Credit Loan > Financial Services > Financial Services - Banks and The Bailout

Nationalization of The U.S. Banking Industry

Despite the injection of over $880 billion to prop up banks affected by the home mortgage lending crisis, they are still keeping a tight hold on the purse strings, and their stocks are still loosing value at a rapid clip. There is growing speculation that some banks could be nationalized, taken over by the federal government. The idea was that institutions like Bank of America and Citibank were too big to fail. But, despite the massive injection of cash through programs like the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008, these banks, and other financial services institutions, are far from stable.

Many people are angry about this and think that it was a mistake to give money to the banks to save them from their own bad business practices and that the government should have taken them over from the beginning. The idea of nationalizing some of the larger banks was something that was talked about from the beginning, but did not have enough support to be included in the plan. Now some of the critics of nationalization have begun to change their tune, but since the government has not announced any plans one way or the other, this has caused a lot of uncertainty in the markets.

The idea of nationalizing key money centers is not new, nor is it untested. Sweden ended up resorting to nationalization in 1990 to remedy its own banking crisis. Even staunch non-interventionist Alan Greenspan has ceded that a "temporary" nationalization of key banks may be unavoidable to facilitate an orderly restructuring of the financial markets. Actually, it was the Federal Deposit Insurance Corporation (FDIC) takeover of the Continental Illinois Bank and Trust Company in 1984 that formed the model for a legal framework used by Sweden and other countries to stabilize their own banking systems.

In essence, it would look something like this. The federal government would "offer" to purchase a large portion of the bad debt held by the banks, and in return would be given a controlling interest in the bank. Then very likely, new directors, and possibly new Chief Executive Officers would be installed by the FDIC, and the banks would be operated by these management teams until they were sufficiently stable. Although the U.S. has been reluctant to resort to this measure, it is a model that the world has come to admire. Businesses will continue to receive lines of credit; mortgages will still be created, et cetera... But, for better or worse, there will be a lot more federal oversight as well.