Trust: The Reason Bank Nationalization is Essential

It has come to this. Our economy is in grave danger. Trust in many of our banks and lending institutions has evaporated. Without trust, without confidence that your counter party financing institutions can deliver or be trusted to execute the obligations they undertake, commerce as we know it will come to a standstill.

If I may, let me give you an example from personal experience. Many years ago while still active in the trading of commodities and physical raw materials I sold a cargo of sulfur to Chile. Now sulfur is the building block for sulfuric acid, which in turn is essential to the production of chemical fertilizers as well as being a key ingredient in the production of explosives for mining operations (think Chilean copper and Chile's bountiful agricultural sector). The transaction was negotiated at a time when the Chilean economy was under enormous pressure. This was during the turbulent Allende presidency, a period during which its commercial relations with the West were sorely strained.

In international commerce, transaction payments for the delivery of supplies are normally executed through letters of credit. The Chilean buyers were happy to oblige and offered to establish a letter of credit issued by Chile's largest bank, the O'Higgens Bank. At that time relations with the U.S. were such that the O'Higgens Bank was unable to find an American bank as counterparty to confirm its obligation to pay against our presentation of the title documents for the multimillion dollar cargo.

It was made clear to the Chilean buyers that without a confirmation from a major banking institution outside Chile, we would not release the cargo. You see, we had no trust that the O'Higgens Bank of that time had either the means or capability to pay down the Chilean buyers' obligation as and when title documents for the cargo were delivered to them. There was no trust, and without trust in the banking institution as payee, the contract would not be executed.

So what happened? The O'Higgens bank was able to to induce the Novrodny Bank of Moscow (I'm not making this up) to confirm the credit. Again, with the political hazards of that cold war moment, we declined the Novrodny Bank confirmation. They obviously needed the cargo badly, and the Novrodony bank thereupon arranged to have the credit confirmed by the Bank of Montreal, an institution well known and respected (our Canadian operations had a long standing relationship with them). Trust was established and the shipment went forward.

Without the element of trust the deal would have been aborted. And there in a nutshell is what our financial sector is facing today. Trust has evaporated. No matter the billions upon billions of TARP funds that have flowed into these myriad zombie banks, funds used to prop up the banks and put their balance sheets into a better light (in the case of Citigroup and Bank of America alone, sums far exceeding their current market value). What has not been achieved is recapturing the trust of the business community, the governing class, nor the nation's citizenry. There is no transparency. Neither we, nor the government fully understand what the banks are doing with the funds showered upon them by the TARP agency. Most damaging is the almost universal lack of confidence in the competence and integrity of these tone-deaf managements who have clearly gotten us into this mess.

With the mention of "nationalization," the howls of outrage coming out of what is left of Wall Street and their government allies are chilling. The projected pain of shareholder equity being wiped out is more than the bank nabobs had ever considered when plying the financial system and the nation with their toxic razzmatazz , taking us all over a cliff, all the while contemplating their shameful year-end bonuses which in retrospect give more the appearance of fraudulent transfers than earned income.

For the government to keep on plowing billions into these banking institutions, without achieving transparency, without control over the sad sacks who got us into this mess is lunacy. Confidence would be restored to the banks almost overnight, to their obligations, their lending capabilities, if a broad nationalization of the zombie banks were to be mandated by the government. The system would function again and America could get back to business.