day, will get bigger and more important.

In the meantime, the world will have moved on.

The Obama administration will have blown it — but then, the administration never really favored American financial supremacy anyway.



2 comments on the article “Bank nationalization: the secondary effects
  1. So, what if it’s a perfectly rational decision to drop the financial supremacy thing, given the huge (realised) risk?

  2. Good question, Chris!


    The problem with the “financial supremacy thing” is that having the US dollar as the world reserve currency has created easy money for US citizens since World War II.


    This has made it easy for millions of Americans to buy homes and cars, because the trade deficit has created a vast source of credit.


    The supremacy of the US dollar has also caused other nations to be eager to sell goods in exchange for US dollars, which means goods have been cheap and financing has been easy.


    With the end of the “supremacy thing”, prices of imported goods would go up and financing would become scarce. Not only that, Americans would have to pay for foreign goods in some other currency, Rupiah, Yen, Euros … and would end up borrowing from abroad not in dollars, but in foreign currency.


    When a country needs to borrow not in its own currency but in a foreign currency, the stage is set for a whole country to go bankrupt as happened in the Asian crisis of 1997.


    So, it’s not rational to voluntarily drop the “supremacy thing”. This is a precious asset that took generations to achieve.


    Without the “supremacy thing” and with a country that has become largely de-industrialized over the years, and with educational standards already far from the top, it would no longer be “Morning in America”, to put it mildly.


    It would not be a “rational decision” to drop the “supremacy thing” … it would be a political decision … and a severely uninformed one at that.


    By the way, the nice thing (for Americans) about the “supremacy thing” is that you never have to really worry about paying back “foreign debt” anymore than citizens of New Jersey worry about their “foreign debt” with citizens of Florida.


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