Nationalization gains as an option

To some, its mere utterance breaks an important American taboo. Others may find it more scary than offensive. But suddenly,

nationalization

is front-and-center in the debate over the U.S. financial crisis.

A growing number of economists, finance experts, and public officials have begun to openly discuss something that until a few months ago would have been politically unspeakable: the idea that to fix the mess, the United States might have to nationalize some key money-center banks, as Sweden did to solve its own banking crisis in the 1990s.

Not just Nouriel Roubini, the New York University economist known as "Dr. Doom" for his early warnings of the financial collapse, who urged nationalization in a Washington Post op-ed this weekend that declared, "We're all Swedes now."

Sen. Lindsey Graham (R., S.C.) told ABC's George Stephanopoulos on Sunday that nationalization, while "not comfortable," should be on the table. "I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we're going to have to do something that no one ever envisioned a year ago, no one likes," Graham said.

The Financial Times yesterday carried what might seem the coup de grace for nationalization naysayers: an interview with former Federal Reserve Chairman Alan Greenspan, a sure vote in most any circumstance for the wisdom of the markets over the intervention of bureaucrats.

Greenspan told the FT: "It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring. I understand that once in a hundred years this is what you do."

It seems clear a taboo has been breached. Dick Marston, a Wharton School professor of finance and economics, called it "shocking how things have changed in just the last few days."

Much less clear is what the transgression means - and whether it reflects more of a substantive or semantic shift, Marston and other economists and financial experts said in interviews yesterday. They said that under any mechanism, a key question is how losses and any eventual gain would be distributed among shareholders, creditors, and taxpayers.

At his news conference last week, President Obama called the Swedish approach inappropriate to the U.S. situation both because of differences in scope - "Sweden had like five banks," he said - and culture.

"Sweden has a different set of cultures in terms of how the government relates to markets," Obama said.

Ironically, the Swedish bank takeover may be less foreign than it seems.

Dick Herring, a Wharton professor of finance and international banking, said he considered talk about nationalizing U.S. banks inflammatory and distracting. But he said Sweden's temporary nationalizations in the '90s actually had roots in the U.S. government's $4.5 billion bailout a quarter-century ago of Continental Illinois National Bank & Trust Co.

Herring said that process, in which the Federal Deposit Insurance Corp. bought off most of Continental Illinois' bad loans in return for an 80 percent ownership stake, eventually led to enactment of a bank-takeover law that other countries, including Sweden, came to see as a model.

"We have a perfectly good legal mechanism for doing this - it's admired the world around," Herring said. "We seem reluctant to use it." He said the law allows the government to establish "bridge banks," in which the FDIC would appoint directors and perhaps a new chief executive.

Back in the '80s, too, many were reluctant to call the process "nationalization." But economist John Caskey, of Swarthmore College, said the dispute over what to call a government takeover of insolvent banks is less important than designing an appropriate response to today's crisis.

"No one is saying just rush in and nationalize them," Caskey said. "They're saying to do this selectively if they're really insolvent."

Caskey said a key issue bedeviling regulators all along had been how to value the so-called toxic assets, especially the complex mortgage-backed securities linked to the collapsing housing market.

"The advantage of nationalizing is that it gives you time to value them," he said.

Caskey said the breach in the nationalization taboo by people such as Greenspan and Graham could have political benefits for Obama, as his administration tries to devise a workable and politically acceptable course and steer clear of hot-button words such as nationalization.

"I don't think it scares economists if it's what needs to be done," he said. "But I'm sure the Obama administration is aware that people like Rush Limbaugh will be treating it as a dirty word, and implying that the federal government will decide if you get a credit card."