Bernanke: Nationalizing banks, if it's necessary, won't last long

McClatchy NewspapersFebruary 18, 2009 

WASHINGTON — Federal Reserve Chairman Ben Bernanke said Wednesday that there would be drawbacks to the federal government nationalizing banks and the Obama administration remained committed to "return them to private hands" quickly if nationalization became necessary.

"As a general rule, it's very challenging for governments to manage banks for a protracted period," Bernanke told a sold-out luncheon crowd at the National Press Club. "There is the additional problem if you have a government-run institution, you tend to lose their franchise value, and counterparties don't like to deal with you because they don't know your future.

"Whatever action would need to be taken at one point or another, there's a very strong commitment on the part of the administration to keep banks private and return them to private hands as quickly as possible."

Bernanke was responding to a question about whether he agreed with his predecessor Alan Greenspan, who told the Financial Times that it may be necessary to "temporarily nationalize some banks in order to facilitate a swift and orderly restructuring."

There's rising talk elsewhere that nationalizing banks could be the best way to rid them of toxic assets corroding their balance sheets. Sen. Lindsey Graham, R-S.C., told The Charlotte Observer this week that the government already has poured billions into banks with little to show for the economy.

A government takeover essentially could wipe out shareholders, which is one reason for the pressure on bank stocks.

Banks now are undergoing "stress tests" that Bernanke called a diagnostic tool to ensure their viability.

The review of major banks' assets and liabilities would assess "not only what is their true position but how would they do under a more stressful scenario in which the economy does worse even than we expect it to," he said.

"The purpose of that exercise is to try to determine how much more capital and other measures would be needed to ensure the banking system would be robust," Bernanke said.

The Federal Reserve issued a revised and gloomier 2009 economic outlook Wednesday and warned that there could be an "unusually gradual and prolonged" economic recovery from a deep global recession.

Steeper declines in housing, trade, industrial production, spending and employment rates "more than offset" an economic stimulus plan, said the Fed's Open Market Committee, which predicted that the economy would shrink by 0.5 percent to 1.3 percent this year and unemployment would rise to between 8.5 and 8.8 percent. "Financial markets continued to be strained overall, credit remained unusually tight for both households and businesses, and equity prices had fallen further," the Open Market Committee said in its report, taken from the minutes of its Jan. 27-28 meeting.

When Bernanke was asked Wednesday what would trigger more government involvement or, alternately, allowing a bank to fail, he said that the details would be up to the Treasury Department.

"Clearly, what we want to do is assure ourselves that under stressed conditions, conditions worse than current conditions, that banks have adequate capital, adequate financing, to not only be stable but also to lend and contribute to economic recovery," he said.

Industry analysts already are handicapping the banks' need for further government intervention.

Christopher Whalen, a co-founder of the research firm Institutional Risk Analytics, said that he ordered the candidates for nationalization this way: Citigroup Inc., Bank of America, JPMorgan Chase & Co. and Wells Fargo & Co. In particular, he said, the government needs to say what it's going to do with Citi before first-quarter earnings are reported in April.

"The U.S. government," Whalen said in a note Wednesday, "must be willing to lead by example to show that there really is only one way to restore confidence in zombie banks: Use receivership to wipe out the common and preferred shareholders, conserve the deposits and sell the good assets to new investors, and then restructure the remaining operations of the bank to maximize recovery to the bondholders and other creditors."

Among the concerns prompting nationalization talk is the need to pump even more capital into the banking system to protect against further losses. Another argument is that some banks already could be technically insolvent because their assets are worth less than their liabilities.

With this as a concern, banks may be less likely to shed toxic assets, prolonging the shakeout in the housing market and discouraging new loans. That was a problem in Japan during its "lost decade" in the 1990s.

One possible solution that's gaining attention is the "Swedish model" of nationalization employed by that country's government during an economic crisis in the early 1990s. After taking over some of the institutions, the government placed troubled assets in a so-called bad bank and sold them as the economy recovered. The liquidation was completed by 1997 and taxpayers got back more than half the initial capital invested, according to a Cleveland Federal Reserve Bank study.

(Rothacker reports for The Charlotte Observer.)

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