Will United States be forced to nationalize banks?

 

Assalam-o-Alaikum
http://www.reuters.com/article/newsOne/idUSTRE50F1KI20090116

NEW YORK (Reuters) - The U.S. government's latest bank rescue, this time a multi-billion dollar lifeline handed to Bank of America, has led to more talk of what once would have been unthinkable -- European-style nationalization of major American banks.

Few see the government nationalizing the entire banking system the way Sweden did in the 1990s, but the U.S. is growing more willing to put significant pressure on the largest banks.

Over time, the government could exercise the same day-to-day control over major U.S. banks as with IndyMac Bank, a failed California thrift that the U.S. government operated for much of last year.

"We're nationalizing banks one at a time now. The real question is, will the biggest ones need to be nationalized?," said Roy Smith, professor at New York University's Stern School of Business.

The U.S. banking system desperately needs capital. Estimates of the shortfall range from $700 billion to more than $2 trillion.

That money will not come from the private sector as long as the pending losses are all but impossible to estimate.

Without private investors bailing out the sector, whose functioning is key to reviving an economy mired in recession, the U.S. government will have little option but to step up.

In earlier stages of the meltdown, the United States tried to penalize investors to the smallest extent possible when it intervened.

When Bear Stearns & Cos Inc failed, the government brokered a deal that ultimately resulted in Bear shareholders getting money, while debt holders lost nothing.

After that deal, regulators got tough, and let Lehman Brothers Holdings Inc fail. Chaos ensued.

Two months later, when the market lost confidence in Citigroup, the government bought preferred shares and warrants, giving it exposure similar to owning shares without diluting shareholders.

The transition team of president-elect Barack Obama, who takes office on Tuesday, has said it will seek more concessions from banks seeking capital than the Bush administration did.

Lawrence Summers, director-designate of the National Economic Council, promised congressional leaders this week to limit dividend payments and executive compensation at banks that are bailed out.

And there are signs that Citigroup (C.N) is facing significant government pressure. It has sold off a stake in the brokerage business that Chief Executive Vikram Pandit said he "loved" just a few weeks ago.

And the bank broke with the rest of the industry and supported bankruptcy legislation that detractors say will give consumers an incentive to file for bankruptcy.  Continued...

Azfar

Quran 16:90 Allah commands justice, the doing of good, and liberality to kith and kin, and He forbids all shameful deeds, and injustice and rebellion: He instructs you, that ye may receive admonition.