U.S. Must Decide What Role To Play With Banks

Talks between the Treasury Department and Citigroup about changes that would boost the government's stake in the troubled bank to up to 40 percent have many people wondering if banks are on a path to being nationalized.

Testifying before the Senate Banking Committee on Tuesday, Federal Reserve Chairman Ben Bernanke tried to assure lawmakers the government's plan is not to take over banks; Sen. Bob Corker (R-TN) sounded less than convinced.

"That to me is nationalization," he said after listening to Bernanke. "I'd like for you to give me a term to use as I leave here as to what we would call that."

"A public-private partnership," Bernanke replied. "It's not nationalization because the banks would not be wholly owned or probably not even majority owned by the government."

What Type Of Shareholder?

Greg Ip, the U.S. economics editor of the Economist, says the type of nationalization being discussed in the U.S. is when the government buys common shares in a bank until it controls at least 50 percent.

"That's kind of the question that's being discussed now because in order to keep the banks from failing, the government may find itself forced to purchase substantial amounts of common equity in these banks," Ip tells NPR's Michele Norris.

It is unclear what the government will do if it acquires a 50 percent plus 1 stake in the banks. When Henry Paulson was Treasury secretary, he said the government would be a passive shareholder.

"Now the question is: Should the government remain a passive shareholder or should it actively vote those shares and therefore take a much more hands-on approach to deciding what the banks will do," Ip says.

Active Involvement

Ip says though the government is trying to stick to its stated philosophy of keeping the banks in private hands, it must soon decide what type of role it will play. He says there is a good case to be made that once it owns more than 50 percent of a bank's common shares, the government should decide on the composition of the bank's board of directors, its management team, and to whom it lends and by how much.

He says the government and Congress are urging the banks to lend more to businesses and homeowners. Banks, however, are reluctant.

"If the government were the shareholder of the banks and forced to confront the pluses and minuses of those types of decisions, they'd have to, in some sense, behave like the mutual funds and active investors of the world behave, which is deciding whether or not those decisions are wise in the long run for the health of the bank," Ip says.

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