Should the US banks be nationalized?

[Cynthetiq]

View: Nationalization Gets a New, Serious Look
Source: Nytimes
posted with the TFP thread generator

Nationalization Gets a New, Serious Look January 26, 2009
News Analysis
Nationalization Gets a New, Serious Look
By DAVID E. SANGER

WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?   click to show 

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”

So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority, with all that connotes.

That has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.

Many believe this form of hybrid ownership — part government, part private, with the responsibilities of ownership unclear — will not prove workable.

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”

“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.

Moreover, Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.

“The nightmare scenarios are endless,” one of the administration’s senior officials said.

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.

Nationalization could pull the banks out of that dive, at least temporarily, as the government injected capital, hired new managers and ordered a restart to lending. But some Republicans who bit their tongues when President George W. Bush ordered huge interventions in the market would charge that Mr. Obama was steering America toward socialism.

Nationalization, said Charles Geisst, a financial historian at Manhattan College “is just not a term in the American vocabulary.”

“We think of it,” he continued, “as something foreigners do to us, not something we do.”

It is also something foreigners do to themselves: the British have recently taken a majority stake in the Royal Bank of Scotland.

Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.

Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”

View: As Doubts Grow, U.S. Will Judge Banks’ Stability
Source: Nytimes
posted with the TFP thread generator

As Doubts Grow, U.S. Will Judge Banks’ Stability
February 23, 2009
As Doubts Grow, U.S. Will Judge Banks’ Stability
By EDMUND L. ANDREWS

WASHINGTON — The Obama administration will begin taking a hard look at the financial condition of the country’s 20 biggest banks this week to judge whether they could hold up even if the downturn worsens further than policy makers already expect.   click to show 

These reviews of the banks’ books, known as “stress tests,” are heightening a dilemma for Obama aides about how candid they should be about the health of banks like Citigroup and Bank of America. The tests are expected to take several weeks.

Bank shares were pummeled last week, partly because of rumors that the government might nationalize some of the banks. Officials consider many of the top 20 banks “too big to fail.”

On Monday, the administration reiterated in a statement that it thought banks should remain private but also offered some reassurance that it would support the banks as needed.

“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth,” the government said. “Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.”

The stress tests come as anxiety is building among investors and industry analysts about the Treasury Department’s broader plan to shore up the banking system. People familiar with the plan, which has been criticized by executives and analysts as vague, say its crucial details may not be ready for another few weeks.

In yet another sign of distress for the banks, Citigroup officials were in active talks with federal regulators on Sunday night about plans for the government to take a bigger ownership stake in the bank, according to a person close to the talks.

Citigroup approached the regulators with a plan that would allow them to convert a large amount of the government’s $45 billion of preferred shares, which is treated as debt, into common stock, this person said. The government owns a stake of roughly 8 percent, but that could grow to as much as 40 percent.

Converting the preferred shares while also issuing more common shares would bring Citigroup closer to the mix of equity that the government is likely to demand when it introduces the stress test. But that would severely dilute the value of shares held by existing Citigroup stockholders.

Still, the big banks say they remain relatively healthy and that, with time and support from the government, they will regain their footing.

But many economists, Wall Street analysts and even some bank executives contend that some of the banks are already effectively insolvent.

Even though banks have reported billions of dollars of losses from bad loans, these critics say, the major institutions still carry trillions of dollars in additional toxic assets and are too damaged to resume normal lending.

This camp says it would be best to nationalize some of them now — with the government wiping out shareholders and taking over the operation of some institutions, at least temporarily — rather than to drag out the process while the economy spirals further downward.

The stress tests will use computer-run “what if” situations to estimate what would happen to each bank under Depression-like conditions, with unemployment surging to 10 or 12 percent, for example, or home prices dropping 20 percent further, Treasury and Federal Reserve officials said.

Fed officials emphasized that these hypothetical events were “highly unlikely” to occur.

Top advisers to President Obama, including the Treasury secretary, Timothy F. Geithner, have insisted repeatedly that they want to keep the major banks in “private hands” and have no intention of nationalizing them. But because the tests involve nightmarish economic conditions, the results of the tests are likely to strengthen the case that some of the major banks need more capital. That would increase the likelihood that the government would increase its stake and dilute or even wipe out the shares held by private investors.

On Friday, Treasury and Fed officials put out the message that the stress tests themselves should not be seen as cause for anxiety. The tests, officials said, would simply make clearer whether a particular bank needs more capital now or might need more in the future if conditions become worse.

Their implication was that federal regulators were not about to impose strict numerical rules to decide whether a bank had “passed” or “failed” the stress test. Federal officials are not expected to publicly disclose the findings about any specific bank, though they are expected to provide at least a rough idea of the new questions they are asking.

Some officials argued that the tests might actually provide reassurance about the strength of many banks. Indeed, Treasury and Fed officials said they had consulted with industry executives in devising the tests.

Bank executives reached over the weekend said that the tests might not produce information that is very different from what regulators already know about the banks. The Federal Reserve already has hundreds of examiners on site at the largest banks, monitoring their businesses.

Meanwhile, the revelation that details of the Treasury’s new bank rescue plan might not come for several weeks leaves banks and their shareholders to stew.

“These stress tests are just going to raise more questions and add to the uncertainty,” said Bert Ely, a banking analyst in Alexandria, Va. “The only thing that is likely to calm them down is if the administration flatly declares that it won’t take over banks.”

Administration officials have tried to make that point, but they have stopped short of making absolute declarations — probably because many industry analysts say some banks that are “too big to fail” may well be too feeble to stand on their own.

President Obama’s chief spokesman, Robert Gibbs, said on Friday that the administration “continues to strongly believe” that a privately held banking system was “the correct way to go.”

But on Friday, and for much of last week, investors acted as if they were betting on government takeovers and dumping bank shares in response. Shares in Citigroup, for example, fell 44 percent, and Bank of America stock dropped 32 percent.

Indeed, investors appeared to be challenging government assertions in exactly the same way they did last summer, when they called the Bush administration’s bluff about the financial needs of Fannie Mae and Freddie Mac, the government-sponsored mortgage-finance companies, which eventually had to be taken over.

Because a complete government takeover could wipe out or at least dilute the value of existing common shares, investors sold bank shares at a furious pace last week.

Rumors about a government takeover of one or more major banks accelerated sharply last week after Alan Greenspan, the former Fed chairman, said on Wednesday that the government might be forced to temporarily nationalize some banks.

When Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, alluded to Mr. Greenspan’s remarks and reluctantly endorsed them in an interview on Friday, investors hammered bank shares once again.

Banks are again looking for the state to pick up the pieces and keep them afloat. Citigroup is asking for more state stake in the company. I'm for the banks to fail. Sorry, it's going to be rough. But, as Thomas Jefferson said, "It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world." This does not just infer war, but in lifestyle. We should not nor cannot live above our means and expect future generations to pay for it.

Do you think that the US banks should be nationalized? Even for a short period of time?

In my mind the answer is a resounding no.

[dippin]

Well, what are the alternatives? That is the thing, nationalization is a lot more market friendly, actually, then the alternatives. If it wasnt for the cultural aspects of it, it would have been done a long time ago.

Here are the alternatives you have:

- do nothing, let the banks fail. The govt. would still need to spend massive amounts of money because of the insured deposits. After spending this massive amount, the banks would still have failed and we would officially be in great depression territory. In fact, we would be worse than that, because of the size of the banks that are about to fail. It might be satisfying on some personal level, but it would be the general population who would lose money, twice. In fact, the future generation would be paying for the debts of the past, just in a much more painful way.

- Bail the banks out by providing capital to generate liquidity. The problem with this is that it is basically free money for the bank's shareholders. The tax payer would be pumping a lot of money into the banks without any sort of stake to potentially revert the losses in the future.

- The government buys the banks, makes them liquid, and sells them. That is, instead of rewarding the stockholders of the banks, the govt. buys the banks at their current very low price, then it injects the money to make them solvent, and then at least partially recovers that by reselling the stocks of a now solvent bank.


People are put off by the "N" word, but this would be nothing like the nationalizations of the 50s and 60s, when governments bought companies to run it themselves, as opposed to fixing it and reselling it.

[flstf]

I guess it's like dippin said, there doesn't seem to be any other good alternatives. The majority of economists seem to think that without a bailout things would be much worse. I'm not smart enough to know if they are right or not and I have a real problem with Washington running things much like our recent regulators which seem like more foxes watching the henhouse.

[Redlemon]

I just finished reading "For Us, the Living" by R.A.Heinlein, which is not really a book but rather a description of a utopia. Nationalization of the banks was large component of this book. The theory was that banks were inventing money by being able to loan more money than they possessed, and that they were doing it for a profit. Instead, they required banks to be 100% capitalized, and allowed the government to create money as needed.

Would it work? I have no idea, but it was an interesting read, considering it was written in 1938 and speaks to today so well.

[Baraka_Guru]

No, I don't think they should be nationalized. That seems extreme and cumbersome. I think the U.S. (and other nations) can learn much from other, more stable banking systems, like the one here in Canada, which is subject to an overarching constitutionalized regulation that makes sure all banks are following regulations, laws, and other aspects of banking/financial regulatory compliance.

Here's something coming from Obama's recent trip to Ottawa:

Obama finds the Canadian banking system 'striking'
Posted: February 18, 2009, 10:19 AM by Vieira
Ottawa

The World Economic Forum has ranked Canada's banking system as the best in the world, and Bank of Canada governor Mark Carney has said other major industrialized and developing economies want to learn more about Canada's financial architecture.

Now, count U.S. President Barack Obama as a fan of the Canadian financial way, according to an interview he conducted Monday with CBC.

"One of the things that I think has been striking about Canada is that in the midst of this enormous economic crisis, I think Canada has shown itself to be a pretty good manager of the financial system in the economy in ways that we haven't always been here in the United States," Mr. Obama said during the broadcast interview in advance of his five-hour working visit with Prime Minister Stephen Harper in Ottawa Thursday. "And I think that's important for us to take note of, that it's possible for us to have a vibrant banking sector, for example, without taking some of the wild risks that have resulted in so much trouble on Wall Street."

Paul Vieira

TheStar.com | Canada | PM praises Canada's financial sector on U.S. TV

Here's an excerpt regarding PM Harper's visit to New York:

PM praises Canada's financial sector on U.S. TV
TheStar.com
February 23, 2009
bruce campion-smith
Ottawa bureau chief

OTTAWA — Prime Minister Stephen Harper hit the Big Apple today — the heart of America's economic meltdown — to boast about Canada's stable banking system, warn against trade protectionism and note the insatiable appetite for oil south of the border.

While Canadian media were shut out of his visit to New York City, Harper wasn't shy about talking to American journalists as hevisitedseveral news networks to build on the attention sparked by U.S. President Barack Obama's visit to Ottawa last Thursday.

"Because we're not a squeaky wheel, we often don't get the grease and we're forgotten. So it was great to have that kind of attention from our great friends in the United States," Harper said during a morning interview with Alexis Glick, of Fox Business News.

"And one of the reasons I decided to travel here today was to follow up on that rare attention we actually got in the U.S. media last week," he said.

The prime minister sang the praises of Canada's prudent banking and financial system, which he said can be attributed to "activist" regulation by Ottawa.

"We're helped by the fact we have six major banks, three major insurance companies so it's easier for the government to exercise moral suasion on the sector," Harper said.

He said that Canada, while hit by the economic downturn, hasn't suffered a meltdown of the financial sector or the mortgage foreclosures that have hit the U.S. economy so hard.

"We haven't had to bail out any of our financial institutions," Harper said. "There will be no government bailout of mortgages in Canada."

Harper said he remains "hugely worried" about the financial system in the United States as well as several other unnamed countries.

[...]

TheStar.com | Canada | PM praises Canada's financial sector on U.S. TV

Nationalization isn't the only answer, and I think the alternatives are to be well-planned and far-reaching.

[dippin]

Baraka,
regulations going forward are a different matter than what to do about currently failing banks.
These major banks are currently insolvent and illiquid. If left alone they will fail, and the options right now are to capitalize them by giving them money or take over them and then capitalize them.

Nationalization is a misleading term here because the idea is not that the US would make these banks state banks going forward. The US government wouldnt run them continually, or anything like that. It would be a short term acquisition with eyes to reselling it as a solvent entity.

[Baraka_Guru]

dippin, I guess it's just hard for me to wrap my head around how bad it is for U.S. banks right now. I suppose, then, if regulation is too much of a long-term solution for what's a crisis now, then I'd rather see the governement float loans to the banks rather than buy them only to sell them later.

These loans would be used for capitalization, but would have regulatory conditions attached to them...conditions that could later be applied in a longer-term solution.

I'm not as keen on these macro issues as I am on micro ones, so I'm not sure this could work.

[dippin]

Originally Posted by Baraka_Guru

dippin, I guess it's just hard for me to wrap my head around how bad it is for U.S. banks right now. I suppose, then, if regulation is too much of a long-term solution for what's a crisis now, then I'd rather see the governement float loans to the banks rather than buy them only to sell them later.

These loans would be used for capitalization, but would have regulatory conditions attached to them...conditions that could later be applied in a longer-term solution.

I'm not as keen on these macro issues as I am on micro ones, so I'm not sure this could work.

The thing is, if these loans are made at anywhere near market levels, the banks would remain insolvent. It would need to be a heavily subsidized loan with a very long due date, which in the end is basically giving them money for free.

The truth is that the process through which the FDIC guarantees deposits and so on is very similar do nationalization. Several small banks have gone under this past year, and the FDIC basically takes over, pays the shareholders and liquidates the assets.

If Bank of America, citigroup, etc were to fail, a similar thing would happen, only it would be a lot more damaging to the economy. So the idea is to either nationalize them now, save them now, and then resell them or keep giving them money. In the former case, the government at least gets a share of the bank when it is fixed. In the latter, it is like giving free money to bank shareholders.

[roachboy]

paul krugman has been talking about this question for weeks. his view, which i agree with, is that the administration should just suck it up and say if the auditing process that's about to get underway reveals that the banks in general--or even a specific cluster of them---are in fact not only in bad shape, but in worse shape than has so far been thought, then they'll be nationalized. the reason i agree with this idea is not so much that i think nationalization is a magic bullet, but rather that there needs to be longer-term plans in place that shape what the administration is doing--and which add a level of transparency to that doing by providing at the least a political objective/set of objectives relative to which stuff can be judged. my main problem so far is that obama's administration has been hit with so much shit so fast that they've had little choice but to be reactive--not as badly as were the bush people, but still.

the problem here is that because there was no clearing space for derivatives trading, no-one has any idea what the devices are or are not worth at this point--not really.
because that's the case, there's nothing like an accurate assessment of the state of affairs within the banking system.
it is not an option to allow collapse because institutions are so intertwined with each other at this point that allowing one to fold could well be writing off an entire sector, and this for no purpose (expect that it enables one to keep talking in outmoded neoliberal terms about stuff like moral hazard).

so nationalization seems a reasonable next step to at least talk about as the process unfolds of trying to use audits to determine what's actually going on with the banking system--to the extent that it can be determined in a quick and accurate manner (no mean feat)...why would you undertake the audit if you aren't going to say what will happen next? and this is what i take krugman's main arguments to be. i think he's right.

nationalization is not the only route, but its a good piece of theater for the present situation.

[Baraka_Guru]

Extremis malis extrema remedia.

[flstf]

In order for nationalizing the banks to work the nation has to have honest polititians capable of the task. Our nation's polititians seem to be neither capable or honest. IMHO this will not end well and we may be better off rebuilding from the rubble of bankruptcy rather than imposing these delaying tactics.

[roachboy]

except that the banking system is more system than collection of individual banks.
the consequence of failure would be catastrophic.

institutions in this sense are a bit like nation-states.

[flstf]

I guess things could get more catastrophic, so far my house and retirement funds are down about 30-50%, I guess they could go to zero. I'm beginning to think a better stimulus for the economy would be to send a $10,000 check to every tax paying household (estimate of bailout/simulus money so far) This will probaby go to $20,000 before long. I don't think many of us will benefit from the trickle down theory of bailouts and stimulus packages or the $12 per week tax cut. I guess when you think about it nationalizing our banks (and other industries if necessary) wouldn't be any worse than bailing them out.

[roachboy]

i think there's a side of all this that's theater--it's theatrically important that the banking system be salvaged from the consequeces of normal operations under neoliberalism. it's also theatrically important that if nationalization happens that there be a purging of the upper echelons of these banks for incompetence.

it's important that property values be stabilized. it's important that banks be forced to refinance mortgages. it's important that people do not loose more jobs. it's important that there be some kind of plan to reconfigure the deindustrialized american economy after neoliberalism has finished enabling the store to be plundered. on and on.

[pai mei]

YouTube - David Icke "What is Money?" from Radical Truth Knowledge and Revolution

YouTube - David Icke "What is Money?" from Radical Truth Knowledge and Revolution

roachboy , "incompetence" ? Maybe "real clever planning".

[robot_parade]

I think a temporary nationalization of the banks is the right way forward - it keeps them from failing outright, which would be disastrous, and also keeps from giving away taxpayer money. We can also put a stop to the insane bonuses to bank execs, which would be nice as well. And of course any such nationalization would be *temporary* by design.

Of course, the crazy right will go absolutely apeshit on Obama if he even suggests anything like this, but really, they will anyway.

[ASU2003]

I'm not sure if the banks can be fixed without some sort of nationization.

The big question is, do we rely on the stock market too much now? Will people only be happy with the economy if BAC goes from 3.5 to 50 in the next year? Bank of America fell from about 50 to 2.5 in the past year. Without artifically inflating the stock market, it is an almost impossible task.

The question is, why would things be different if the government controlled the banks? If the government had been running the banks in the past few years, wouldn't we be in about the same place? The top execs might only have made $800,000 like the head postmaster general, and a not-for-profit banking system could be benefiticial to the customers.

[tisonlyi]

In effect, they're already nationalised.

Where it not for the idea that the US Govt will not let the remaining banks fail (through all manner of insuring and temporary purchase above market value schemes), they'd be dead now. The final decision as to what happens to all of the large banks in the US rests solely with the US govt, no matter how much one or the other of them squeals that they're fine... Everyone who looks at their leveraging figures knows that they are not. (Wells was the least leveraged in the US if memory serves, at least on its own books, with around 1:30 ratio. 3.3% losses and it's entire capital base has been wiped out. Case-Shiller today reports house prices down between 15-20% on average. No math(s) required.)

If the state is calling the tune then that, chaps, is nationalisation.

This would all be solved sooner if the banks were formally taken under state control, purged, broken up into much smaller pieces and sent back out into the world anew.

Also, you'd have a lot more control over what these fuckers were up to. It seems one or two of the tarp recipients simply took their cash and doubled down. No joke.

[pai mei]

The state should be the only one with power to create money. Paper or electronic. When someone needs a loan he borrows with 0 interest from the state run bank. When he pays the loan the money created disappear. All money needed to run the administration are created and used by the state, not borrowed from some banks by the state. The state can increase the money supply when it;s needed - to let the economy grow, or decrease it when it's needed - when inflation appears. Increase by sending people money to spend, decrease by instituting taxes. There will be no taxes when there is no need to decrease the money supply, the expenses for the state - create new money. If the economy is in good shape these new money will not create inflation.

There. Comments ?

And I forgot to tell you that you are rulled by bankers right now. The whole world is. Find out about what Andrew Jackson wanted. Then what happened in 1913.

[tisonlyi]

pai mei, that's a topic to expand on and use as another thread.

Bloomberg.com: Worldwide

U.S. to Get Bank Ownership Stakes Only as Losses Rise (Update1)
Email | Print | A A A

By Craig Torres

Feb. 24 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. government’s bank-capitalization plan is designed to shore up lenders’ common equity only if the economy worsens and creates more losses for financial institutions.

The Treasury will buy convertible preferred stock as needed in the 19 largest U.S. banks after stress tests to determine how much capital is needed to address losses in a “worse” case scenario, Bernanke told lawmakers at a Senate Banking Committee hearing today. The shares will be converted to common only as the extraordinary losses happen, he said.

“It doesn’t have an ownership implication until such time as those losses which are forecast in the bad scenario actually occur,” the Fed chief said. He also rejected the idea that the stress tests are a pretext for nationalizing banks, saying, “I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary.”

Bernanke’s remarks eased concern among some investors that the Treasury’s capital-injection plan will hurt banks’ shareholders and lead to government takeovers of lenders. The Standard & Poor’s 500 Banks Index climbed 10 percent, the most in more than two weeks.

Majority Ownership

“We don’t need majority ownership to work with the banks,” Bernanke said today. “We have very strong supervisory oversight. We can work with them now to do whatever is necessary.”

The chairman added that it will be up to Treasury Secretary Timothy Geithner and the Obama administration to determine whether more bailout funds will be needed from Congress.

“How much more we’ll have to do depends on the state of the banks, it depends on how the economy evolves and it depends on the margin of safety we think we want to have,” Bernanke said today. He separately warned that “if we don’t stabilize the financial system, we’re going to founder for some time.”

Bernanke also said the so-called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens.

The stress tests “will look at the balance sheets and the capital needs of each of our 19 largest $100-billion-dollar-plus banks over the next two-year horizon,” Bernanke said in response to a question from Senator Robert Corker, a Tennessee Republican.

Economic Scenarios

The assessment will use “both a consensus forecast -- where we think the economy is likely to be based on private sector forecasts -- and an alternative which is worse,” Bernanke said.

In his semiannual testimony on the economy to Congress today, the Fed chief warned that the recession may last into 2010 unless policy makers can stabilize the financial system.

The economic forecasts Fed officials prepared in January suggest that “a full recovery of the economy from the current recession is likely to take more than two or three years,” Bernanke said.

A private survey today showed that confidence among U.S. consumers sank to a record low in February. The Conference Board’s index declined more than forecast to 25 this month, the lowest level since data began in 1967, the New York-based research group said today.

Bernanke urged “strong” action by policy makers. The message comes as the Obama administration works on fleshing out the details of its bank-rescue plan. Financial stocks had slumped further since Geithner unveiled his outline Feb. 10, amid concern a lack of details and worries over the ultimate intention of the approach.

Citigroup Talks

Officials have also opened talks with Citigroup Inc. about providing further help to the lender after the company’s share price dropped to as low as $1.61 four days ago. It was at $2.43 at 1:53 p.m. in New York.

Along with a new round of capital injections, Geithner’s strategy includes creating public-private partnerships to purchase toxic assets weighing down banks’ balance sheets, and a $1 trillion program to restart the markets for securities backed by consumer and business loans.

The purpose of the stress tests on banks isn’t to provide a “pass” or “fail” grade, Bernanke said today. Instead, the government wants to ensure that firms can meet their obligation to lend even if the economy worsens, he said.

‘Sufficient’ Equity

“The bank could convert the preferred to common to make sure that it has sufficient common equity, and only at that time, going forward, if those losses do occur, would the ownership implications become relevant,” Bernanke said.

Treasury officials are expected to provide further information about the stress tests tomorrow.

Regulators won’t let banks “hide anything” as they look at how lenders have valued their assets, and will ensure that firms are using “appropriate models” for mark-to-market accounting, Bernanke said.

“We’re going to do a tough evaluation,” the central banker said in response to a question from Senator Richard Shelby of Alabama, the Senate panel’s ranking Republican.

Bernanke took issue with some observers’ characterization of major U.S. banks as “zombie” firms, kept alive only through access to federal programs. They have “substantial franchise value,” he said.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: February 24, 2009 14:11 EST

So, folks, there are 19 banks that the administration believe are going to need massive, ongoing, regular bailouts (until they eventually fail). Oh, and "If everything goes our way and the world magics itself into a new state of utopia" then the economy will start to pick up towards the end of this year.

"substantial franchise value" as the only reason to keep those entities limping along?

That whole deposition was a joke and Bernanke knows it.

Every indicator is heading through the floor, credit supplies are still drying up, margin calls are still ongoing. Not just in the US, but worldwide.

If they go through with this, then the V shape recession Bernanake is talking about is out of the question, with U shape recession or an L shape recession both equally likely I think.

All. Of. The. Banks. Are. Dead.

US. UK. Euroland. Asia.

ALL.

The necromancy to keep them alive with ever expanding bailouts, insurance coverage, guarantees, shotgun weddings with dowries, etc, etc... are only going to suck all life out of whatever is left of the western and eastern economies until those damn banks, financiers and distressed corporations all fail, through either bankruptcy or nationalisation.

"The United States can be relied upon to do the right thing, only once it has tried every other option." - Whisky-Sodden Imperialist Relic.

The rest of the world too, I hope, Mr Churchill. The last solution to this sort of global problem is now not an option.

Can you believe this stuff? Does anyone out there swallow this nonsense?

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As an aside, what this effectively does is hitch the state and therefore the people (as the UK has also) to specific corporate, mainly banking interests. The merging of corporate and state power.

*gulp*

At least if they were nationalised and reformed, the damn shareholders could be wiped out, with as much incompetent management kicked out as possible, as much bad debt written off as possible and the system reset to a certain degree...

Urgh... this is insane.

[Man/Amazing]

I think the banks should be nationalized just for a while until we get out of this mess. It only makes sense, so much of our tax dollars are going to the failing banks to keep them afloat we should at least have some control or represented control. Hopefully they will start giving out loans again soon I need to finish school ASAP.