U.S. Must Decide What Role To Play With Banks Many say the government's plan to become a major shareholder in the nation's biggest banks amounts to nationalization, but Federal Reserve Chairman Ben Bernanke calls it a "public-private partnership." Greg Ip, U.S. economics editor at The Economist, offers his insight.

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

  • Download
  • <iframe src="https://www.npr.org/player/embed/101106212/101106202" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

MELISSA BLOCK, Host:

From NPR News this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, Host:

And I'm Michele Norris.

And we begin this hour with the economic crisis. The Treasury Department is talking with Citigroup about changes that would boost the government's stake in the troubled bank to as much as 40 percent. Treasury is already one of Citi's largest shareholders, and that has a lot of people wondering if many of the nation's biggest banks are on a path to being taken over by the government.

But what does it mean to nationalize a bank? Might the government actually end up running Citigroup or Bank of America? This afternoon, Fed Chairman Ben Bernanke tried to assure the Senate Banking Committee that the government's plan is not to nationalize banks. But Senator Bob Corker sounded less than convinced.

BLOCK: That, to me, is nationalization. I'd like for you to give me a term to use as I leave here as to what we would call that.

BLOCK: Call it a public-private partnership. It's not nationalization because the banks will not be wholly owned or probably not even majority owned by the government.

NORRIS: Well, we're joined by Greg Ip. He's the U.S. economics editor at The Economist magazine. Greg, thanks so much for being with us.

BLOCK: Good to be here.

NORRIS: Perhaps you could help clarify this point a bit further. What, exactly, is bank nationalization, and how does it differ from what's already happened with some of the big banks, where the government has already taken on a very large equity stake?

BLOCK: There's no single definition of nationalization but generally, it means when the control of the bank falls under that of the government, and it can occur in a number of ways. At the most radical end, we sometimes think of, for example, the president of Venezuela taking away the oil fields of companies and not giving them any money in return. That's kind of a forced nationalization, and it's not at all in the realm of what anybody's considering here.

Another form of nationalization effectively occurs when a bank fails, and it is taken over by federal regulators. And again, that is not what we're talking about here. The final form, which is what we're discussing, is if a government purchases common shares in a bank until it controls at least 50 percent or more of the bank and therefore, can, for example, vote in the board of directors and tell the bank what to do.

And 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.

NORRIS: Substantial amounts. Now, the government is talking about up to 40 percent. Is 50 percent the magic number?

BLOCK: Fifty percent plus one is normally considered the magic number that gives you control. But it's not quite so simple because it's not enough for the government simply to own the common shares in a bank. It also has to agree to vote those shares. For example, last October, when the first round of injections of new money into the banks occurred, Hank Paulson, who was then the Treasury secretary, said that if this resulted in the government owning any common shares, it would not vote those common shares. It would essentially 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 bank will do?

NORRIS: Does that mean that they would essentially run the bank, that they would be making decisions about what kind of loans they offer, who gets those loans, whether or not they hoard capital or free up lending?

BLOCK: This has not been decided yet because the government is still trying to stick to their stated philosophy, which is to keep the banks in private hands. But they will have to make up their minds very quickly. And there's a good case to be made that, yes, they should, in fact, once they own more than 50 percent of a bank's common shares, decide who should be on that board of directors, who should be management, who they should they lend to and by how much.

And the reason why is that the government and Congress now is urging the banks to lend more to businesses, lend more to homeowners. And the banks are saying, well, that may not be safe. We're in a deep recession; if we lend that money, we may not get it back, and that will only make our situation worse off. If the government were the shareholder of the banks and forced to confront the pluses and minuses of those types of decisions, they would 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.

NORRIS: Greg Ip, thanks so much.

BLOCK: Good to talk to you, Michele.

NORRIS: Greg Ip is the U.S. economics editor at The Economist magazine.

Copyright © 2009 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.