Feb 7

Bank Nationalization According to Clint Eastwood

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We’re now hearing from politicos of all stripes about the potential to ‘nationalize’ some large US banks.  Eventually, this may not be called ‘nationalization’ and instead may be called ‘rehabiliation’ or ‘restructuring’ or something similar…in advance of breaking those banks into smaller pieces and re-selling them in the public markets.

In such a scenario, we fully expect depositors to continue to be protected by the Feds, while today’s equity holders’ interests will likely disappear.  However, for insurers, nearly all with significant investments in unsecured debt issued by those banks, the major question is ‘What will happen to the bond holders?’

If this means the government will sell off assets at ‘fire sale’ prices to deleverage ‘nationalized’ banks, what will that mean for the values of bonds, generally, in insurer portfolios?

That’s where the man most slighted this year by the Academy of Motion Picture Arts and Sciences comes in (he and his excellent film, Gran Torino, got zero nominations).

“You’ve got to ask yourself one question:  ‘Do I feel lucky’?”

More and more, fundamental portfolio decisions, like these, are primarily subject to the whims of the political process.  One things is certain, however.  All that palaver from investment managers about how the Federales had ‘picked winners and losers’ via the TARP, and that you ‘would not lose’ investing along side the Federales will prove to be nonsensical in light of future US Government moves.

“If you want a guarantee, buy a toaster.”

Nothing could be more prescient in this market than that.  It’s time to rethink what the banking system – worldwide- will look like in a few years with your invesment manager and then decide what portfolio decisions should be made today in light of that expected landscape.

“My old drama coach used to say, ‘Don’t just do something.  Stand there.’”

And, while you’re standing there, you might be thinking of the next moves the US Government will make that will impact our business..  Federal regulation of insurance?  Reorganiztion of state guaranty funds?  Unique opportunities to invest in ABS backed by low-cost financing at the Fed?

“Go ahead, make my day.”

There is little doubt that when it comes to some of these Federal actions, most insurers would agree most with Mr. Eastwood’s sentiments in Gran Torino:

“Get off my lawn!”