The Bottom Line

 The Buzz Word of the Day

Volume V Issue III – March 3, 2009

A monthly financial commentary for our Friends, Clients and Advocates

The word nationalization has been getting a lot of press lately. What exactly does it mean? It actually conjures up different connotations for different people. For some it means that the government is running private enterprise. For others, they perceive it synonymous with communism. So rather than trying to define the word, we thought it would be helpful to talk about current government ownership in the private sector, in the banking industry in particular.

The Troubled Asset Relief Program (Also known as the TARP) is the primary vehicle that the government is using to invest in banks. Just like you or I might buy shares of stock in a banking institution, the government has bought preferred stock in big and small financial institutions alike. This is not nationalization – instead, it is having the government as a partner. Having the government as your partner brings with it many undesirable consequences. Once banks realize that their hands will be tied to some degree when it comes to compensation among other things, many banks will do their dead-level best to pay this money back as soon as possible. Jamie Dimon, CEO of JP Morgan was quoted by CNBC as making a comment to a friend during a congressional grilling: “If I wire the TARP money back right now will you let me leave?” Louisiana-based Iberiabank was the first to announce that they intend to pay their TARP money back as soon as possible. In summary, although the government is a partner for many (but certainly not all) banks in this country – they do not own the majority of any. No one knows if that will continue to be the case or not.

It is very important not to paint all banks with the same brush. It is unfortunate that sound financial institutions that were not involved in the high risk transactions are being lumped into the same category as their more aggressive sister banks. It is also unfortunate that certain institutions have become “too big to fail” meaning their failure would be so catastrophic to the world economy that the government will pay any cost to prevent it. It is my opinion that as financial turmoil continues, it will become easier to identify which banks will weather the storm. The strongest will survive and the others will be gobbled up, carved up, or propped up.

Corporations outside of banking are also changing course in light of the economy. Starbucks recently announced a new segment to be added to their product line – instant coffee. In recognizing the changing spending habits of consumers in this environment, they have set their sites on a market CEO Howard Shultz believes is virtually untapped. Meanwhile in the entertainment space, Netflix is putting quite an emphasis on delivering movies in digital format rather than on a disk. They can save a significant amount in cost if their customers will download movies onto their computer, then watch the movies on TV using an adapter. Likewise, Amazon is pioneering digital book delivery through a medium called Kindle. Kindle is a device about the size of a clipboard that can store and display hundreds of books for your reading pleasure. Theoretically, you could store your entire library on this one device. These three examples illustrate how desperation produces innovation. And it is this type of innovation that will be the very thing to eventually move us out of recession and beyond.

Chad P. Wilson, CFP

Foundation Bank – Division of McKenzie Banking Company, McKenzie, TN  - 731-554-2423