GWEN IFILL: Federal regulators today promised to prop up struggling banks and possibly even take greater ownership stakes in them. But a White House spokesman said President Obama still supports a private banking system.
At the same time, Citigroup was widely reported to be asking the government to raise its equity stake in the company.
On Wall Street, bank stocks were up, but overall the market retreated to 11-year lows. The Dow Jones Industrial Average lost 250 points to close at 7,114. The Nasdaq fell 53 points to close at 1,387.
For more on our lead story, I’m joined by Krishna Guha, U.S. economics editor for the Financial Times.
Thank you for joining us tonight. What do we know about what it is that these banks may be asking of the federal government and what the federal government is prepared to do?
KRISHNA GUHA, Financial Times: Well, the federal government is laying out a framework here that could lead to it taking significant shareholdings in a large number of banks. They don’t want that to happen; they would prefer it didn’t; and they hope that, by offering more support, they’ll make this less likely.
But here’s their plan. They want to stress test the banks, see what would happen if the economy got even worse than it is today. Based on those stress tests, they’ll find out how much capital banks might need to survive these rocky scenarios.
The government is saying, if no one else will make funds available to you, we’ll put up some capital that can convert into equity. In theory, it would be up to the banks to ask for that. But in practice, the regulators could probably cram it down their throats.
GWEN IFILL: Is Citigroup the only bank that we know of that’s considering this approach?
KRISHNA GUHA: So, City is — they’re actually asking the government to take a large shareholding in it. Executives think that’s the only way to shore up market confidence in the bank.
At the moment, the government has what’s called preferred shares in Citigroup, as it has in a lot of the other banks. These are non-voting stocks. They carry a fixed interest rate. Investors think it’s not quite as good as having common equity. That’s normal shares for normal people.
So the executives at Citi are saying, “Come in. Become a large shareholder in our bank, perhaps even as much as a 40 percent stake in Citigroup.” It’s a sign of how far we’ve moved.
Treasury releases statement
GWEN IFILL: I want to read something to you today. This Treasury Department put out a statement which was open to all kinds of interpretation about what they meant. They said the government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. That sounds like the government's trudging down that path to nationalization.
KRISHNA GUHA: Well, I think their view is that they'll do as little nationalization as they can and still achieve their goal, which is to get credit flowing again to the real economy.
But in situations like Citigroup and potentially other banks, if the only alternative to full nationalization is for the government to take 30 percent, 40 percent or even 50 percent of the bank, that's the way they'll go.
GWEN IFILL: Is that a distinction without a difference? It sounds like a slippery slope.
KRISHNA GUHA: Well, you see, there's two ways a government can take greater control of a bank. One way is for the regulators to basically seize the bank and say, "We think it's no longer sound. We're going to take it over and run it." The other is for the government to essentially buy shares in that bank.
The preference that the Obama administration has is for investing in the bank's equity, which means it continues to be a private company listed on the stock market, but, as you say, it's not a yes-no. In either situation, we're talking about increased government control and influence over the financial system.
Preventing another bank collapse
GWEN IFILL: So if this goes according to plan, the assumption is there would never be another collapse like Lehman that we saw?
KRISHNA GUHA: Absolutely. I mean, there was another line in the statement this morning where they made it clear that they do not intend to permit the disorderly failure of any more big financial institutions. The cost of the Lehman failure was simply too great.
GWEN IFILL: Is it possible to go so far out on this limb toward government investment in banks in order to save them from themselves that it's impossible ever to go back again to where we were before, where private companies entirely control private interests?
KRISHNA GUHA: Well, I think we need to think about two separate things here. One is ownership. Now, no one is suggesting that the government should long term be in the business of running banks. All the people, even those who favor nationalization, suggest that the idea would be to get them back into private hands as quickly as possible by selling down the government's stake.
So the ownership can be returned to the private sector in fairly short order, but some things can never be undone. The relationship between the banking system and government and the taxpayer has changed now, I think, forever.
And we'll see that, for instance, in greater regulation of the banks. After all, once they've managed to put the economy and taxpayers at such great risk, the government is not going to allow that to happen again.
GWEN IFILL: It's easy to look at what happened on Wall Street today and say, well, the markets kind of like the idea of what Citi was asking for, but didn't very much like the overall direction of the economy. Is that over-reading?
KRISHNA GUHA: You know, I think that there's some reassurance in the market that the government looks to be trying to support Citi as a private company, although it hasn't categorically ruled out nationalization.
And there's some interest in the framework the government has set out, but people still aren't quite sure where this goes. And they're troubled by other news, that AIG, for instance, the insurance giant, might soon announce giant losses and need more money from the government, and people worry that the trajectory of the whole economy remains very dark at the moment.
GWEN IFILL: Yes, they're talking $60 billion of projected losses from AIG.
KRISHNA GUHA: That's right. That's right.
GWEN IFILL: Krishna Guha from the Financial Times, thanks a lot.
KRISHNA GUHA: Thank you.