Fallout: The Financial Crisis

Nationalization fears are mounting

Steve Henn Feb 27, 2009
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Fallout: The Financial Crisis

Nationalization fears are mounting

Steve Henn Feb 27, 2009
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TEXT OF STORY

Tess Vigeland: The stress test. It’s one of those checkups that, at a certain age, you’ll probably have to get. Starts with those little pads that hook you up to the electrocardiogram, then the treadmill. . . . Try to keep breathing. . . . Try not to let this happen. [Eeeeeeeeeeee…]

As you may have heard this week, several of the country’s biggest banks are about to get on the treadmill. Regulators want to see how prepared they are for a worst-case financial scenario. Because apparently we’re not there yet. But all this talk put bank stocks on the gurney this week. We asked Marketplace’s Steve Henn for a list of side effects.


Steve Henn: The big fear for bank investors in the last few weeks has been nationalization. Bill Isaacs, a former head of the FDIC, says it might be easy or popular to lash out at banks and bank executives these days, but . . .

Bill Isaacs: By and large the owners of banks are the same people who pay taxes around the country. They are people who are fortunate to have some money to put away, but they don’t want to take big risks so they buy relatively conservative investments. And that would be banks.

Isaacs says that as fears mount the government’s going to take over a bank and dilute or wipe out it shareholder’s its these average people who are being punished.

Isaacs: I have an 89-year-old aunt, for example, who has worked all of her life — she’s still working. And she is very frugal. And she puts her money away and she invests in bank stocks primarily. And she made a statement the other day. She said, “I came into the world with nothing, and I guess I’m going to leave with nothing.”

But huge potential losses at Citigroup, Bank of America and some of the nation’s other big banks have raised the prospect that large new government investments might be needed to keep these banks afloat. Because banks stocks are in such bad shape already, it’s easy to imagine a scenario where the U.S. Treasury ends up with a controlling stake. Right now, what we have isn’t really nationalization. What we don’t have is a name for it. So I’m going out on a limb here and try to coin a term. I think these banks are Private in Name Only — PINO. Pino Banc.

Simon Johnson: That’s exactly right.

Simon Johnson’s an economist at MIT.

Johnson: We’re pretending. We are absolutely pretending that we still have a privately run banking system in this country. We don’t.

Citibank’s an excellent example. On Friday it announced the government would take a 30 percent stake in the company. But Johnson is not a big fan of this vintage. He says Pino Banks are unpalatable.

Johnson: Essentially what we have done now — and this is a remarkable thing and I guess it crept up on us without us without fully realizing — is we got a lot of the negative features of nationalization: A lot of government control over the banks and a lot of government responsibility for the banks, without any of the positive sides of nationalization, which would include tax payer upside. So we have got the worst of all worlds right now.

And if the government goes ahead buys controlling stakes in these Banks, Johnson believes very little will change. If you are customer borrowing money, it’s unlikely to get much easier. If you’re a stockholder you’ll probably take another hit. And if you have a deposit or an account, you don’t have anything to worry about. But Johnsons says this kind of nationalization isn’t likely to work either.

Johnson: You need some something much more decisive and much bolder. You need a proper clean-up of the banks that aren’t viable going forward. And unless and until you do that, we are not going to get out of this mess.

The costs of that would be enormous, even by today’s inflated standards. So, instead, the Treasury is moving ahead with a plan for stress tests of the biggest banks. And it will likely keep searching for ways to prop them up without — at least officially — taking them over.

In Washington, I’m Steve Henn, for Marketplace.

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