In Nationalizing Banks, what happens to Gov money that are now loans to Banks?

[FrenchieCat]

I believe that currently, the money being given through the TARP are actually loans to the banks, which means we can get the money back.

But if we nationalize the Banks, what happens to those loans? Are they recharacterized, since the Gov would now be owning the whole thing? Does this mean that Government money put into these banks once they are nationalize are no longer loans, but expenditures with no guarantees?

How does this work?

[LittleBlue]

1. Nothing happens to the loans

They're still a liability on the balance sheet regardless of the ownership.

Recall that corporations are separate legal entities from their owners. Nothing changes at all, except now the bank and government are related parties, unable to execute arms length transactions (which is not particularly noteworthy or worrisome).

[FrenchieCat]

3. So what about new money pumped in by the Government, if needed.

So All of the moneys extended to these banks would still be loans? and so would new moneys?
So what is the advantage in nationalizing the Banks? Is it that we get rid of the Stockholders, or what?

[LittleBlue]

4. You can structure a loan in many ways.

If they purchased additional treasury stock at above market price (essentially a loan), then it would be company equity.

But if we structured it as a loan, then it would simply be a liability on their BS.



So what is the advantage in nationalizing the Banks? Is it that we get rid of the Stockholders, or what?

Good question. Basically, every company is run by executives, and their motivation is to keep share price up. They sacrifice everything to trigger their considerable stock options. The short-term profit motive greatly outweighs solvency motive (aka going concern issues), wise investment, and prudence.

By eliminating profit motive, price per share obsession, etc., we can focus on transparency and accuracy of the financial statements (lending much credibility to the banks), and ultimately the rehabilitation of the banks. Even if the news is horrible (the bank lost 100 gazillion dollars), it is far less worrisome to an investor than not knowing whether the banks' books are fraudulent. And do not doubt, they are indeed fraudulent. Citi saying it has a quarterly gain when their asset price is many times fair-market value is completely, and utterly, fraud. It makes potential investors pee their pants in fear.

[Turbineguy]

2. It goes to the poor execs

who lose their jobs because of the bankruptcy.

[Stargazer09]

5. To be honest

I don't know what would happen, but I do know this:

All of this financial stuff is causing me the worst headaches I've had in a long time. I'm so sick of the economy being so bad that people are afraid to buy anything anymore. My small business is failing because I started it at the worst time ever, and my husband and I are fighting more now than we ever have before (and that's saying something!).

I am counting on President Obama and the "experts" to get us out of this mess as soon as possible. Until then, I'm just trying to survive.

With all that said, you asked a really good question, FrenchieCat! I just wish I had more answers, or even a better understanding of the whole system.