The Back Door To Nationalization

I was reluctant to support a bank bailout because I considered it to be a back door to nationalizing the financial industry, and now it looks like those fears were well founded.

Banks that were forced to take TARP funds so as to destigmatize the program are finding that they can't repay the money because the federal government refuses to take the money back.

Now, reports are indicating that the federal government is looking to convert those loans into equity shares in the banks, meaning that the government will take an increasingly large ownership stock in these banks.

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.
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While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.

Many banks are already looking to get out from under TARP restrictions, and note that they are on stable financial ground.

While the Obama Administration continues to push ahead with these plans because they claim that the credit markets aren't lending enough money, they do not differentiate between those who are good credit risks and those who aren't. People who have no business getting additional loans should not have additional credit extended because that's precisely how the credit mess got to the point it did. We'd simply be replaying the same mess, only with the government fully in the driver's seat with their foot on the gas pedal.

There's no reason to stop banks from repaying their TARP obligations unless the reason is to expand the government's role in the financial sector.