Tuesday, February 24, 2009

Bankers Break It, Taxpayers Buy It

The Citibank web site has a curious marketing slogan atop its home page, "we never sleep." Presumably, the motto means customer's can do their banking anytime, but with nationalization of banks becoming more likely by the day, it could be an admission of many sleepless night to come.

The past week has seen more than a whisper campaign from some Democrats and few leading economists that the short-term remedy for the banking system is nationalization. Sen. Chris Dodd has said it may "unavoidable", which is nearly equivalent to saying, "Folks, get ready. It's happening." It's no wonder the stock market, although briefly rallied today, is beginning to see the reckoning a collapse of Citibank, Bank of America and Wells Fargo could mean to the economy and the administration is slowly setting the stage for nationalization. For the time being, though, President Obama and Fed Chairman Ben Bernanke say nationalization is not on the radar. Bernanke's comments today stoked Wall Street and that was his intent.

The Washington Post reports today the Obama administration tweaked the terms of government assistance by demanding common stock in lieu of cash. "The change paves a road toward nationalization for the most troubled large banks," according to the Post. A piece on Bloomberg.com goes further in calling nationalization inevitable.

Nationalizing the nation's top banks has its drawbacks. With taxpayers already shouldering a large burden of risk that is likely to increase in the future, backing the financial sector may be too much. Some economists even believe another stimulus bill of nearly the same sticker price will be needed within two years. On the other hand, taxpayers saw little in return in the form of consumer lending after the initial $350 billion bailout money passed late last year and news reports of lavish executive spending and multi-million dollar bonuses left a lingering distrust of banks to apply the aid judiciously.

How poor is the health of the nation's biggest financial institutions? The grand sage of the credit mess, New York University Professor Nouriel Roubini laid it out in this week's issue of Time, saying Citibank is "on the way to ICU," Bank of America should "prepare the transfusion" and surprisingly, Wells Fargo needs a "Defibrillator. Stat!"

The poor health of these once mighty institution is a reminder of how their bottom line's were nothing more than a house of cards. Just 16 months ago, Bank of America and Citigroup were quarterly flipping top positions for the title of world's largest bank. Today, they may be on the verge of being owned by the biggest economy in the world.

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