What’s the big deal?
It happens all the time, and as a practical matter, it’s already been done.
Venezuela’s Hugo Chavez couldn’t have done a more thorough job than what already has happened, only on a smaller scale.
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The firestorm started when Senate Banking Chair Chris Dodd (D-Conn.) said that some banks may have to be nationalized “temporarily.” With all the aid being handed out by the federal government, Dodd was only stating the obvious.
The Obama administration, which quickly responded by saying it did not intend to nationalize U.S. banks, may find itself taking another step in that direction. The government already is contemplating converting its preferred shares in Citigroup, Inc. into common equity to help the firm withstand losses. Doing so would give the taxpayers better than a 50 percent stake in the bank.
Citigroup and rival Bank of America Corp., beaten down in New York trading last week on U.S.-takeover speculation, are among more than 20 lenders that could wind up majority-owned by the government if such conversions took place.
Difference in Methods
Whenever banks become insolvent, and the security of deposits is threatened, the Federal Deposit Insurance Corp. (FDIC) is authorized to step in. Unlike the scenario that has unfolded in the TARP bailout, the FDIC doesn’t infuse the target banks with new capital to keep them on their feet. Rather, it holds the line to protect deposits while it looks for another more solvent bank to take over.
This week, under the direction of the Treasury Department and the Fed, U.S. regulators will start performing stress tests on major national banks to measure their functional solvency. The ostensible purpose of these examinations is to determine which big banks need more taxpayer cash to keep from folding.
The federal government already has pledged to inject more capital into these banks to keep them from failing. Consequently, the tests are simply a formality on the toll road to further nationalization.
Closing in on Nationalization
To buy political cover in the media, the Obama administration is saying banks that cannot privately raise the additional capital they need after the stress tests, will be eligible for supplementary taxpayer money. Since the outcome of the bank examinations is a foregone conclusion, and only a deranged lunatic would throw good money after bad, there is little question but that several national banks will be another step closer to nationalization.
As the economic slump has deepened, bank shares have been hammered. Since the start of the year, the Standard & Poor’s 500 Banks Index has lost 58 percent.
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These precipitous declines have given enormous momentum to the notion to some form of short-term nationalization. Some of the more vocal proponents of this proposal have been Sen. Lindsey Graham (R-So. Car.) and former Fed Chair Alan Greenspan.
Even with the incremental nationalization that has already happened, and the further actions that invariably will be taken by the federal government, many analysts believe it will be at least 2010 before the money markets recover.
Change Remains Distant
For all the trillions of dollars pledged to combat the financial crisis, banks still are not lending, and likely will not be doing so soon. This projected negative tilt on lending is reflected in the Libor-OIS spread, which measures the difference between what banks claim they have to pay to borrow from one another and what the market actually expects they would pay. Essentially, it is the premium that banks charge one another for short-term borrowing.
The Libor-OIS is a barometer that reflects fears of bank insolvency. Last week, the spread rose above 1 percent for the first time since Jan. 9. In other words, despite the massive federal bailout, banks are still not lending, and credit will probably remain frozen for the foreseeable future.
If that’s the case, why not simply cut to the chase. Do what everyone says we are not doing … nationalize the banks. This way, we might actually get some bang for our bucks.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
