Nervousness Over Nationalizing U.S. Banks
Friday, February 20, 2009SUZANNE PRATT: Talk of nationalizing U.S. banks took center stage on Wall Street and in Washington today. That prospect sent bank stocks tumbling and pushed the Dow to its lowest close in seven years. The White House said a government takeover of banks is a bad idea, but the chairman of the Senate Banking Committee warned that banks may have to be nationalized for a short time to help them survive. Nationalization would give banks a clean slate by wiping out all their bad debts, but it would wipe out shareholders, too. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Some believe it would be the end of capitalism. Others say it is the only way to save the banking system. Nobel laureate Joseph Stiglitz says a takeover would force banks to stop helping themselves at our expense.
JOSEPH STIGLITZ, ECONOMICS PROFESSOR, COLUMBIA UNIVERSITY: American taxpayers have provided most of the capital but the banks are not maximizing the interest of the owners, i.e. the American taxpayers. They're maximizing their interests of their management, of their own shareholders. And that's why you see this very peculiar behavior, taking our money and pouring it out to dividends, pouring it out to bonuses.
GURVEY: Rumors about a possible nationalization are rocking Wall Street, driving Citigroup and Bank of America almost to penny stock levels. These two are considered the most likely targets if the government decides on a takeover. Taxpayers already have $45 billion invested in Bank of America, which today said quote, we see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization. Citi also has $45 billion in taxpayer funds and today it said quote, Citi's capital base is strong and our tier one capital ratio among the highest in the industry. Investors trying to sort through the rumors have been unsettled by a series of ambiguous comments. Earlier this week, Fed Chairman Ben Bernanke implied a government takeover is possible.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I think there's a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible.
GURVEY: And Christopher Dodd, chairman of the Senate Banking Committee agreed, although he said he opposes such an action. Treasury Secretary Timothy Geithner has been silent on the issue and when asked at today's White House news briefing if banks would be nationalized, Treasury (sic) Secretary Robert Gibbs said:
ROBERT GIBBS, WHITE HOUSE PRESS SECRETARY: This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government.
GURVEY: Strategist Robert Albertson of Sandler O'Neill is among those raising strong concerns about a government take over of any bank.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: There's no such thing as temporary nationalization. Once you've done it, you have permanently wiped out capital and you have for the long term reduced the opportunity of ever attracting capital again into the banking system. Secondly, you're driving it out of banks that aren't nationalized, because once you do one or two, it's hard to know where you're going to stop and therefore investors shun for a long, long time into the future.
GURVEY: Meanwhile, credit default swaps on Citi and Bank of America rose sharply today. Those are effectively insurance policies against default and is a sign of declining investor confidence. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
