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What Is 'Nationalization'? Depends Who You Ask.

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By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, February 25, 2009

A purist could argue that the word nationalization should only be used to describe situations in which the government owns a company, the government runs the company and the government plans to keep on running the company.

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That kind of nationalization is wildly unpopular in the United States. So it's no surprise that Obama administration officials have objected so vigorously when their plans to rescue the banking industry are described as a form of nationalization.

To understand why others continue to use the word, however, it's helpful to consider each of three components: Ownership, control and long-term intent.

Ownership: Generally, the government does not invest in private companies. But since November, the government has taken ownership stakes in more than 400 banks. While the government controls only a small portion of each company's shares, in many cases it has nonetheless become the single largest shareholder.

These stakes could expand considerably under the Obama administration's new investment plan.

Some experts say any government ownership is a form of nationalization. Others draw the line at 51 percent. There's also a technical standard: If the government owns 80 percent or more of a company's shares, accounting rules put the company on the government's balance sheet. That's why the government chose to take control of 79.9 percent of the shares in American International Group, Fannie Mae and Freddie Mac when it seized those companies.

Control: The government had plenty of power over banks before it became a shareholder. Federal regulators, for example, already review executive hirings and board appointments. The government gains even more power as the largest shareholder; companies listen carefully to big shareholders. And if the government assumed majority control, it would gain the formal power to control companies completely, as it does with AIG, Fannie and Freddie.

But officials insist that the government does not want to run banks, even if it has the power to do so.

The evidence so far is mixed. The government has imposed a growing list of restrictions on banks in which it owns shares, but it has left existing management in charge.

Intent: Banks on the verge of failure are commonly seized by the government. Regulators have seized 14 banks this year. Where possible, the healthy portions of the bank are sold immediately to a stronger company. But when a buyer can't be found, the government runs the bank. The most recent example is IndyMac Bancorp, which has been run by the government since it was seized in July. Officials resist using the word nationalization to describe this process because they say that the government is only taking control of the bank for the purpose of returning it to the private sector as soon as possible.

Many experts who favor "nationalization" as a solution to the current crisis are talking about a form of this process, in which the government would seize the most troubled institutions with the goal of returning them to the private sector as soon as possible. And senior officials in the Obama administration say they are considering the idea for the most troubled banks.

But if it happens, it will probably need a new name. A new USA Today-Gallup poll found that 57 percent of Americans oppose "temporarily nationalizing U.S. banks" while 44 percent oppose "temporarily taking over."

The word makes all the difference.


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