Wednesday, February 25, 2009

Administration: Nationalization of Banks is not Happening

The Citibank web site has its famous marketing slogan atop its home page, "Citi never sleeps." The motto means customer's can do their banking anytime, but with nationalization of banks becoming more likely by the day, it could be an admission of many sleepless night to come.

The past week has seen more than a whisper campaign from some Democrats and few leading economists that the short-term remedy for the banking system is nationalization. Sen. Chris Dodd has said it may "unavoidable", which is nearly equivalent to saying, "Folks, get ready. It's happening." It's no wonder the stock market is beginning to reflect concern about what a collapse of Citibank, Bank of America or Wells Fargo could mean to the economy, and the Obama administration may be slowly setting the stage for nationalization. For the time being, though, President Obama and Fed Chairman Ben Bernanke say nationalization is not on the radar. Bernanke's comments stoked Wall Street, and that may have been his intent, while Treasury Secretary Timothy Geithner told Jim Lehrer, “I think that’s the wrong strategy for the country and I don’t think it’s the necessary strategy.”

The Washington Post reported that the Obama administration tweaked the terms of government assistance by demanding common stock in lieu of cash. "The change paves a road toward nationalization for the most troubled large banks," according to the Post. A piece on goes further in calling nationalization inevitable.

Nationalizing the nation's top banks has its critics, of course. With taxpayers already shouldering a large burden of risk that is likely to increase in the future, backing the financial sector may be too much. Some economists even believe another stimulus bill of nearly the same sticker price will be needed within two years. 

James S. Turley, Chairman and CEO of Ernst & Young told The Commonwealth Club of California earlier this month that state ownership is a bad idea over the long haul:

The thing I hope doesn't happen is government officials get too comfortable with state ownership in the various industries they are investing in. And I hope they don't see this as the long-term solution.... Let me be clear, I think it was important that the government stepped in during these unprecedented times, but it is not a good idea and no thinks that governments over the long-term allocated capital as efficiently or effectively as free markets.

On the other hand, many commentators say that taxpayers saw little in return in the form of consumer lending after the initial $350 billion bailout money passed late last year, and news reports of lavish executive spending and multi-million dollar bonuses left a lingering distrust toward the banks.

How poor is the health of the nation's biggest financial institutions? The grand sage of the credit mess, New York University Professor Nouriel Roubini laid it out in this week's issue of Time, saying Citibank is "on the way to ICU," Bank of America should "prepare the transfusion" and surprisingly, Wells Fargo needs a "Defibrillator. Stat!"

Just 16 months ago, Bank of America and Citigroup were quarterly flipping top positions for the title of world's largest bank. Today, they may be on the verge of being owned by the biggest economy in the world.


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