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Taleb says nationalize banks, you can’t trust them
James " Jamie" Dimon, chairman and president of JPMorgan Chase & Co., speaks during a session on day two of the World Economic Forum in Davos, Switzerland, on Thursday, Jan. 29, 2009.
Bank nationalizations are “absolutely necessary” to avoid taxpayers having to bear the burden of their risk-taking, said Nassim Nicholas Taleb, author of the best-selling finance book “The Black Swan.”
“You cannot trust the banks in taking risks,” Taleb said in an interview with Bloomberg Television in Davos. “We have a very strange situation in which it’s the worst of capitalism and socialism, a situation in which profits were privatized and losses were socialized. We taxpayers have the worst.”
The global economy will slow close to a halt this year as more than $2 trillion of bad assets in the US help sink economies from Russia to the UK, the International Monetary Fund said Wednesday. Taleb echoed comments from New York University Professor Nouriel Roubini, who says the majority of US banks are insolvent.
“You have to eventually nationalize US banks, you have to take the problem by the horns,” Roubini told Bloomberg Television in Davos Thursday. “In my view actually most of the US banking system is insolvent.”
Roubini, a former economist in President Bill Clinton’s White House, predicted the financial crisis as early as July 2006. Last February he forecast a “catastrophic” meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings.
Black swans
Rare and unforeseen events are known as “black swans,” after Taleb’s book, “The Black Swan: The Impact of the Highly Improbable.” It was published in May 2007, about three months before the credit crunch rocked global markets and led banks to announce more than $1 trillion of writedowns and credit losses.
“We should not trust these bankers; look at their track record,” Taleb said. “They know we’re going to bail them out. They hold us as hostages” and “the only way to stop the process is for the government to own those banks, tell them what to do.”
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, speaking at a panel at the World Economic Forum in Davos Thursday, doesn’t agree.
“JPMorgan will be fine if everybody stops talking about nationalizing banks,” Dimon said. “Policy has been catch-as-catch-can. I haven’t yet seen people get all the right people in the room, close the damn door, put all the problems on the wall and come up with a solution.”
‘Complex’ instruments
Taleb Thursday signaled he favors curbs on the trading of some financial instruments. House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. That might prohibit most trading in their $29 trillion market.
“I don’t like credit default swaps,” Taleb said. “We should probably stop trading derivatives, anything more complex than regular options” because “I am an options trader, and I don’t understand options. How do you want a regulator to understand them?”
As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof investors from market blowups while profiting from big rallies.
He now advises Universa Investments LP, a Santa Monica, California-based firm opened in 2007 by Mark Spitznagel, Taleb’s former trading partner, using some of the same strategies they’d run since 1999.
Bloomberg
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