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Just the hint of a move to nationalize banks triggers brutal sell-off

It didn't need to be true.

All it took was the hint of a federal move to nationalize banks to trigger a brutal sell-off on banking stocks and the broader markets Friday.

At one point, the Dow Jones Industrial Average had sunk near an 11-year low. Bank of America briefly tumbled to a 26-year low, while Citigroup stock fell as much as 36 percent.

The markets stabilized and largely rebounded after a report that the Treasury Department next week will release details of its rescue plan for the financial industry, quelling rumors of imminent federal intervention.

But the lesson was learned. Investors in public companies have an itchy finger to sell if they think the government is going to be calling the shots.

In its strictest terms, nationalization would involve the federal government taking over all decisions in a bank, eliminating the equity held by holders of common stock. In lesser degrees, it could involve the government asserting greater authority over everything from hiring to lending to executive pay.

Among the advantages of nationalization: the full weight of the government would back the bank's debt, easing customers' concerns. Among the disadvantages, beyond a toll on shareholders, is that a nationalized bank could have an unfair marketplace advantage over other private lenders because of the government guarantees.

Miami-based banking consultant Ken Thomas contends we've had a "stealth nationalization'' already, at least on a temporary basis. Four national behemoths based outside Florida — Citigroup, Bank of America, Wells Fargo and JPMorgan Chase — already control 70 to 75 percent of the state's banking deposits and make banking decisions from afar. Each of the four has received billions of federal dollars, giving the government a stronger say in their operations.

"You could argue we've already had a nationalization there, but the idea was that was supposed to be temporary,'' Thomas said. "What some people are talking about now is more on the scale of what Sweden has had for many, many years.''

And that scares Thomas. He's no fan of socialized health care, socialized public housing or practically any nationally run federal program shy of the military. "The whole concept of capitalism is that we make the best decisions in the boardroom, not the Beltway,'' he said.

Moreover, Thomas points out, the Swedish model is for a country with banking assets held in relatively few institutions. The United States has more than 8,000 banks.

The two biggest targets of nationalization speculation are Bank of America and Citigroup. Bank of America rebounded to close Friday at $3.79, down 4 percent, while Citigroup ended at $1.95 a share, down 22 percent.

Last month, Citi reported a $8.29 billion loss in the fourth quarter and announced it was splitting itself in two. Bank of America reported a $2.39 billion fourth-quarter loss, hours after ironing out a deal for a fresh multibillion-dollar lifeline needed to digest troubled Merrill Lynch & Co.

Both banks have now taken $45 billion apiece in federal bailout money. That dwarfs what each bank is worth based on their latest market values ($11 billion for Citi and $24 billion for Bank of America). In other words, taxpayers already have pumped more money into the banks than what they're worth.

Like other banks, the institutions have been unable to clarify the extent of troubled real estate assets on their books and customers are complaining that the flow of credit remains restricted.

Until the government finds a way for the country's biggest banks to shore up their balance sheets, the threat of nationalization will continue to wreak havoc on bank stocks. Thomas asks rhetorically, "Who would want to buy stock in the biggest bank in Florida if they think it might be nationalized?''

Alex Sanchez, president of the Florida Bankers Association, said he's confident it won't reach that point.

"I do not think banks are going to be nationalized,'' Sanchez said. "This is a free enterprise system. We are the beacon of hope in the world for a free enterprise system."

Sanchez' suggestion: Buy bank stocks now because they're cheap and will rebound.

Yet it's hard to soothe investors when politicians from both aisles are increasingly speculating about some form of nationalization. Senate Banking Committee Chairman Chris Dodd, D-Conn., said, he "could see how it's possible'' that a short-term nationalization of some banks may be necessary, echoing similar comments from former Federal Reserve Chairman Alan Greenspan and U.S. Sen. Lindsey Graham, R-S.C.

Meanwhile, the Obama administration continues to leave the door open for increased intervention.

"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," White House press secretary Robert Gibbs said when asked about nationalizing banks.

Pressed for more details, Gibbs said it was hard for him to be any clearer.

When a reporter suggested the press secretary could do that by saying point-blank that Obama would never nationalize banks, Gibbs would not make that statement, but emphasized: "I think I was very clear about the system that this country has and will continue to have."

Times wires contributed to this report. Jeff Harrington can be reached at jharrington@sptimes.com or (727) 893-8242.

fast facts

So, what is nationalization?

Part of the angst over whether to nationalize major banks is that not everyone is talking about the same thing. In its strictest definition, nationalization would be the federal government taking over complete control of a bank, wiping away all the equity of holders of common stock. But there are lesser degrees of government intervention that could be construed as nationalization ­— if, for instance, the government wields power to replace management, insert board directors, set salaries, set corporate strategy or direct lending decisions. In giving billions of dollars to banks in return for preferred shares, the government arguably has already increased its decision-making influence.

Just the hint of a move to nationalize banks triggers brutal sell-off 02/20/09 [Last modified: Saturday, February 21, 2009 6:37am]
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