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When reading through two articles from The Washington Post and The New York Times something was missed in both articles that I think deserve some serious discussion.  While both articles focused on regulationg bonuses, I think they both glossed over what could possibly be the biggest story concerning the administration's thoughts and possible future actions.

I think that the administration has a plan B. And that plan B might be temporary nationalization of not only banks, but corporations that are deemed too big to fail.

From The New York Times

A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large troubled companies not now regulated by Washington, like insurance companies and hedge funds.

That proposal would, for instance, make it easier for the government to cancel bonus contracts like those given to executives at the American International Group, which have stoked a political furor. Under the proposal, the Treasury secretary would have the authority to seize and wind down a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board.

Now I want you guys to really think about this.  The government and the administration want broad powers to take over insurance companies and hedge funds to wind them down.  

Usually the word winding down means that they want to break it a part and then sell the pieces.  If there is any other meaning, please tell me in the comments.

The New York Times then goes into why the adminstration wants these powers:

The government now has the power to take over only the banking unit that controls federally insured deposits of large troubled institutions, not the parent company — a limit that could pose problems if large financial conglomerates like Citigroup or Bank of America continued to spiral downward.

That's mind blowing when you really think about it.  So if the government wanted to take over Citigroup, it could only take over its banking unit.  They have no permission to touch anything else in the company but that.  Citigroup has so many different units that do so many different things that don't fall under just banking.  Which would explain why the admnistration has not made moves to nationalize it yet because even if they did, they could only take charge of the banking portion of that business, which in Citigroup's case, would be but a small part of the international company.

Which leads me to The Washington Post article about the toxic assets plan.

The Treasury also intends to ask Congress to pass legislation that would provide the government with the authority to take over large nonbank financial firms on the brink of collapse. Government officials said that if they had such powers last fall, they could have seized AIG and wound down its troubled businesses at far less cost to taxpayers.

So the government would have taken over AIG completely if it wasn't for the fact that it doesn't legally have the power to do that.  

Which leads to the question of why the government and the administration want the power now? Bernanke lays out the case:

Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.

Is it just me or does that sound like nationalization?

Now I know what some of you are thinking "Niwind, you are reading too much into this! The administration has made it clear it will never ever do such a thing as temporary recievership to the big banks! It will never happen!"

The thing is most banks that get nationalized don't know they are nationalized until the FDIC knocks at their door after closing to tell them they are.  The goverment then seizes all assets, puts a nice little sticker on the door to tell custormers what is going on, and then proceed to run the bank.  The reason they do that is to prevent runs on the banks where concerned depositors might try to take their money out, thereby making it much harder to keep the bank alive.  

You will not hear a peep from this administration if they do this.  It will happen on a Friday night when everyone is asleep to avoid a  run on these banks.  The reason that Paul Krugman can say this and Tim Geithner cannot is that Geithner is actually Treasury Secretary and him saying it can actually create a panic and run on banks.  Krugman can just get interesting dicussion.

"But Niwind, I don't think that is possible.  Why would they go with the toxic asset plan if they are considering temporary nationalization?"

Because temporary nationalization is plan B if plan A doesn't work the way they want it to.  Right now the government can control those companies banks, but not much else.  You don't ask congress for powers you are never going to use.  You don't make a case for it if you don't plan on implimenting it in some way.  

I think that if Plan A doesn't work out for Obama he may use the power of Plan B to bring the situation under control.  But first the administration must have congress' vote on it in order to have that power.  The difference between Fannie Mae and Citigroup is that Fannie Mae had the Federal Housing Finance Agency to step in to place it into conservatorship where as Citigroup is more of a hybrid of different businesses and not just a bank.  Same goes for Bank of America.

It is a very interesting examination of what might be the thoughts of the adminstration.  I'm surprised that newspapers didn't focus on that aspect of the plan rather than bonuses.

Originally posted to Niwind on Sun Mar 22, 2009 at 10:32 AM PDT.


Is temporary nationalization on the table?

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