By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
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.
The government has tried to address the problem by injecting billions of dollars into the banks. In some cases, including with Citigroup and Bank of America, officials have also agreed to limit the banks' losses on distressed assets. Neither of these approaches has convinced investors that the problems are under control.
In his speech last week, Geithner said the government would partner with private investors to buy the troubled assets. But he provided few details about how the partnership would work, leaving investors uncertain about its chances for success.
Nationalization is an alternative approach in which the government would take control of the bank, allowing the removal of distressed assets without having to create a system for buying those assets. The approach also would wipe out shareholder value, something many proponents regard as desirable to restore market discipline.
The government has nationalized banks in the past. Nations including Sweden also have used the approach to successfully restore the health of their banking systems.
But the approach generally is used as a last resort, reserved for institutions that cannot survive on their own. Administration officials warn that banks under public control can be forced to implement policies that compromise their core role as lenders. Other businesses may be reluctant to work with a public institution. And nationalization can create a domino effect in which investors flee from less troubled firms for fear that they, too, will be wiped out.
Still the idea, once unthinkable, is now being talked about everywhere. Alan Greenspan, former Federal Reserve chairman and longtime champion of the laissez faire philosophy that private markets can solve their own problems, told the Financial Times this week that the current crisis might be an exception. "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," Greenspan said. "I understand that once in a hundred years this is what you do."
Most proponents of nationalization have focused on the two companies that have received the most government help, Citigroup and Bank of America. The government has invested $45 billion in each company and promised to limit Citigroup's losses on a $301 billion portfolio of troubled assets. Bank of America got a similar guarantee on a $118 billion portfolio.
Both companies warned that the speculation is misguided.
"Our company continues to be profitable. We see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization," Bank of America said in a statement yesterday.
Citigroup also issued a statement that noted the company's reserve of capital, a key measure of a bank's health, is among the largest in the industry. "We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," the company said.