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Posts Tagged ‘nationalize’

Rahm Emanuel, who is the White House chief of staff recently said on ABC’s, “This Week” program, that he believes, “we will be able to avoid the temporary nationalization of the nineteen weakest of the big banks”, and added that he didn’t envisage that it would be necessary for the administration to ask for any additional funding, since several banks are already preparing to repay loans that they recently received.

Emanuel’s remarks were reinforced by those of Lawrence Summers, who is National Economic Council director, who said on NBC’s “Meet the Press”, “we won’t have to get more money because there’s the capacity to turn to the private market first for firms needing more capital. The government can also deploy if necessary additional taxpayer cash, which is likely be buttressed over time by lenders that are in the strongest position of paying back U.S. money”.

Financial regulators and The U.S. Treasury are presently clashing with each other as to how to disclose the results of stress tests that are scheduled to be released May 4, because several officials are concerned about the potential damage that could be caused to the weaker institutions if it’s not done correctly.

The intention of the tests, is to clarify which of nineteen companies that include Citigroup Inc., Bank of America Corp., GMAC LLC and MetLife Inc., have enough capital to weather a deeper economic downturn, should it in fact occur, and the Office of the Comptroller of the Currency, and other regulators would prefer that less details about the assessments be publicized, whilst the Treasury would prefer more.

The first of two major dangers that is envisaged, is that if all the banks pass the tests with clean bills of health, then the credibility of the tests themselves will suspect, especially since the economy has worsened since the Treasury announced the tests in February, causing questions to be raised about whether the checks that regulators are presently applying to bank portfolios are exacting enough. The second danger is that if some banks fail the tests, then investors can be expected to punish them, by refusing to invest in them, thereby causing them even greater problems.

The nineteen financial institutions are all expected to get the preliminary results of the tests as early as April 24, and any banks deemed to be weak, and in need of additional capital will be given six months to raise additional funds.

President Barack Obama said at a news conference in Trinidad and Tobago on April 19, that “the tests will show that different banks are in different situations”, and he pledged that no new injections of government money would, “go into a black hole where you aren’t going to see results or some exit strategy so the taxpayers ultimately are relieved of these burdens”.

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There’s a lot of talk right now about nationalizing America’s banks but not everyone agrees on what it would mean.

The first idea that most likely comes to mind would be an outright takeover of troubled firms such as happened with the mortgage giants Fannie and Freddie Mac when the government put them into conservatorship but many people using the word ‘nationalization’ simply mean that the government would invest large amounts of cash into banks thereby enabling it to have a major say in their activities.

Although the Obama administration is on record as saying that it wants to keep the banking system in private hands it hasn’t completely ruled out taking over troubled firms as can be seen by recent comments made by people that should be familiar with White House thinking.

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system”. – Treasury Secretary Tim Geithner

“I don’t welcome that at all, but I could see how it’s possible it may happen. I’m concerned that we may end up having to do that, at least for a short time” – Senate Banking Committee Chairman Chris Dodd, D-Conn.

Following further large declines in the shares of Citigroup on Friday which caused it to end the day with a 22% loss, White House spokesman Robert Gibbs told reporters,

“The president believes that a privately held banking system regulated by the government is what this country should have”.

That said, his statement left open the question as to whether or not the administration might consider intervention which would involve the taking over of a troubled bank after which it would be broken up and then new investors would be sought after a cash injection had been made.

The idea is one which is somewhat popular and Simon Johnson who was chief economist at the IDF had this to say,

“We have no problem in this country shutting down small banks. In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks. Nobody has the political will to do it. So you need to take an FDIC-type process. You scale it up. You say, ‘You haven’t raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone”.

It is not clear however if what the FDIC succeeded in doing with a few small banks would work with banking giants that employ hundreds of thousands of people and donate millions of dollars to various campaigns.

The bottom line however was probably best expressed by Paola Sapienza who is a finance professor at Northwestern University in Evanston, Ill.

“There seems to be some sort of ideological bias against the government taking over banks but eventually we’re going to pay for this, one way or another!”.

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