Democrats Signal Possible Bank Nationalization

Leading Democrats have signaled further government aid to failing banks in the near future, possibly including increased nationalization.

Treasury Secretary Timothy Geithner will outline the Obama administration’s new proposal to aid the banking sector in a speech at noon on Monday. After a three-day retreat with a briefing from Geithner, Speaker Nancy Pelosi (D-Calif.) indicated on Saturday that lawmakers will place strict requirements on any new aid to banks.

Obama administration officials say they have rejected nationalizing institutions by taking large ownership stakes, and Geithner has previously stated that he wants to avoid completely nationalizing banks, if possible.

To some extent, however, nationalization has already happened. Taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent, according to the New York Times.

The cost could increase if the government sets up a “bad bank” to pay for these banks’ most toxic assets, which could cost hundreds of billions of dollars.

Sources told the Wall Street Journal in January that such a bailout could cost $2 trillion. Senator Chuck Schumer later revealed that the government might have to pay $3 to $4 trillion to private banks to take bad debt off their hands.

Despite the cost, not all lawmakers are opposed to such a scheme. “Well, whatever you want to call it,” said Pelosi in January. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.”

Adam S. Posen, the deputy director of the Peterson Institute for International Economics, told the New York Times that Obama and Geithner will have to “bite the bullet” on the issue of nationalization. We have yet to see exactly what that will look like.