WASHINGTON – 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 Dodd, D-Conn., chairman of the Senate Banking Committee, said Friday on Bloomberg Television. “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 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 values. 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 their operations and retain the confidence of customers and business partners.
The administration has pushed back. White House spokesman Robert Gibbs said Friday 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.
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.
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.
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 shareholders, something many proponents regard as desirable to restore market discipline.
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.
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 said the nationalization speculation is misguided.