Robert Reich: How to Keep the Banking System in the Private Sector

[marmar]

Wednesday, January 28, 2009
How to Keep the Banking System in the Private Sector


Tim Geitner said today, in response to questions about the prospect of bank nationalization, that the Treasury is considering a range of options with the intent of preserving the private banking system. “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he told reporters.

Well, it all depends on what "private" means. The fact that the Treasury has not sought voting rights or outright control over day-to-day operations doesn't mean the banks are still "private." Nor does it mean that much remains of the former "system" to be preserved. The Treasury now owns preferred shares and warrants of many of the banks that have received bailout money. These can be converted into common stock and cashed out whenever the government wants. Technically, the Treasury has a controlling interest in many of these banks if it wanted to exercise that interest. As to many other banks, the Treasury could easily gain a controlling interest; their remaining common shares are worth so little now that Treasury could buy just buy them up. In addition, the Treasury, as well as the Fed, is monitoring these banks carefully, and the banks are highly sensitive to what Treasury and Fed officials want from them.

But "nationalization" is a dirty word in America. More to the point, it's far from clear that federal officials would have any better idea how to manage day-to-day operations than the current managers -- although it's hard to imagine how they could be managed any worse than they've been managed.

Yet the real issue here isn't about day-to-day operations. It's about something much larger. Put simply, the big banks are going under. No one wants to say this out loud for fear of causing even more panic, but the fact is that many of these banks are insolvent. Their assets are worth far less than their face value because so many borrowers can't -- or won't be able to -- repay the loans. ..........(more)

The complete piece is at: http://robertreich.blogspot.com/2009/01/how-to-keep-banking-system-in-private.html