Government's plan to fix banks doesn't include 'nationalization'

ByABC News
February 25, 2009, 11:24 AM

— -- Federal Reserve Chairman Ben Bernanke said Tuesday the government did not plan to nationalize major U.S. banks, describing instead a "public-private partnership" under which the government would recapitalize ailing institutions to bolster the financial sector, a crucial step for the economic recovery.

Bernanke, amplifying comments this month by Treasury Secretary Tim Geithner, says the plan doesn't mean nationalizing the nation's biggest banks. But others aren't so sure that the government hasn't already moved in that direction.

"It's a form of creeping nationalization," says Sen. Bob Corker, R-Tenn.

That might not be such a bad idea, others say.

"You have to go in there, take over giant institutions that are in trouble, and clean them up," says Paul Miller of FBR Capital Markets.

A big part of the discussion depends on what "nationalization" means. In the strictest sense, the government routinely nationalizes banks when they fail, as it did with IndyMac Bank last year, which cost the Federal Deposit Insurance Corp. $8.9 billion. And if the government chooses to take common stock in repayment for its bailout money, it also would get voting rights as a shareholder. In some cases, the government could be the majority shareholder in effect, controlling the company.

To date, the Treasury has spent $196 billion to buy preferred bank stock in its Troubled Asset Relief Program, while spending billions more for American International Group and auto lenders. The Federal Reserve has vastly increased its lending facilities, including the Term Auction Facility, which offers $150 billion in secured loans to banks per auction.

The stock market and bank stocks particularly rallied sharply on Bernanke's description, with the Dow Jones industrial average gaining 236 points Tuesday.

The plan entails close scrutiny of the nation's 19 largest financial institutions, propping them up, and hoping to recoup taxpayer money when they return to health. It's a big, complex undertaking, and the health of the financial system depends on it.