Understanding the "Nationalization" Debate Over Banks

We think you woke up on Monday, and saw David Sanger's front page New York Times article about the trial balloons being launched over the idea of nationalizing some failing banks. Then we saw CNN.com post Nobel Prize winning economist Joseph Stiglitz's piece breaking down how we got from October to now, and basically advocating for the nationalization of failing banks.


Here's why you care: When you hear "nationalization" you think, ah, the government takes something over. That's true, but what you need to know, and can be less obvious is a defacto nationalization if you will. In other words, the U.S. government has been injecting cash into banks in return for stock. At a certain point the U.S. government, has in some cases already, and will in other cases wind up as the majority share holder. I.E. - majority shareholder gets a lot of pull, and you could sort of call that nationalization if you want. We just want you to be able to understand that there are two flavors here.

Lastly, keep in mind as this debate moves forward the other options for the U.S. government are as follows: 1) Inject more cash into banks, and get more stock in return (see above); 2) Take over failing banks (nationalization); 3) Create a "bad bank," where financial institutions can dump troubled assets (click here for our explanation last week); and 4) revive the original TARP plan - go buy troubled assets from banks through auctions.

Keep this in mind as you see this debate get more play in the weeks to come.