Should we nationalize banks that are 'too big to fail'?

This article discusses the US Government's 3rd bailout of Citigroup about a month ago. It brings up an interesting discussion of nationalization vs. bailouts.

From the article:

"'The government is bending over backwards to not go along the lines of nationalization,' said Bernie Sussman, chief investment officer of Spectrum Asset Management, a unit of Principal Financial Group Inc. that manages about $6.9 billion in assets. 'They had the alternative to completely zero out the common stock.'"

Are bailouts the best way to fix these banks that we cannot allow to fail? The article notes that the government is making a lot of concessions that are in the best interest of the bank. On the other hand, the article notes:

"Wall Street also is worried about 'whether the company will be run in the interest of private shareholders or for the public good,' said John McDonald, a banking analyst at Sanford Bernstein & Co. 'It's a valid question what the priorities will look like.'"

Should Citigroup be run in the interest of the shareholders or the public good? What is best for our economy? Thoughts on nationalization vs. bailouts?

http://online.wsj.com/article/SB123573611480193881.html

A definition of securitization

From Investopedia:

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security.A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages. The process works as follows:
First, a regulated and authorized financial institution originates numerous mortgages, which are secured by claims against the various properties the mortgagors purchase. Then, all of the individual mortgages are bundled together into a mortgage pool, which is held in trust as the collateral for an MBS. The MBS can be issued by a third-party financial company, such a large investment banking firm, or by the same bank that originated the mortgages in the first place. Mortgage-backed securities are also issued by aggregators such as Fannie Mae or Freddie Mac. 
Regardless, the result is the same: a new security is created, backed up by the claims against the mortgagors' assets. This security can be sold to participants in the secondary mortgage market. This market is extremely large, providing a significant amount of liquidity to the group of mortgages, which otherwise would have been quite illiquid on their own. (For a one-stop shop on subprime mortgages, the secondary market and the subprime meltdown, check out the Subprime Mortgages Feature.)
Furthermore, at the time the MBS is being created, the issuer will often choose to break the mortgage  pool into a number of different parts, referred to as    tranches. These tranches can be structured in virtually any way the issuer sees fit, allowing the issuer to tailor a single MBS for a variety of risk tolerances. Pension funds will typically invest in high-credit rated mortgage-backed securities, while hedge funds will seek higher returns by investing in those with low credit ratings.

Clear as mud, don't you think????  The underlying assumption is that the illiquid asset has a known risk level (low) and a certain return (passed on the payments for the original asset).

the Volcker rule

A series of articles on the Volcker rule can be read in many different locations. I've compiled a list of websites that deal with the passing of the bill in congress and it's affects. Is this an adequate response in the need of Banking Reform? What are the downsides to this bill?


Check out Paul Volcker's opinion as chairman of Obama's economic advisory panel here. Another article which goes deeper into Volcker's stance can be read here.

Opinion against the Volcker rule can be read here.

Health Care

One of the struggles in health care that directly affects us after graduation is that many entry level positions do not offer health care insurance. Insurance companies will no longer be able to drop young adults from health care after the age of 19 or 23. The age will be extended to 26. To read more about this, there are two websites to check out:

http://money.cnn.com/2010/04/01/news/economy/health_reform_changes_for_uninsured_underinsured/index.htm

and

http://www.statenews.com/index.php/article/2010/03/health_care_bill_to_extend_insurance_age_limits

Does this directly affect anyone?

Jon Stewart, chief economist????

Jon Stewart's explanation of the Wall Street bailouts and bonuses is very funny.  Watch it here.

The Declining Middle Class

The New York Times has been running a good series on the impacts of the crisis on people.  Many people will never recover from this recession in terms of their quality of life, incomes, and wealth.  The Times article called them "The New Poor." Yesterday, one of the regional Fed presidents talked about the same issue. His point was that the fall in construction sector jobs was permanent.  This, coupled with foreclosures, will create many of those New Poor.  He also talked some job creation numbers that will be needed to bring down the unemployment rate.  Sad and sobering, in my opinion.

Financial Crisis Inquiry Commission

Go to http://fcic.gov/ to see information collected by the investigative commission charged with determining the causes of the financial crisis. You can even keep in touch with them on facebook and twitter.