What Does Bank Nationalization Mean?

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Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee on Tuesday that he didn't see why bank nationalization would be necessary. David Wessel of The Wall Street Journal talks with Renee Montagne about what nationalization means.

RENEE MONTAGNE, host:

And throughout this crisis, those of us who don't work for banks have been getting a crash course in economic terminology. A word we're hearing more and more these days is nationalization. We keep hearing talks that the Obama administration might nationalize some of our biggest banks.

To find out what this may mean, we turn now to David Wessel. He's economics editor of the Wall Street Journal. Good morning.

Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning, Renee.

MONTAGNE: So, David, what would nationalization look like? I mean, does it mean the government would take over Citigroup or Bank of America and run it like a government department?

Mr. WESSEL: Well, that's not the idea. The whole idea is for the government to take a failing bank, cleanse it of all its bad loans and lousy assets and then put the bank back into private hands. That's what the government did with a big bank called Continental Illinois in the 1980s. And, in fact, the federal government did that. The Federal Deposit Insurance Corporation took over IndyMac last year, owned it, operated it as a federal bank and is now in the process of selling it to private investors.

MONTAGNE: And, of course, it never used the word nationalize at the time. But what has brought us to the point where we're even talking about this?

Mr. WESSEL: Well, banks have lost an extraordinary amount of money. They've made loans and bought securities that aren't worth anywhere near what they thought they'd be. When banks have losses, that reduces their capital cushion. When their capital cushion gets reduced too far, they stop lending, or the government says it's not safe for them to keep lending.

So the government would love for the banks to raise capital privately. They're unable to do that in this climate, so the government is stepping in, buying shares to restore their capital so the banks can resume lending.

MONTAGNE: What argument for nationalization? Give us some more.

Mr. WESSEL: Well, the taxpayers are already supporting the banks. We've seen hundreds of billions of dollars of taxpayer money go into the banks. So some people say why should the taxpayers put money in it and let the shareholders or the bondholders benefit when things get better? Why not just let all the upside go to the taxpayers?

Another argument is that the halfway approach isn't working very well. You know, the government essentially took over a big insurance company, AIG, last year. The government owns, the taxpayers own 80 percent of it. And it just seems like the government keeps pouring more and more money in, and it's not getting better.

So what's the big difference between owning 80 percent and telling them what to do and just sort of putting it out of its misery and making it a government-owned enterprise?

And then finally, there's the notion that it's just cheaper in the long run than this dribbling, dribbling in of capital. And if it's going to happen eventually, maybe it's better to just do it now and get it over with.

MONTAGNE: Well, you just mentioned shareholders. Shareholders, of course, can be us, as a lot of people would say. What are the arguments against nationalization?

Mr. WESSEL: Well, that's right. You know, obviously, nationalization is often, usually, bad for the people who bought shares in the company. That's the way capitalism is supposed to work. If things go well, the shareholders benefit. If things go poorly, the shareholders are not supposed to benefit.

With full government ownership, though, comes government control, or can come government control and can come political interference. We see quite a bit now of members of Congress saying it's not right for this bank or another bank to have a golf tournament or entertain their customers.

And there's some concern that if once they become fully government-owned entities, if they do, that there will be more interference, that they should make this kind of loan and not that kind of loan. And that's not generally the way we think banking works best.

There's also the risk that if the government nationalizes any one bank, kicks out the shareholders, that that'll freak out the shareholders in all the other banks, they'll dump their shares and it'll just make a bad situation worse and force the government to take on all the banks. And the government, to be quite frank, has its hands full. They already have AIG. They're working with Citibank, Bank of America. There's Fannie Mae and Freddie Mac.

I think there's a limit to how many big financial institutions the employees of the U.S. government can even hope to oversee or supervise, and so why make it bigger? And then finally, there's the concern that if the government nationalizes the banks and says some day it's going to return them to private hands, it may be a lot easier to say that than to actually do that. And most people don't think that it's a good idea in the long run for the government of the United States to operate the banking system.

MONTAGNE: You know, one thing, David - and just very quickly - in this country, nationalization is a very loaded term. How is that influencing this whole debate?

Mr. WESSEL: Well, I think that's why no matter what we do, it's not going to be called nationalization. There was a poll the other day that suggested that people liked temporarily taking over banks better than the phrase nationalization. Some people prefer to call it receivership or pre-privatization.

I think it illustrates how, fundamentally, Americans are uncomfortable with the government running the economy. And so this is the last choice of our policymakers. And they're going to try to make it sound palatable.

MONTAGNE: David, thanks very much.

Mr. WESSEL: A pleasure.

MONTAGNE: David Wessel is economics editor of the Wall Street Journal.

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

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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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