Feds try dousing bank takeover fears

by Frank James

Wall Street has remained concerned that the nation's largest banks are on the verge of being nationalized, despite assurances from the White House last week that the Obama Administration doesn't plan on doing that.

The New York Times no doubt added to those worries with its Sunday editorial calling for bank nationalizations.

So the administration and regulatory agencies, along with the Federal Reserve, today issued a statement meant to tamp down speculation that nationalizations are on the way.

The bottom line is that the statement suggests the nation's largest banks presently have more than adequate capital. That's an interesting assertion since a number of analysts have said that certain institutions appear insolvent.

The statement then goes on to say that starting Wednesday the banks will begin undergoing so-called stress testing in which regulators will test the banks' balance sheets against certain worst-case scenarios.

Banks that produce a lot of red flags will get more injections of money, with the preference being for private funds. But if that doesn't materialize, the money would come from taxpayers who would give provide the banks money through purchases of the banks' preferred shares which could later be converted into common stock, giving the federal government voting power in the banks.

An excerpt from the statement:

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands."

The last sentence, which comes at the end of the statement, is the one meant to do the most to calm financial-institution investors (and bank officials,) that the bias of federal officials is for banks to stay private and not become wards of the federal government.

But the statement is still nowhere near an absolutist declaration that some of the banks won't be nationalized. Federal officials are clearly giving themselves room to try the Swedish solution as a last resort.

Meanwhile, the Calculated Risk blog believes something about today's statement sounds familiar:

I'm reminded of this statement from last year:

Of course both Fannie and Freddie were put into conservatorship (edit) in September.