Steps toward bank nationalization

New moves by administration seen as step toward bank nationalization
by John Wojcik
People's Weekly World Newspaper
04/20/09

In a major change of course, Obama administration officials are saying they don’t have to ask Congress to add money to the Bush administration’s bank bailout and that they can convert the government’s existing loans into common stock. Although the move would turn federal bailout money already handed out into available capital for the banks, it would give the government a major ownership stake in the nation’s largest 19 banks.

Some Republicans are already complaining that the move will make the government the largest shareholder in several banks and that it is really just a back door to nationalization. Others are saying the administration is making the move because it is unwilling to ask Congress for more money when mass opposition to bank bailouts is so high.

In the next few weeks federal bank regulators will finish the so-called stress tests they are conducting on the nation’s largest 19 banks. Several major banks, including Bank of America, are expected to fail those tests with results showing that they need billions. Under the administration’s new approach the “stress” would be relieved, not by pumping in more federal tax dollars, but by changing existing loans to common stock.

Rahm Emanuel, the White House chief of staff, said, on a television news program Sunday, that the government had enough money to shore up the banks without asking Congress for any additional money. He did not elaborate further. The shift in administration strategy announced today clarifies his statement.

The 19 big banks have received more than $140 billion from the government, and all of that has been in exchange for nonvoting preferred shares that pay an annual interest rate of 5 percent.

The Obama administration already decided in January in its deal with Citibank what it is now prepared to do with more of the big 19 banks. The Citibank deal would convert $25 billion of preferred stock, in effect, a loan, into common stock, which represents equity for taxpayers.

After doing this, the government would hold 36 percent of Citigroup’s common shares, making it the largest shareholder and bringing it close to having nationalized a major bank.

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