Friday, February 27, 2009

What the hell is nationalization and why do I care?

Mia, who seems to ask me all the best questions these days, wants to know:
I have what might be a stupid question. Why should I care about the nationalization of banks? What's the benefits and what's the negatives?
First, that's not a dumb question at all. In all the hysteria over what it means to "nationalize" a bank, few reporters have explained what that means. Mostly that's for good reason: there isn't really one definition, and there's not an example in modern US history.

The nationalization talk started when it was reported that the government is giving a "stress test" to big banks that got bailout dollars. That means they're going to open the banks' books to see how healthy they are financially and whether they have enough capital to survive if the economy goes further south. That brought up the question of whether the government, having invested taxpayer money in the banks, would take them over and potentially install its own management if any of the banks fail the stress test (which, by the way, the gov. says it's not going to tell us).

In any event, a bank "nationalization" could mean any number of things: in the case of Citibank, the government is probably going to end up owning between 35 and 40 percent of the bank's shares. That probably won't make current shareholders very happy and could make investors wary of pouring anymore capital into Citi. (It could also have the opposite effect of giving investors more confidence and helping the bank get access to more cash).

At the end of the day, though, a total takeover of all the banks by the government is very, very, very unlikely. With all the other things the government has to worry about, day-to-day management of individual financial institutions is not something they want to do.

As for your money, no worries. Your cash is still federally-insured and none of this "nationalization" talk means you won't be able to make a withdrawal or pay a bill tomorrow.


laughing808 said...

I agree this was not a dumb question. I came across a few articles yesterday and was wondering the same thing.

Thanks for the clarification.

Mia6998 said...

As always, thanks for answering my questions and dropping knowledge. I was on vacation for a few days so I missed when you first posted this. But I'm playing catch up.

Side note: Is this a bad example of newspapers writing the second day story on the first day...forgetting the most important part? Things that make you go hmmmm.