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Feb 23, 2009 10:49 pm US/Central
Good Question: What's It Mean To Nationalize Banks?
(WCCO)
It is the fear driving huge drops in the Dow Jones Industrial of the New York Stock Exchange. It's driving the national discussion about the second phase of the bank bailout. But what does it mean to nationalize banks?
"In it's most extreme what it would mean, [the government] is coming in and seizing control of the bank, wiping out the existing shareholders," said Professor Andrew Winton, Minnesota Banking Industry Chair at the University of Minnesota's Carlson School of Management.
"We did a lot of that in the Savings & Loan crisis in the late 80s," he said.
In the 80s, some banks failed and were taken over by the government. But according to Winton, times are quite different today.
"I think that worked pretty well [at the time]. But the difference was that was a much smaller part of the economy than the size of the banking assets we're talking about today," said Winton.
Citigroup and Bank of America are two of the banks mentioned at the center of the discussion over potential nationalization.
The White House has been adamant that it does not intend to nationalize.
"The president believes that a privately held banking system regulated by the federal government is the best way to go about this," White House spokesman Robert Gibbs said Monday.
The Treasury Department, Federal Reserve and other banking regulators announced a plan to change the way the government gets reimbursed for giving banks bailout funds.
Right now, the government has been receiving preferred stock.
"Preferred stock is stock which gives you a fixed dividend. Typically, if the bank were to file for bankruptcy, preferred stock puts you ahead of common stockholders," said Winton.
The new plan would allow the government to convert preferred stock to common stock. It gives the government voting rights to have some control over the banks operations. It allows the government to reap the rewards if the bank turns things around, and starts to profit again.
"I think giving government part of the upside makes sense. Given we're putting so much in, taxpayers have the right to get something back," said Winton.
The strategy could be applied retroactively to banks that received money in the first phase of the bailout. There are risks: if the bank takes major losses, common shareholders absorb those losses before preferred shareholders.
"Eventually you've got enough government money in there, the bank mostly belongs to the government, and you're more than half way to nationalization at that point," said Winton.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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