The Obama administration plans to pump more money into troubled banks, even though the billions spent so far have seemed to do little. Some experts, including former Fed Chairman Alan Greenspan and Democratic and Republican members of Congress, have suggested that the banks may have to be nationalized. Staff writer James Bernstein spoke to economists and other experts about what that would mean.
Are we close to nationalizing the biggest banks?
"I think it's a growing possibility," said Richard Sylla, a professor of business history at New York University's Stern School of Business. "I think in the next few months some decisive actions will have to be taken."
Banks have never been nationalized in the United States, even during the Great Depression. How about elsewhere in the world?
In the 1990s Sweden nationalized banks. Those with troubled assets were put into a so-called bad bank, where they were held and then sold over time when market and economic conditions improved. Ireland last week approved a capital injection of $4.5 billion each for Allied Irish Banks and Bank of Ireland, becoming the first European Union country to take de facto control of its most important banks. And Britain last fall took control of The Royal Bank of Scotland.
Nationalizing would seem to be a complicated task.
Absolutely, said Bert Ely, a banking consultant in Northern Virginia. The largest U.S. banks are owned by holding companies, he added. "Are we talking about nationalizing the holding companies or just the banks? That's a very important distinction. There are activities at the holding companies" such as real estate and insurance deals "that don't go on at the bank," Ely said. "No one is even talking about this."
What's the advantage to nationalizing banks?
Some of the largest U.S. banks already may be bankrupt, said Sylla, who added that nationalizing those banks would wipe out the debts. "You want to get the banks operating again where people aren't suspicious of them," he said.
Is nationalization a good idea?
Experts are very divided. Sylla said he is "leaning" that way "more and more," but he plans to wait to see the results of a government "stress test" on banks, to be conducted by the Treasury Department. Ely thinks it's a bad idea. "It doesn't make the underlying problems go away," Ely said, referring to poor management decisions and the overall economy.
What happens to depositors if a bank is nationalized?
The Federal Deposit Insurance Corp. insures up to $250,000 per depositor, per insured bank. This includes principal and accrued interest up to a total of $250,000.
What happens to shareholders?
Generally, they are wiped out. The government may give them a few pennies a share, but that's about it.
And bank employees?
That depends on their level, said David Wyss, an economist at Standard & Poor's Corp. Top executives, Wyss said, would undoubtedly be fired. Lower-level employees, such as tellers, loan officers and others, would remain.