WASHINGTON — Nationalization. One word; so much meaning, especially when it comes to banking.
The government has already made a series of unprecedented moves — arranging mergers for stricken institutions, investing $275 billion directly in 400 banks, guaranteeing more than $300 billion of loan losses.
It sure starts to sound as though the government is slowly taking over the business, yet regulators repeatedly insist they have no desire to nationalize banking.
Still, it is an idea, a concept, that is gaining ground. Even former Federal Reserve Board chairman Alan Greenspan described nationalization this week as "the least bad option."
But just how likely someone thinks nationalization is varies with how they define the term. To help clarify things, we offer answers to these frequently asked questions:
What is nationalization?
The term is used loosely to mean a variety of things, and no consistency exists in how it is applied. To some, it applies when the government begins buying stakes in financial institutions — a scenario already playing out with the Treasury Department's capital infusion program. Others believe a bank has not been "nationalized" until the government owns enough common stock to assert control over the board of directors.
"The issue comes up if it turns out that the amount of [government] investments needed to recapitalize the banks is so large that, in effect, the common shareholders get diluted down to a smaller percentage," said Henry Fields, a partner at Morrison & Foerster in Los Angeles. "I think it's remote, but there has been talk that might happen with some institutions."
Some also view nationalization as the government's using its legal authority to assert control, even without owning an institution, as when the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac in conservatorship last fall.
So nationalization is already happening?
Again, it depends on how you define it.
The government has — at least temporarily — nationalized Fannie and Freddie. That's why the Obama administration can use the government-sponsored enterprises as the centerpiece of the foreclosure prevention plan it released Wednesday. Some have even said that the plan will make it harder to return the enterprises to private hands.
The government also semiroutinely takes over failed banks — even if just briefly — or maneuvers institutions into an acquisition. More rarely, it will manage an insolvent institution for a longer period when no acquirer emerges for its deposits. The most recent examples were IndyMac Bank last year and Superior Bank in 2001. Before that, the Resolution Trust Corp. was a tool used by the government to run hundreds of institutions this way during the savings and loan crisis.
"To a limited degree, if one speaks fairly loosely, one could say that the government has engaged in some sort of partial nationalization," said James Barth, the Lowder Eminent Scholar in Finance at Auburn University and a senior fellow at the Milken Institute.
But have any banks been truly nationalized?
Some argue that by putting $125 billion of capital into the nine largest banks, as the government did in October, it effectively nationalized them.
And investors, clearly worried about being wiped out by the government, have hammered the two banks given "extraordinary" help — Citigroup Inc. and Bank of America Corp.
Since just before their second bailouts, Citi shares have sunk from nearly $10 to under $4 while Bank of America shares have fallen from over $14 to around $2.50.
Still, the government does not have voting rights for the shares it holds in any other company in which it has invested. Sure, regulators can make demands, and have powerful leverage, but they did before the mass recapitalization, too. On the other hand, critics wondered aloud if it is was more than a coincidence when, just after its second cash infusion, Citi dropped its long-held opposition to legislation allowing mortgage debt to be discharged in bankruptcy.
What about a broad nationalization of, say, the largest banks controlling the majority of the industry's assets?
We are a long way from that, but momentum clearly is growing.
Those supporting a more dramatic intervention say the Treasury's capital infusions have not worked and that the Obama administration's plan to stabilize the banking sector is insufficient. Therefore, they say, the United States should take over management of banks to nurse the system back to health.
That sounds extreme.
It is, but it has been tried in other countries. Sweden took over its banking system temporarily in 1992 and was able to stabilize it before releasing it back to private ownership. Mexico tried a similar step in 1982.
Who thinks this is a good idea?
In addition to Mr. Greenspan, Paul Krugman, the Princeton professor and New York Times columnist who won last year's Nobel Prize in economics; New York University economist Nouriel Roubini; and Sen. Lindsey Graham, a South Carolina Republican, like the idea.
Why would nationalization help?
It would give the government greater control over how banks operate and allow it to run them in the best interest of the system as a whole, rather than current management and shareholders. The corollary here is Fannie and Freddie, which used to answer to public shareholders and the government. Now, the chief executives at each company are hirees of the government, and regulators can put the enterprises to use in new ways to help stabilize the system.
Doing the same thing in banking could — in theory at least — let the government increase lending and loan modifications. The issues of how to compensate executives and the proper use of government money would also be moot.
A wholesale takeover of the system would also arguably give consumers more confidence. Again, as with Fannie and Freddie, the government could always just throw more money at the problem if conditions worsen.
The last argument for nationalization is simple: Nothing else has worked yet.
Those sound like good reasons.
You haven't heard the downsides yet, and it is worth noting that plenty of people think this is a bad idea. One of the most important is current Fed Chairman Ben Bernanke, who dismissed the idea this week when taking questions from reporters at the National Press Club. "As a general rule, it's very challenging for governments to manage banks for protracted periods," he said.
Mr. Bernanke also touched on a key problem of nationalization. If the government is running all the big banks, there essentially is no difference between them. Run them long enough, and it becomes increasingly hard to return them to the private sector.
"An additional problem when you have a government running an institution is that you begin to lose the franchise value so that counterparties and others don't want to deal with you because they don't know the future," Mr. Bernanke said.
Are there other problems?
Definitely. For one, it sounds great in theory to say the Federal Deposit Insurance Corp. should take over and run the largest banks in the country.
Though the agency has plenty of experience in running banks, however, it has never run one the size of, say, Citigroup, which had $1.3 trillion of assets at Sept. 30. It certainly has never run several such institutions at once.
The largest institution the FDIC has ever run was Continental Illinois, which had $40 billion of assets when it collapsed in 1984. Just by comparison, Bank of America is 45 times larger.
President Obama himself has touched on this issue.
"You'd think, looking at it, Sweden looks like a good model," he said in a recent TV interview. "Here's the problem: Sweden had like five banks. We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets [is] so vast, and the problems in terms of managing and overseeing anything of that scale, I think, would … . Our assessment was that it wouldn't make sense."
And it is not as though taking over a bank magically solves all its problems. IndyMac's takeover last July by the FDIC spurred one of the largest bank runs in recent memory — after it had failed. It took months longer than expected for the agency to return the bank to the private sector, and even now the deal announced in early January has yet to close.
Imagine trying to return Citi, B of A, JPMorgan Chase & Co., and Wells Fargo & Co. to the private sector at around the same time. What would they be worth, and who could or would buy them?
There is another, arguably more important, obstacle. Nationalization goes against something fundamental in the country's character, which is still — for all the recent anger toward banks — pretty devoted to the ideals of capitalism. Seizing the largest banks would be a major step. It is only likely if the situation is absolutely dire.
"Given American traditions and attitudes, nationalization won't be the first, second, or third choice. If we run through those, and we get down to the fourth or fifth choice, I can imagine going for some version of nationalization," said Alan Blinder, a former vice chairman of the Federal Reserve Board and now a Princeton University professor.
OK, so let's say it does happen. How would it work? Would the government take over all the banks?
Taking over every bank would be impossible. Unlike Sweden, we have thousands of financial institutions in this country (just under 8,400 at last count). By comparison, Sweden has about 120.
At worst, the United States would be taking over a handful of the largest institutions that control the vast majority of the assets and have the most systemic importance.
"If you take 1% of all commercial banks that are controlling about 80% of the industry's assets — that means about 75 banks," said Prof. Barth.
So will this happen?
Almost certainly not. Though the government may have to take over one or two large financial institutions, the idea of its seizing the top 75 — or even the top 10 — is hard to fathom. The operational headaches alone would give even a die-hard socialist pause — and Mr. Obama has shown no sign of wanting to go in that direction.