WASHINGTON - Former Federal Reserve Chairman Alan Greenspan thinks it's necessary. His successor, Ben Bernanke, doesn't rule it out. From editorial pages to the blogosphere to boardrooms, this is the question on many minds: Should the United States nationalize some banks?
A few months ago, it would have been heretical to suggest that Bank of America could become Bank Owned by America. Now, however, the U.S. economy is sinking faster than anyone thought possible, and respected economic authorities are suggesting that temporary bank nationalization, once the domain of Third World basket cases, could be the best solution.
"It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," Greenspan, the long-revered sage of free-market theory, told London's Financial Times in an interview published Wednesday. "I understand that once in a hundred years this is what you do."
When Bernanke was asked whether he shared his predecessor's views, he didn't distance himself from them during a question session Wednesday at the National Press Club. He answered as if nationalization were inevitable, after first listing some of the problems it would entail.
"Well, I think as a general rule, it's very challenging for governments to manage banks for a protracted period. And there's the additional problem that if you have a government-run institution, that you tend to lose the franchise value, that the counterparties and others don't want to deal with you because they don't know your future," Bernanke said. "So I think whatever actions may need to be taken at one point or another, I think there's a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible."
The term "nationalization" conjures images of the communist Soviet Union or corrupt Latin American dictatorships, but advocates of nationalizing U.S. banks envision a seizure of big banks on the grounds that they're already insolvent except for some accounting sleight of hand.
Banks are sitting on trillions of dollars worth of complex securities, backed by U.S. mortgages that are going into default as more and more homes are now worth less than the mortgages on them. If banks were forced to put present-day values on these securities instead of hold-to-maturity values, their liabilities would far exceed their assets. They'd be insolvent.
What's needed, nationalization advocates argue, is for the government to seize Bank of America, Wells Fargo, Citigroup and other large banks, carve out their bad assets, then break them into smaller pieces for quick sale to the private sector.
"Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume," Nouriel Roubini, a prominent New York University economist, wrote in an opinion piece Feb. 15 in The Washington Post. "Of course, the economy would still stink, but the death spiral we are in would end."
Other analysts think that nationalization is all but inevitable.
"It's very hard when you get to this point not to do that," said Adam Posen, the deputy director of the Peterson Institute for International Economics, a free-market research center. Posen thinks that nationalization is losing its stigma, and he envisions scenarios in which the government could seize the nation's 50 largest banks.
Most depositors would be safe, since their deposits are insured up to $250,000. Stockholders probably would be wiped out, and bondholders eventually would get shares of any new company. The government could even make money on some seizures, if history is any guide.
Roubini and Posen think that a bold, drastic step is inescapable, and that a failure to take it now would only make it costlier and more difficult later. Today's problem is the $1.2 trillion in assets whose underlying collateral is shoddy sub-prime mortgages, which have eroded faith in the broader U.S. housing market.
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Tomorrow's problems go far beyond housing.
"Another $7 trillion - including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans - is at risk of losing much of its value," Roubini wrote. "Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages."
Translation: Address the problem of today's toxic assets or risk a much bigger universe of assets also turning toxic and poisoning the entire economy. In this scenario, nationalization is akin to stacking sandbags ahead of rising floodwaters.
For now, the Obama administration is mum on nationalization, something that was tried on a smaller but successful scale in Sweden in 1992 and Japan in 2001-2002.
The Obama administration began new "stress tests" this week, with regulators visiting major banks to gauge how they'd hold up if today's recession became a full-blown depression. Nationalization advocates such as Posen think that this exercise is simply the Treasury Department laying the groundwork for bolder action such as seizing banks in the months ahead.
"Unless you put in government money and take control of management, the problem will get worse," he said.
One important voice thinks that a degree of nationalization already is taking place.
"This is the right debate to have. We risk doing a backdoor nationalization by subsidizing the banks with overpayments and never acknowledging that's what has happened," said Elizabeth Warren, who was appointed last year to head the Congressional Oversight Panel for the $700 billion Wall Street bailout.
"Think about where we are now: putting $40 billion into a financial institution that has a market capitalization after the infusion of only $15 billion. Looks a lot like a step toward nationalization."
Although the Harvard Law School professor didn't say it, she was referring to the Treasury Department's efforts late last year to bail out Citigroup weeks after declaring that it was giving taxpayers' money only to healthy banks to bolster their balance sheets.
Warren reported to Congress earlier this month that the Treasury had overpaid by almost $78 billion when it bought distressed assets from banks last year.
"There may be good reasons to subsidize the banks, but those need to be overt. Don't say there's no subsidization here while there's deep subsidization," Warren told McClatchy. The "worst possible position for us would be to semi-nationalize while denying that it's happening."
Greg Gordon contributed to this story.