Altering Bailout Rules, US Moves Closer to Nationalizing Troubled Banks

In a joint statement, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced yesterday the government might demand a direct ownership stake in major banks that do not have enough capital to withstand an extreme recession. The government will begin a series of so-called “stress tests” this week on twenty of the country’s largest banks with $100 billion dollars in assets.

The Obama administration has confirmed it is already in talks with Citigroup, that could raise its stake in the company–one of the world’s largest financial institutions–to as much as 40 percent.

The news was welcomed by some investors. Even as the Dow Jones industrial average plunged on Monday to its lowest close in twelve years, shares of Citigroup climbed 10 percent. And shares of another troubled firm, Bank of America, rose about 3 percent.

But administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis. Treasury Secretary Timothy Geithner has said he wants to avoid an explicit takeover that would put the government in charge of running the banks but, as a last resort, the government would consider taking temporary control.

Meanwhile, President Obama takes center stage this evening to announce his broader agenda for jolting the country out of deep recession and confronting long-term economic challenges. Obama will deliver a State of the Union-style address at 9 p.m. Eastern time in his first appearance before a joint session of Congress since taking office.

Nomi Prins, former investment banker turned journalist. She used to run the European analytics group at Bear Stearns and is now a senior fellow at Demos. She is the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket. Her upcoming book is called It Takes a Pillage.

Robert Johnson, former chief economist of the Senate Banking Committee and a former managing director at Soros Fund Management. His latest article is Nationalize Failing Banks? Think Twice.