Nationalization Revisited.

The financial sector continues to give the market a heart attack as AIG reports huge losses and the their bailout is renegotiated.

Asia is the first to react to the bad news:
Nikkei => 7,280.15, -288.27, -3.81%
Hang Seng => 12,317.46, -494.11, -3.86%
Straits Times => 1,533.40, -61.47, -3.85%

Europe didn't react any better:
FTSE => 3,625.83, -204.26, -5.33%
DAX => 3,710.07, -133.67, -3.48%
CAC => 2,581.46, -121.02, -4.48%

And the US finished the day:
Dow => 6,763.29, -299.64, -4.24%
Nasdaq => 1,322.85, -54.99, -3.99%
S&P => 700.82, -34.27, -4.66%

As for me:
AMD => 2.01, -0.17
F => 1.88, -0.12
NG => 2.54, -0.32
AMD DG => 0.09, -0.01
HRP JZ => 1.50, unchanged
NLH JZ =>1.55, unchanged

Today I listened to a Yahoo! Finance techticker interview by hosts Aaron Task and Henry Bloget, and their guest Nouriel Roubini of NYU's Stern School. In the interview they got Roubini's reaction to Bill Gross' comments that "nationalization is a bad idea." I believe Roubini made a few interesting points about how the "nationalization" of the banks isn't the same as the Swedish model that Gross is referring to. If you haven't watched the video, please do(2). This video is a continuation of the interview where Roubini encourages full nationalization as better(1).

Roubini comments in a way that indicates that the situation is no longer "if" the banks will be nationalized, but how and how much. He uses the words "partial" or "full" and illustrates that with Citigroup who is now 36% owned by the government. To him, anything over a third is effectively partially nationalized, and that is the status of Citigroup right now.

I personally don't agree with the idea of fully nationalizing the banks since it will wipe out the shareholders, of which I am not. However, Roubini does make a point at the end of the first video that could very well be true. He comments that at this point fully nationalizing Citigroup and Bank of America would barely have an effect on the market because their stock has already been beaten down so much. Nationalizing the "big banks" would only have about a 50 point effect on the Dow and the significant moves in the market are a result of systemic fear because of the financial sector.

Unfortunately, I see that as a continuing inevitability. News reports will still come out about how the government is disassembling these "to big to fail" banks and those reports will affect the stock value of other companies since these big banks are still the account providers for existing companies.

My opinion on what the government should do is very simple, yet not at all pretty. If the banks want to clean up their balance sheets, they should have to follow these 4 steps.

First, accept a moratorium on all incomplete foreclosures. This will provide time for the owners to get their act together for the last step.

Second, the banks will have to accept the government's offer to buy the bad assets from them at market value or for the foreclosure principle balance, whichever is least. This is fare because the Bank wants more but the government wants to pay less, neither will be happy.

Third, the government should then send the list of assets to the county court house for which the properties reside so that they can be auctioned off, starting at the value the government bought it from the banks for. The resulting amount should then be funneled into the counties budget to pay for education and infrastructure.

Forth, the banks should be forced to allow for every property owner the opportunity to refinance even if they are not in default yet.

Like I said, it is simple, not pretty.

That is my opinion, you can take it or leave it.

Disclaimer: I am not a stock broker; I am not a financial advisor; I am not recommending to you what to buy or sell. I am just an opinionated investor. If you decide to follow in my footsteps you are taking risk. It is inevitable that I may be wrong. So if you are going to follow in my footsteps that is your own personal decision. I am not responsible for any loss that you may, and probably will, incur regardless of my opinion.