Plan to nationalise American banks

Plan to nationalise American banks

Geoff Elliott, Washington correspondent | February 23, 2009
Article from: The Australian

THE Obama administration is considering a plan to temporarily nationalise US banks in a historic departure for the world's champion of free markets, prompting fears of further steep falls in US and world share markets.

Despite tepid denials from the White House, there has been a steady drumbeat of signals over the past few days indicating the bank plan is under consideration, including comments from Federal Reserve chief Ben Bernanke, who acknowledged that government takeover was a possibility.

"Whatever actions need to be taken," Mr Bernanke told journalists when asked last week about nationalisation. "I think there's a very strong commitment on the part of the administration to try to keep banks private, or return them to private hands as quickly as possible."

While some top administration officials are said to be against any sort of nationalisation, Chris Dodd, head of the powerful banking committee of the US Senate, said on Friday he was "concerned we may end up having to do that, at least for a short time".

Unthinkable just months ago but becoming more likely as the US Government and Federal Reserve commit trillions of dollars to try to underwrite a financial system many say is bankrupt, a government takeover of the US banks would wipe out shareholder funds.

Bank shares started to plummet in the US on Friday (Saturday AEDT) and rebounded only after the White House was forced to reiterate its support for the private banking system.

White House spokesman Robert Gibbs told a press briefing the Obama administration "continues to strongly believe a privately held banking system is the correct way to go" but he declined to rule out nationalisation.

The plan proposed in Washington would effectively force the troubled US banks into receivership and put them under government control, recapitalise them with taxpayers' funds and then sell them off to private investors, wiping out the existing shareholders' equity. The President said of the US banking system last week: "I think what you can say is I will not allow our financial system to collapse. And we are going to do whatever is required to get credit flowing again, so companies and consumers can do their business and we can get this economy back on track."

Already the White House has some political cover to consider nationalisations.

In the past week, Nouriel Roubini, the economist dubbed Dr Doom for his prescience on the US financial crisis and who is close to US Treasury Secretary Timothy Geithner, has called for a temporary government takeover, saying the US banking system is technically insolvent.

Republican senator Lindsey Graham followed suit, saying the idea needed to be on the table, and former Federal Reserve chief Alan Greenspan, who was once the champion of laissez-faire economics, agrees.

Mr Greenspan told the Financial Times: "It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring."

Mr Bernanke said it was "very challenging for governments to manage banks for a protracted period", indicating that at least a temporary bank takeover was on the cards. The Obama administration plans to "stress test" the US banks, which Mr Bernanke said would be to "assure ourselves that under stressed conditions, conditions worse than the current conditions, that banks have adequate capital, adequate financing to not only be stable but also to lend and contribute to economic recovery".

In an interview with The Wall Street Journal under the heading "Nationalise the banks", Dr Roubini said the idea of a temporary government takeover would follow the Swedish model, which took the same approach to its collapsing banking system in the early 1990s.

"That is," Dr Roubini said, "you take banks over, you clean them up, and you sell them in rapid order to the private sector - it's clear it is temporary. No one's in favour of a permanent government takeover of the financial system.

"I think we're going to see the policy adopted in the next few months, in six months or so."

In Dr Roubini's calculation, with the guarantees, liquidity support and capitalisation, the US Government has already committed up to $US9 trillion ($14 trillion) to the banking system, and he argues Washington is effectively controlling much of the banking system already.

http://www.theaustralian.news.com.au/story/0,25197,25091172-2703,00.html