Bank Shares Topple on Talk Of Possible U.S. Takeover
Saturday, February 21, 2009
The specter of bank nationalization is driving a historic fire sale of stocks including Citigroup and Bank of America, making it harder for those firms to survive and imperiling the efforts of the Obama administration to keep banks in private hands.
A burgeoning chorus of prominent economists and members of Congress has concluded that some banks lack the money to solve their own problems and charges that the government has not yet announced an effective plan to help and that time is running short.
The administration has publicly and repeatedly denied that the banking system will be nationalized. But some experts and lawmakers say the government may be forced to take temporary control of the most crippled firms to scrub their books of troubled assets.
"I don't welcome that at all, but I could see how it's possible it may happen," Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said on Bloomberg Television yesterday. "I'm concerned that we may end up having to do that, at least for a short time."
The talk has only mounted in the 10 days since Treasury Secretary Timothy F. Geithner sought to assure the nation that banks could be stabilized without being taken over. Citigroup's stock has dropped nearly 42 percent, while shares of both Bank of America and Wells Fargo have lost about a third of their value. J.P. Morgan Chase has lost about 19 percent of its value.
The falling prices could force the government toward nationalization by making it harder for banks to fund operations and retain the confidence of customers and business partners.
The administration has pushed back. White House spokesman Robert Gibbs said yesterday that there are no plans to take control of the banking system.
"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," Gibbs said. When pressed by reporters to rule out the possibility of nationalization, Gibbs responded: "I think I was very clear about the system that this country has and will continue to have."
But sources familiar with the thinking of Obama's senior advisers say they remain open to nationalizing selected banks as a last resort. What has been ruled out is the nationalization of a large number of banks. Treasury officials also are continuing to develop a plan to use public and private funds to offer help tailored to other large banks.
The Treasury plans on Wednesday to describe details of "stress tests" that will be performed on about 18 of the nation's largest banks to determine their need for additional government investments, according to people familiar with the matter. A major goal will be to ensure these firms could withstand a further deterioration in the economy.
Last night, Treasury spokesman Isaac Baker said in a statement: "There are a lot of rumors in the market, as always, but you should not regard these as any indication of the policy of this administration. As Secretary Geithner has said we will preserve a financial system that is owned and managed by the private sector."
The basic problem confronting the government has not changed since the start of the financial crisis. Banks hold vast quantities of assets, such as mortgage loans, that have deteriorated significantly in value. Banks cannot sell the assets without taking a huge loss, but holding the assets is tying up vast amounts of money and inhibiting new lending.