The U.S. Divided Over Bank Nationalization

The inefficiency of the financial institutions bailout is pushing certain conservatives to plead for their orderly liquidation.

There’s an intense debate in Washington about the necessity to nationalize certain banks. This approach is now being defended by some conservative people. Among them, Alan Greenspan and Republican Senators John McCain and Richard Shelby. Their arguments are similar to those of experts usually opposed to their opinions, like Democrat and Nobel Prize winner Joseph Stiglitz. All of them are disappointed by the current state of affairs.

We have been waiting for a month for the details of the American Treasury plan to encourage private investors to buy, in partnership with the government, the toxic assets which are sinking the balance sheets of dozens of banks. Meanwhile, the individual public bailouts of institutions are becoming more and more ruinous and don’t really solve the problem. The case of AIG, an insurance company, which grows hungrier everyday for public funds, is provoking a fierce controversy. It won’t be possible to avoid the problem eternally. The time will come when the 100 percent guarantee from the federal government for its greatest diseased banks will not be politically tolerated.

In the mind of Sen. Shelby, the nationalization of an institution such as Citigroup should be the prelude to its well deserved liquidation. “Close – close them down, get them out of business. If they’re dead, they ought to be buried,” he states. Citigroup is seen to be the first candidate for this radical treatment. The New York giant has been “saved” three times by injecting funds for a total of 45 billion dollars and guarantees against devaluation of a 301 billion dollar asset. However, few are those who believe that “Citi” has been definitely saved.

Vikram Pandit reassures

Its CEO, Vikram Pandit, wanted to reassure yesterday by stressing that the bank, far from being on the brink of bankruptcy, has been generating profits since the beginning of the year, that the amount of its deposits is “relatively stable” and that it has enough stockholder’s equity. Citi’s stock price went up by 20 percent to 1.3 dollars. However, after five quarters of losses for a total of 37.5 billion dollars, Citigroup has a lot to do to regain its stockholders’ trust, having lost 80 percent of their capital in one year. What’s more, the deterioration of the economic situation will bring more billion dollar losses over the coming months.

For Citi and others, Richard Shelby proposes to give up the rampant nationalization approach and treat institutions judged up until now too big to go bankrupt in the same way as small banks would be. These so-called “too big to fail” on life support would be seized by the Federal Deposit Insurance Corporation (FDIC), then liquidated and sold to sufficiently healthy rivals. The FDIC, fed by funds paid by all banks, acts in this manner regularly with institutions whose survival does not represent a systemic stake.

In the eyes of the Treasury and Federal Reserve, this method is difficult to apply to a big bank present in dozens of countries. Liquidating Citigroup would be very complicated, very long, very expensive, and mostly very dangerous. If Citi was seized, investors would immediately bet on other big banks affected by the same disease being seized. These wouldn’t stand a chance in raising private capital. The authorities would then have triggered a domino effect, causing an unavoidable series of nationalizations that would plunge a great deal of the American financial system under government control. But the White House and Democrat leaders say that “the government doesn’t know how to manage banks. We don’t want to control the banking system.”

Everyone agrees on that point: nationalization isn’t an accomplishment. The idea is not to maintain a bank’s life in the name of employment preservation, for example. It can only be a temporary solution to an exceptional situation that is keeping a bank from raising stockholder’s equity from private investors. The very name “nationalization” is taboo. The opinion associates this word with America becoming socialist, an anti-American system by definition.