Financial news and rumors are flying fast this week. The word on everyone’s lips is “nationalization” (aka receivership or preprivitzation). Simon Johnson explains the most obvious reason no one should fear nationalization- it is already happening.  

The government is essentially taking over the role of intermediation - take funds in and lend them out - for the US economy.  This is a form of nationalization, and it will lead to all the lobbying and politically directed credits we have seen in other nationalized financial systems; taking away this credit once the economy starts to recover will not be easy.  We have state control of finance without, well, much control over banks or anything else - we can limit executive compensation (maybe) but we don’t get to appoint directors (or replace entire boards) and we have no say in who really runs anything.  Responsibility without power sounds accurate.

The government already owns 80% of AIG (and is about to own more since AIG needs additional funds) and is set to own 40% of Citigroup. But, to paraphrase what Johnson says, it is ownership without power. That is likely to change soon. There is bound to be more restructuring of the system before reprivatization sweeps through.  

There is the possibility of creating a good bank/bad bank system, a solid detailing of which can be found here. The economic tea leaves being stirred at the moment are the regulators Timothy Geithner sent out to conduct the stress tests. How transparent the process will be- and whether we’ll find out the results for banks found to be insolvent- remains to be seen. But finding out, concretely, that some of these institutions are indeed insolvent will be a decision maker. 

The banks are nervous about the stress tests. Even JP Morgan- thought to be one of the healthier banks- is shuffling things around so they can look better for their visitiors.  Bank of America is taking the “they who doth protest too much” route. CEO Ken Lewis says the bank needs no further help from the government and is making strong declarations on the health of his company. Contrast that with Paul Krugman, who said two days ago that “Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout.” One of these men isn’t lying through his teeth. 

Very few investors are going to take the word of the CEO at a beleagured bank. Lewis’ claim that he will not seek more government money will make investors less confident in the institution. A fact that would not be lost on Lewis, heavily suggesting this is his attempt at a Hail Mary pass.

This entry was posted on Tuesday, February 24th, 2009 at 2:23 pm and is filed under Society, Society & World, Uncategorized.You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.