Monday, April 20, 2009

Backdoor Path to Bank Nationalization

A big New York Times story this morning strongly suggests that Team Obama is about to up the ante in an effort to control the banking system for as long as the eye can see.

White House and Treasury officials are now talking about turning government TARP loans into common stock for the 19 biggest banks. It’s clearly a backdoor path to nationalization, as Uncle Sam would be the largest shareholder in these institutions. What’s more, it’s not at all clear that the administration will even let certain banks pay down their TARP loans.

This is government intervention into the private sector on a grand scale. It is financial/industrial policy. Banks will be kept on a very short leash regarding compensation, loans, credit-card issuance, mergers, acquisitions, and all the rest.

Not surprisingly, stocks opened down 200 points today — with banks leading the freefall — and finished down about 300 points.

Government control of the banks is going to get worse. Team Obama won’t let go without a fight. And the hook may well be the so-called economic stress tests that will show certain big banks in need of more capital. The Treasury (a.k.a. the taxpayer) already owns 36 percent of Citigroup’s common stock, a position that comes with full voting rights. Now it looks like more of this is on the way.

As a political excuse, the White House says it’s not going to get more TARP money from Congress, so its next best step is to convert TARP into common-stock government ownership. But there’s a clear agenda here: to keep banks under the heavy boot of the government policymakers.

On the Sunday talk shows Larry Summers did not deny any of this. He was cagey about de-TARPing, and he left the door open for new federal action following the release of the stress tests early next month. Summers also turned up the burner on credit-card controls, bashing the banks for being unfair to consumers. But if consumer credit-card defaults are rising, any risk-based credit-card issuance would have to tighten rates or charges. Otherwise banks will just cut out the middle-income credit-card holders and stay with the top income earners. Is that what Congress wants? Is that what Obama wants? Is that what taxpayers want? Tougher credit-card terms are a solution — that is, if banks are still profit-maximizing institutions.

The irony here is that earnings reports from the banks have been very good. This is one of the key factors in a dramatic six-week stock market rally that foreshadows economic recovery later this year. But that rally was stopped dead in its tracks today by a new threat of bank nationalization.

Once again, the investor class got shafted.