Maria Bartiromo to George Soros about the banks that will not be allowed to fail.
"They'll be nationalized?"
This was from Business Week, April 20, 2009.
What did George Soros mean?
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M$2 Answers
I don't think I disagree with you, but I am sure I do not quite understand what you are saying.
What Mr. Soros is saying is that it is better for the government to take ownership of the bank than to take ownership of only the bad assets.
His reasoning is very simple. Everyone knows that these assets are not worthless. They had no market value because nobody knows what they were worth. If the government just takes the assets and sells them to third parties at huge discounts, the third parties will "make a killing" and the taxpayers will take a "bath".
If the government takes ownership of the banks and has each bank work out its own assets, the bank will profit ( indirectly by taking a much smaller loss than if they sell the bad assets. ) and the taxpayers will profit indirectly by having a much smaller loss to pay for.
Here is how it works:
If I buy 1000 100,000 loans from the government that is $100,000,000 worth of loans. There will be loans in there that are completely current and loans that should be forclosed immediately.
On average, in the 1990's those loans were sold for anywhere from 8% to 30% of face value. If I pay 30%, I will have 30,000 invested in a 100,000 loan.
If that was a 100% loan when it was made and the property values have declined 30%, that property will sell for around 70,000.
It will cost 10 to 15% to foreclose on it and clean it up, and 6% to sell it. If I sell it for 70,000 - 14,700 (21% expenses) I will realize a net of 55,000 on a loan I bought for 30,000. Even if the property has been vandalized and it takes 36,000 to clean it up, I still break even.
What Mr. Soros is saying is that it is better for the taxpayer to keep that 55,000 than to pass it on to a third party investor.
Worked for five years in the S&L clean up of the 90s. Our group worked out over 130,000 mortgage, and 20,000 Auto loans.
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M$
What I believe Mr. Soros meant was to distinguish handing taxpayer money to the banks with no strings - having the nation take on the debt with no ownership, or "nationalizing the debt" - and nationalizing the institutions, where there is a taxpayer stake in the company with the expectation that some compensation from profits would go back to the taxpayer as investors. In the latter case, taxpayers also have more strength as angry investors when they see continued mismanagement and can speak out against it.
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M$
Actually, I think that you and bbrookin are saying the same thing, although I think that you explained it better.