Bank nationalization may not be the policy preference of Democrats and Republicans alike, but it may well be the last resort of both parties, as more and more analysts say nationalization is no longer a matter of "if" but "when."
With the banking sector in a quagmire of bad assets, poor demand and weak cash flow, and government policy initiatives to date showing meagerly results, the concept of nationalization—long considered anathema—is now a real policy option in a growing number of quarters.
“I think nationalization makes an awful lot of sense,” says Walker Todd, a former Federal Reserve official now with American Institute for Economic Research. “Not only is it a viable alternative to keep going with TARP or bad bank solutions, eventually you reach the point where the money needed surpasses the capacity of the taxpayer.”
Nationalization has always had its share of high-profile supporters, such as Nobel Prize-winning economist Joseph Stiglitz, but when free-market champions such as former Fed boss Allen Greenspan mention the possibility, the concept has clearly moved to another level of policy debate.
Sen. Lindsey Graham (R-SC) is among those who admit nationalization may soon be on the table.
“The tolerance for throwing good money after bad has ended,” says Kevin Bishop, a spokesman for Graham. “We're talking about certain banks … temporary surgical stabilization.”
Nationalization Meaning What?
Phrases like that illustrate how the current debate over nationalization may be as much about semantics as it is about political ideology.
Nationalization means different things to different people. By one definition the U.S. government has been doing it for decades, and mostly quite successfully.
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Typically, the FDIC shuts down what it’s determined to be an insolvent bank and briefly assumes control while finding a buyer. The government supplies the necessary capital to satisfy the needs of the buyer as well as regulatory requirements. Insured deposits are protected and the bank reopens under new management.
“We did 1,000 savings and loans and 1,000 commercial banks, 20-years ago,” says Lawrence White, a savings and loan regulator at the time, who’s also served as a White House economist. “If you want (you can) call it nationalization. That's not how I thought of it.”
And that’s exactly what a growing number of people would have the government do with a limited number of banks—big ones—if the current rescue measures fail to pay off.
“Short term, given the alternatives, it’s not such a dreadful thing,” says White, adding the government needs to “make it clear it would be sold back into the market.”
White and others make it clear they are not talking about the primary alternative—outright industry nationalization, best illustrated by the socialist French government of Francois Mitterand in the early 1980s. That was direct government control of the banks' operations. Later, the banks were privatized.
The growing talk of nationalization also reflects a standard progression of crisis management, say experts.
“It’s common that when countries go into a financial crisis, they follow a piece meal approach, partly because of constraints in the political arena," says Luc Laeven, a senior economist at the International Monetary Fund, who co-authored a 2008 study of systemic banking crises and government policy responses in the past four decades.
“Considering nationalization as an option is the right thing to do. It is better to save a bank after you write down the shareholders and take control and have direct control over how the money spent.”
The Bush administration struggled over those issues from the moment the financial crisis began causing direct and collateral damage on a major level—the Bear Stearns collapse-shotgun marriage to JPMorgan Chase [JPM 19.35 -1.25 (-6.07%) ] in early March—while they also appear to have influenced the Obama administration's significant revisions to the original TARP program
Thus far the effort has centered on injecting capital for government equity and protecting shareholder value, while also protecting taxpayer exposure. Neither, however, has succeeded.
The market capitalizations of Citigroup [C 1.87 -0.64 (-25.5%) ] and Bank of America [C 1.87 -0.64 (-25.5%) ],two of the big financial firms struggling the most under the weight of bad assets, are now well below the amount of government assistance.
“Pay out the shareholders and move on,” says Gerald O’Driscoll, a former official at the Dallas Federal Reserve Bank and former vice president at Citigroup. “You could do it that way—the Bear Stearns model. Give them something nominal, so they don't resist.”
O’Driscoll, who's now with the Cato Institute, is among those who support the nationalization model on a case-by-case basis as part of the solution. “I think they're going to end up with a certain number of cases, even though they procrastinated, hoping the situation would work itself out.”
Dow Hits 10-Yr Low; Citi Drops Below $2
Topics:Banking | Taxes | Laws and Legislation | Earnings | Stock Market
Sectors:Banks
Companies:Barrick Gold Corporation | Lowe's Companies Inc | UBS AG | Bank of America Corp | JC Penney Company IncBy: Cindy Perman, CNBC.com | 20 Feb 2009 | 01:57 PM ET Text Size Stocks declined Friday as banks took another pounding amid fears of nationalization and the Dow dropped to its lowest point in more than 10 years.
The Dow Jones Industrial Average lost more than 2 percent, reaching its lowest level since October 1997.
The S&P 500 shed nearly 3 percent, and the Nasdaq dropped more than 1 percent.
Major U.S. Indexes.DJIA7310.16-155.79-2.09%1,589,376,000.NCOMP1423.87-18.95-1.31%593,945,000.SPX761.35-17.59-2.26%4,092,958,100
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Both Citigroup [C Loading... () ] and Bank of America [BAC 3.15 -0.78 (-19.85%) ] plunged more than 30 percent, leaving Citigroup below $2 and Bank of America below $3.
Wall Street was rattled by several comments alluding to nationalization out of Washington.
Sen. Chris Dodd said today that banks may have to be nationalized for some period of time, which sent stocks spiraling further. This comes a day after Fed Chairman Ben Bernanke alluded to nationalization in a speech, which got traders buzzing.
This comes after as selloff Thursday that saw the Dow crash through its November low to settle at a six-year low.
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Several big caps hit multiyear lows today: Boeing [BA 35.84 -1.73 (-4.6%) ] and Berkshire Hathaway [BRK Unavailable () ] both fell to their lowest in five years, General Electric [GE 9.10 -0.96 (-9.54%) ] hit its lowest in more than 10 years and Alcoa [AA 6.09 -0.25 (-4.02%) ] hit a 20-year low.
Traders have been clamoring for details of the Obama administration's stimulus plans, which were expected to assuage market jitters. But when specific plans for the mortgage-rescue plan emerged, stocks sold off.
"This market sold off quite frankly because it did not like the plan period," Jack Bouroudjian, a principal at Brewer Investment Group, told CNBC this morning.
And, while tech stocks had a harder selloff than financials yesterday, Bouroudjian said it all comes down to the banks.
"The banking sector is the heart blood of capitalism. Unless it gets healthy, the rest of the sectors are going to spin their wheels," he said.
In the day's only economic data point, consumer prices rose 0.3 percent last month, the first gain since July; core CPI, which excludes volatile food and energy costs, rose 0.2 percent.
>> CPI Breakdown: Where Costs are Rising
Switzerland’s tax and banking laws came under sharp scrutiny as US authorities widened a probe into UBS [UBS 9.25 -1.33 (-12.57%) ], suing for information on 52,000 clients. The Swiss bank agreed to large fines earlier in the week in an attempt to settle criminal charges.
American depositary shares of UBS tumbled more than 10 percent, pushing the stock under $10 on the New York Stock Exchange.
Bank of America is also under legal scrutiny, as chairman and chief executive Kenneth Lewis was subpoenaed by New York Attorney General Andrew Cuomo last week. Cuomo is investigating whether the bank violated state law by withholding information from investors, a source familiar with the case told CNBC.
"Would I be buying the equity in Citi and Bank of America here? I mean, it's very cheap, but I think the banks survive; I don't think the equity survives," Steve Auth, CIO of global equities at Federated Investors, told CNBC.
(Click on the video at left to watch the interview.)
More and more analysts are saying that nationalization isn't a matter of i
Crude oil pulled back a few dollars, trading between $37 and $38 a barrel, while gold popped above $1,000 a troy ounce.
"The time of stock and bond investing only, is over. And we have to realize that," said Heath Bray, a VP at Wealth Trust Arizona, told CNBC.
Tough times continued for the auto sector as General Motors' [GM 1.70 -0.30 (-15%) ] loss-making unit Saab said it would seek legal protection from creditors as it scrambles to restructure and gather new funding.
And missing Texas billionaire Allen Stanford has been found in Fredericksburg, Virginia and served with a complaint accusing him of an $8 billion fraud.
In earnings, Lowe's [LOW 15.62 -1.36 (-8.01%) ] reported a sharp drop in quarterly profit as the home-improvement retailer slashed prices to try to lure penny-pinching shoppers. Earnings fell to 11 cent a share, just below analyst estimates. Lowe's outlook fell short of expectations.
Also, Barrick Gold [ABX 37.25 0.81 (+2.22%) ] shares gained after the company beat analyst estimates with a profit of 32 cents per share.
And JCPenney [JCP 15.03 0.11 (+0.74%) ] beat forecasts but issued a disappoi
I will buy the UYG on the close today. The beat goes on Mikey\\\
Correction ....market rallied holding off buying the close
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