Nationalization Fuels Fear on Wall Street

Feb. 20, 2009— -- Nationalization was the word bouncing between Wall Street and Washington Friday as talk that the government might take over some troubled banks fueled fear among investors.

Despite a show of support from the White House for maintaining a private banking system, Wall Street was not calmed. The Dow Jones Industrial Average lost 100 points Friday, leaving it at its lowest point in more than seven years.

Wall Street was pulled down even further by a run on bank stocks. Citigroup shares are now worth 92 percent less than a year ago. At one point Friday, Citigroup was trading at $1.61 -- the lowest value in its history. Bank of America's share prices dipped to $2.53; its stock is down 91 percent from last year.

Adding fuel to the fire, Senate Banking Committee Chairman Chris Dodd, D-Conn., told Bloomberg's Al Hunt that banks may have to be nationalized for "a short time."

"I don't welcome that at all, but I could see how it's possible it may happen," said Dodd. "I'm concerned that we may end up having to do that, at least for a short time."

Former Fed Chief Alan Greenspan, the famed champion of free markets, said nationalization may be inevitable.

"It may be necessary to temporarily nationalize some banks," he told the Financial Times this week. "I understand that once in a hundred years this is what you do."

Investors are concerned that if the government takes control of troubled banks, shares in these companies will become worthless.

"Well if you're an investor -- with all this talk of nationalizing banks -- if you're a shareholder in xyz bank, the fear is if it gets nationalized your stock goes to zero," said Art Cashin Jr., managing director at UBS Financial Services.

The Treasury Department attempted to dispel the notion of nationalization.

"There are a lot of rumors in the market, as always, but you should not regard these as any indication of the policy of this administration," said Isaac Baker, a Treasury Department spokesman. "As Secretary Geithner has said, we will preserve a financial system that is owned and managed by the private sector."

White House Affirms Support for Private Banking

The White House also jumped in.

"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," said White House Spokesman Robert Gibbs.

However, when pressed by a reporter to go further and say President Obama would never nationalize banks, Gibbs would not do so.

Economists say that the White House must keep open the option of taking over some banks, cleaning their books, and infusing them with capital to get banks lending again.

"The White House has to do whatever it takes to get these banks running and if that means nationalization, it will be nationalization," said Stephen Leeb, chairman of Leeb Capital Management and author of "Game Over."

Many analysts say that nationalization is a real possibility. With $250 billion given to troubled banks so far and the banking system still broken, even economists are unsure of the true health of the banks and what it will take to get the banks lending again.

The recent comments by Dodd and Greenspan were not the first by high-level authorities to broach the subject of bank nationalization. On Sunday, Sen. Lindsay Graham, R-S.C., mentioned the idea on ABC News' "This Week With George Stephanopoulos."

"I would not take off the idea of nationalizing the banks" from the table, Graham said.

"This idea of nationalizing banks is not comfortable, but I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we're going to have to do something that no one ever envisioned a year ago, no one likes," Graham said. "But, to me, banking and housing are the root cause of this problem. And I'm very much afraid that any program to salvage the bank is going to require the government."