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There are few natural buyers in the current environment for a nationalized bank. These few buyers have a multitude of other opportunities to invest in the sector, which gives them the ability to drive a very hard bargain. It is also very difficult for them to raise capital themselves to fund any acquisitions of the size required by a major nationalization. The great likelihood is that much of the purchase price would be in stock, leaving the taxpayer with continued exposure to a combined bank. This environment will change over time, but it may be a number of years before a fair price is obtainable, especially if the taxpayers face the need to dispose of multiple major banks.

The plan, therefore, should be one that contemplates government ownership for years, not weeks or months. This requires establishing an infrastructure to manage the government’s stake and to oversee the management of the nationalized bank.

Step 7: Create an ownership structure The government will need to decide how to own and manage the nationalized bank(s). This question becomes particularly pressing if multiple banks are nationalized. There are a number of subquestions to be answered upfront, since there seems to be no point in waiting until later. The answers are essentially decisions about principles, rather than being heavily dependent on the particulars of the nationalization(s).

Should there be one overall ownership and oversight organization for all the nationalized banks? This seems clear. It makes a great deal of sense to have a single organization responsible for the government’s majority ownership stakes, in order to avoid overlapping functions and inconsistent strategies. It may also make sense to house the government’s other investments in banks in the same institution, although it will be important to have strong information compartmentalization so that the governmentowned banks do not have the advantage of confidential information about the banks in which the government has a more passive investment and vice versa.

Where should this organization sit? It would be best to have a standalone, independent organization, in order to provide some protection against the inevitable politicization of banking decisions. Keeping it separate from Treasury or other parts of the Administration also reduces the distractions that could be caused if everyone who wants something from a nationalized bank runs to Secretary Geithner to lobby.

How actively should the government manage the nationalized banks? The ideal appears to be for the government to act in the capacity of a strong Board of Directors that chooses a CEO, signs off on major strategic decisions, and holds the CEO accountable, replacing him or her, if necessary. This balance allows the government the level of control it deserves as the owner while preserving the benefits of the traditional corporate structure and reducing the potential problems of politicization. This approach worked well at Continental Illinois. In that case, Jim Swearingen, the retired CEO of Amoco, was brought in as Chairman. He replaced many members of the management team and brought in new hires, eventually handing over the reins to Thomas Theobald, a highly respected banker.

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