Public speculation that the government may nationalize America's major banks to save them from insolvency and collapse is not helping our current financial crisis, writes William Isaacs, a former chairman of the FDIC, in The Wall Street Journal.
"This irresponsible chatter is causing tremendous turmoil in the financial markets," says Isaacs in his op-ed page essay.
Isaacs could be right. In the wake of nationalization talk a nervous Dow swooned to its lowest level in 12 years.
Isaacs specifically warned against the decision from his own experience as a regulator. "Unlike the talking heads, I have actually nationalized a large bank," writes Isaacs.
Isaacs is referring to the government's take over of Continental Illinois Bank in 1984, when Uncle Sam wound up with 100 percent of this huge institution, seventh-largest in the country at the time.
"The FDIC purchased Continental's problem loans at a big discount and hired the bank to manage and collect the loans under an incentive arrangement," recalls Isaacs. Continental was bought seven years later by Bank of America.
That was then, this is now, suggests Isaacs — today our 10 largest banks hold two-thirds of the country's banking assets. Continental held only 2 percent.
Isaacs also warns of short sellers, taking down banks one after another.
Who will run the government-purchased banks after senior management is terminated is another issue Isaacs raises. And who will have the capital to buy the nationalized banks back from the government?
Yet several influential economists and politicians are suggesting a temporary government nationalization of banks, among them former Fed chair Alan Greenspan, Nouriel Roubini, and conservative Republican Senator Lindsey Graham.
On Friday, Citigroup reached a deal with the government designed to stave off its possible nationalization.
Citi will give the government up to a 36 percent stake and then the government and other private investors will convert some of their preferred stock to common shares to improve the bank’s balance sheet.
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