Did Bernanke Really Promise No Nationalization?

As Chairman of the Federal Reserve, Ben Bernanke is still a powerful and influential figure whether he is considered a “legacy” of the Bush administration or not.  Unlike Geithner, Bernanke is not considered an administration mouthpiece.  Of course, he is not exactly fighting any of the administration policies in public either.  The markets have now traded up after Bernanke testified before the Senate today, on the hopes of a “no nationalization” stance from Uncle Sam.

We listened to most of Bernanke’s comments today in front of the Senate Banking Committee.  Again, there were no assurances that nationalization was totally off the table.  But all of the comments pointed to a desire to keep the banks in the private sector.  And there is nothing that points to an imminent seizure of any of the major banks.

Bernanke did say that he thinks banks should not be wholly owned or majority owned by the government. This sounds like a promise, but it did not come in the most absolute form.  He also said that the major US banks still have big franchise value, and he also said that they can be stabilized.  He also went as far as to call the term “zombie bank” an inaccurate one.

If you break this down, it is not a 100% endorsement for no nationalization. . The reason we say this is because his comment was over the need to “formally nationalize” the banks, for which he said he does not see the need to formally nationalize them.  But the net-net result is that his comments are being interpreted as a “no nationalization” preference.

Bernanke did say that the banks would not be allowed to hide issues in their stress tests.  But he also said that stress tests not being passed would lead to other actions.  There were discussions about converting preferred shares into common and increasing ownership.  There were also comments about the criteria for more capital infusions, although that point was less pointed and more general.  This sounded as though Bernanke and friends at the Fed were using the tests as a method of assuring that the banks were adequately capitalized.

Again, these are our own interpretations.  Bernanke spoke about many issues such as recovery, ARS, credit markets, debt prices, TALF opening up, and much more.  But we were trying getting a better handle on IF a bank nationalization was to occur, ust what it might actually look like.  That is why we gave a base case for what that REALLY MEANS to the top banking institutions in the U.S.

We did not get any sort of promise that large financial institutions that pose no systematic risk would not nationalized. But we also heard absolutely no hurry to take control of these institutions for the greater good.  Maybe it isn’t Bernanke’s place to speak about such things any longer.  Maybe it is.  But what we just heard was something far short of Uncle Sam being hellbent on taking control and running the banking system.

Jon C. Ogg
February 24, 2009