Wednesday, February 25, 2009

Nationalized or Not?

Its funny to me that the major topic in the media right now is whether or not we have "nationalized" the major banks. The government now make decisions for these banks on executive compensation, transportation costs, marketing promotions, and just about every major cost moving forward.

More importantly than that, the government now stands ready to cover any losses these banks have moving forward with "loans" from the taxpayers. We cover all the losses under the current program with no upside. At least if the government admits they have taken full control, the tax payer's would receive a benefit from future profits.

The problem is that everyone knows that future profits will never cover the losses we are currently paying for. AIG started with $60 Billion, then $100 Billion, and now $160 Billion. The number will keep getting higher and it will be the same for the oncoming losses from Citigroup and Bank of America.

It is important to remember that after we cover the estimated total $3.6 trillion in total losses, that their businesses will only be a fraction of their former selves. They made all their money over the past few years on fees associated with bundling mortgage back securities. Fees associated with credit default swaps in protecting these securities. Fees associated with the ridiculous company mergers during the credit boom.

That is all gone, and its not coming back. So it will take about 740 years to pay back the government grants based upon their new business models. This is the reason why I refer to these loans as "flushing money down the toilet."

While people continue to worry about if these banks have been nationalized, Obama spoke to the nation last night. He spoke to us about great sacrifice and fiscal discipline over the next few years, which is necessary to turn our country in the right direction.

Fiscal Discipline?

Oh yes. He must mean the estimated $2 to $4 trillion he is projected to add this year to our national debt. Or maybe he's referring to the total of $9 trillion worth of guarantees the government and the Fed have ALREADY accumulated this year.

The Sacrifice?

That will come from us. As the government pumps in trillions and trillions of liquidity, it will be up to Americans to do what we do best; spend. Our sacrifice will be to go back out and buy houses, cars, televisions, and go on vacation. That is the foundation of a great economy, and that is the sacrifice he is hoping for from the American people.

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