Down the Path To Nationalization?


The Obama administration put the nation’s biggest banks on notice Monday that the government could become their biggest shareholder if regulators decide they are not strong enough to weather a deeper-than-expected downturn in the economy. In an unexpectedly assertive joint statement, the Treasury Department, Federal Reserve and federal bank regulatory agencies announced that the government might end up demanding a direct ownership stake in major banks after they undergo a tough evaluation of their strength, which is to begin shortly.


“The capital needs of major U.S. banking institutions will be evaluated under a more challenging economic environment,” the administration said. “Should that assessment indicate that an additional capital buffer is warranted,” it continued, the banks could be required to give the government a right to acquire common shares, with voting rights.

(Emphasis supplied.) Some hard truths are beginning to be faced now it seems.

Speaking for me only

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    "Communism?" (5.00 / 1) (#15)
    by jay20 on Tue Feb 24, 2009 at 01:28:40 AM EST
    its really something how the GOP calls everything communism, and throws in "Karl Marx would do that" into every piece of propaganda they throw out from the woodwork. Well, here's a manifesto:

    "Americans disdain to see their economy fall to Reaganesque lassez faire-ism. They openly declare, through their representatives that economic recovery can only be achieved by a strong government role which creates more jobs, increases health care coverage, and stops banks from losing million's life savings. Let the Republicans tremble at an Obama revolution which will put Reaganism on the dust bin of history, and create a sound and sustainable economy. Americans have nothing to lose but the GOP's outmoded, outdated, and failed policies. They have a future to win. Liberals of the world, UNITE"

    I think that would sit well with many.

    Citi is asking the government (none / 0) (#1)
    by Green26 on Mon Feb 23, 2009 at 02:06:30 PM EST
    to convert its existing preferred shares of Citi into common shares. This might result in the government owning 40% of Citi, I read.

    Citi and other banks believe this will result in more confidence from the equity markets, i.e. other private investors may invest/provide capital and the stock price will rise.

    Private investors are not going to buy equity of troubled banks, i.e. provide capital, when there is talk of things like nationalization or government takeover of banks. Private investors don't want to invest in equity, and then get wiped out by government takeover or nationalization.

    I make a distinction between government investing, whether in preferred or common stock, and nationalization.

    Best statement so far ... (none / 0) (#2)
    by Robot Porter on Mon Feb 23, 2009 at 02:24:33 PM EST
    from the administration on nationalization.

    But, rather than using it as a threat to banks, I think they should begin to explain to the people why this is necessary.

    The argument is pretty simple:  "If the people's money is going to be used to save the banks, then the people need control and an equity stake."

    "The dumbest guys in the room" have run the banks for long enough.

    This makes no sense, imo (none / 0) (#6)
    by Polkan on Mon Feb 23, 2009 at 03:12:19 PM EST
    because the current preferred stock is a much safer option for taxpayers. It has overriding priority in liqudation and it pays dividend, which in the case of Citi is over $2bio.

    If it is exchanged into common shares, the dividend is gone and the risk to taxpayers grows exponentially.

    The capital infusion was already spun to taxpayers as the need to save the banks.


    true, (none / 0) (#8)
    by cpinva on Mon Feb 23, 2009 at 04:04:47 PM EST
    If it is exchanged into common shares, the dividend is gone and the risk to taxpayers grows exponentially.

    but you left one critical fact: common shares are voting shares, preferred shares aren't. with majority voting interest, boards of directors and management can be changed (which is obviously necessary, given the abysmally poor performance of both), easily, not so with preferred shares.

    i'm a cpa, i'll take the common shares.


    Just do it (none / 0) (#3)
    by Coral on Mon Feb 23, 2009 at 02:31:05 PM EST
    I have to agree with Krugman. The longer the administration delays, the worse the situation with the banks is going to get.

    Yes, and (none / 0) (#5)
    by KeysDan on Mon Feb 23, 2009 at 02:42:57 PM EST
    the stock market, too.

    Perhaps they don't feel the population (none / 0) (#14)
    by Inspector Gadget on Mon Feb 23, 2009 at 08:06:35 PM EST
    has reached the proper level of fear yet. We need to be willing to just turn everything over to them to take care of it for us because we're frozen in fear of our security.

    I read this statement... (none / 0) (#4)
    by Polkan on Mon Feb 23, 2009 at 02:39:38 PM EST
    as a much better way, politically, to handle what Citi is allegedly proposing, i.e. the conversion of preferred stock to common shares.

    Obviously they will need to find a conversion rate that still makes the government look good politically while preventing such terrible dilution that would make the rate bickering meaningless.

    Perhaps I'm wrong, but it seems that the conversion in the context of this bank bailout is a relatively new idea and a good example of the Obama administration making good on its promise to try new things until they find a solution.

    This Statement Is Almost Saying the Opposite... (none / 0) (#7)
    by santarita on Mon Feb 23, 2009 at 03:22:01 PM EST
    of nationalization.  

    While turning preferred stock into voting common stock would be a step towards nationalization, especially if the amount of common is a controlling interest, the full statement reiterates their desire to keep the banks private.  In addition, the statement makes it clear that the injection of capital in the form of common stock is meant to be temporary.

    This suggests to me that they are taking incremental steps towards "nationalization" with the idea of buying time in the hopes that the economy will stabilize.

    Roubini says nationalize in 6 months (none / 0) (#9)
    by MKS on Mon Feb 23, 2009 at 04:12:38 PM EST
    to avoid a panic now and to be more efficient, rather than piecemeal nationalizing banks or putting them into receivership.  This is the more market friendly approach:


    So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks."


    So, will the highest level of government be receptive to the bank-nationalization idea? "I think it will," Mr. Roubini says, unhesitatingly. "People like Graham and Greenspan have already given their explicit blessing. This gives Obama cover." And how long will it be before the administration goes in formally for nationalization? "I think that we're going to see the policy adopted in the next few months . . . in six months or so."

    That long? I ask. "Six months from now," he replies, "even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.


    Oh, well if Roubini himself says so..... (none / 0) (#11)
    by Polkan on Mon Feb 23, 2009 at 04:20:05 PM EST
    He has been more right than anyone (none / 0) (#12)
    by MKS on Mon Feb 23, 2009 at 05:11:53 PM EST
    lately....and, more important, many may be following his lead....

    The idea of creeping nationalization over time does seem to echo Roubini....this may be what the conscious administration policy is....Is Obama following Roubini on the banking issue?


    I no longer trust Greenspan (none / 0) (#13)
    by Inspector Gadget on Mon Feb 23, 2009 at 08:04:50 PM EST
    and heard that his current affiliations make the nationalization of the banks something that will benefit him greatly on a personal level.