A Tricky Third Way: Saving Banks Without Nationalization
Sunday, February 8, 2009
Citigroup still has shareholders, a chief executive and a board of directors, but the New York company's major decisions now are subject to Washington's approval.
The federal government, Citigroup's largest investor, has forced the company to slash its dividend, pursue the sale of units including its Smith Barney retail brokerage and modify mortgage loans according to a government formula. A corporate jet was sold at the urging of federal banking regulators, and the company's chairman was replaced. The bank must issue public reports on its use of government money.
But senior officials in the Obama administration insist that Citigroup has not been nationalized.
Despite calls from some economists and members of Congress, officials say they are determined to maintain the appearance, and in important respects the reality, that banks remain under private ownership. Chastened by the results of the government's September seizure of American International Group, they say that true nationalization would open a Pandora's box, and that they are focused on cheaper and more efficient solutions to the financial crisis.
Treasury Secretary Timothy F. Geithner was scheduled to unveil a new government plan tomorrow to help banks deal with troubled assets. Officials continued to discuss details yesterday.
One thing that's clear: Nationalization is on the table only as a last resort for preventing the collapse of large banks.
"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," Geithner told reporters recently.
The word nationalization calls to mind banks owned and run by the government in perpetuity, as with China's largest banks. In Western economies, however, nationalization more often resembles detox. The government takes control, scrubs away problems and returns the company to private ownership.
Countries including the United States have a long history of temporarily nationalizing large, troubled banks. Smaller banks that get into trouble can be absorbed by healthy companies, but the largest banks often can be absorbed only by the government itself.
The most recent domestic example was the July nationalization of IndyMac Bancorp, a California mortgage lender. The company was seized and run by the Federal Deposit Insurance Corp. for about six months before the government sold the company to private owners last month. John Bovenzi, the FDIC's chief operating officer, served as chief executive.
But IndyMac is an example of a company that needed to be seized. The nationalization now envisioned by proponents, including lawmakers and economists, would involve companies that could remain private, at least for now.
The basic problem confronting the government is that banks hold large quantities of assets they consider more valuable than the prices investors are willing to pay. Banks cannot sell the assets without incurring massive losses, but holding the assets is tying up vast amounts of money and inhibiting new lending.