Fallout: The Financial Crisis

Banks await second round of bailout

Bob Moon Jan 23, 2009
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Fallout: The Financial Crisis

Banks await second round of bailout

Bob Moon Jan 23, 2009
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TEXT OF INTERVIEW

Tess Vigeland: Remember that huge federal bailout package from a few months back? Fat lot of good it did.

Shares of Bank of America have fallen to the $5 range. Citigroup is hovering around $3. Both are down more than 50 percent just this year.

The Treasury Department is set to release the second half of the bailout money soon, but at this point why bother? What’s another $350 billion gonna do that the first 350 didn’t?

We’re going to put that question now to Marketplace’s senior business correspondent Bob Moon. Welcome back to the show once again, Bob.

Bob Moon: You always call me in here for the bad news Tess.

Vigeland: Well, is there anything but that these days?

Moon: That’s the problem.

Vigeland: Alright, let’s talk about what is going on with the banking system. Wasn’t all of this supposed to be fixed, what, three, four months ago?

Moon: It was, and then we got all those bad earnings reports out of the banks again. Particularly with the Bank of America thing where they didn’t have enough money to complete the Merrill Lynch purchase: they go back to the government and say, “We need another 20 billion bucks.” Well, investors start wondering what else is hiding in all those arranged marriages that we saw — JPMorgan Chase taking over Washington Mutual and Wells Fargo merging with Wachovia, that sort of thing — and they began to wonder and bank stocks started to tank this past week.

Vigeland: What happened to the $350 billion that’s already gone into the coffers?

Moon: All the money we spent so far?

Vigeland: Yeah.

Moon: This is what you’ve got to show for it. Now for the sake of this conversation, let’s start thinking in terms of these patients that are under intensive care. They’ve got gaping wounds and we’ve been pumping the blood into them trying to keep them alive, trying to get them stabilized so we can close those wounds, let’s say. Then we have a problem with these opportunistic infections that have started sweeping through the hospital. Let’s call that “the recession.” In this case, it’s a lot like a staph infection. So even those patients who came into the hospital in fairly good shape are now facing these other problems. It’s beginning to spread to them as well. The argument can be made that if we had not been pumping the blood into these patients…

Vigeland: The $350 billion?

Moon: …that’s right — that things would be a lot worse now. So you can at least take that to the bank.

Vigeland: If $350 billion didn’t do it, perhaps another $350 billion, which is what we’re waiting for now, won’t do it as well, so what possible solution is there to sew up the banks and get them off the gurney?

Moon: Well, to stretch this metaphor even more, this is sort of like triage: you have to set your priorities here. And as a last resort, what a lot of people have been talking about is this word you’ve probably heard lately: nationalization. Nationalize the banks.

Vigeland: What does that mean?

Moon: That would very simply be, as I say, a last resort of the government taking over the banks. Uncle Sam would run them. This has worked in the past in some cases. Sweden, for example, nationalized its banks — on a much smaller scale than we’re talking about in the U.S. — and it did work. Then they sold them off into private hands again. We saw during the S&L crisis a couple of decades ago a similar thing where the government took over hundreds of institutions, basically nursed them back to health and sold off the bad assets — that sort of thing. So it has worked to some degree in the past.

Vigeland: How would the consumer see that happen? For example, do you keep your FDIC insurance if the bank is nationalized? Does the statement come from Barack Obama or Tim Geithner, the new Treasury Secretary?

Moon: Well first off, the FDIC would indeed still continue to insure your deposit. Through the end of this year, $250,000 per deposit would be insured by the Federal Deposit Insurance Corporation. We’re seeing the possibility in this case let’s say of less customer service. You might see the banks trying to cut corners in some areas, you might see fewer branches being opened, that sort of thing, while the government whipped them into shape.

Vigeland: OK, but your money is safe?

Moon: That’s correct. Stockholders, however? That would be a totally different question.

Vigeland: Out of luck.

Moon: Out of luck. Stockholders, whenever banks have been nationalized, their proceeds have been wiped out.

Vigeland: Marketplace’s Bob Moon joining us once again as he has been throughout this financial crisis. Thanks so much and I’m going to lay good money that we’re going to talk to you again.

Moon: I think probably so. This story is going to be around for a while.

Vigeland: Thanks Bob.

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