Nationalisation, long regarded in Washington as a folly of Europeans, is gaining rapid ground among US opinion-formers. Stranger still, many of those talking about federal ownership of banks are Republicans. Lindsey Graham, a Republican senator for South Carolina, said that many of his colleagues, including John McCain, the defeated presidential candidate, agreed with his view that nationalisation of some banks should be “on the table”.
Mr Graham said that people across the US accepted his argument that it was untenable to keep throwing good money after bad into institutions such as Citigroup and Bank of America, which now have a lower net value than the amount of public funds they have received.
“You should not get caught up on a word [nationalisation],” he told the Financial Times in an interview. “I would argue that we cannot be ideologically a little bit pregnant. It doesn’t matter what you call it, but we can’t keep on funding these zombie banks [without gaining public control]. That’s what the Japanese did.”
Barack Obama, the president, who has tried to avoid panicking lawmakers and markets by entertaining the idea, has recently moved more towards what he calls the “Swedish model” – an approach backed strongly by Mr Graham.
In the early 1990s, Sweden nationalised its banking sector then auctioned banks, having cleaned up their balance sheets. “In limited circumstances the Swedish model makes sense for the US,” said Mr Graham.
Mr Obama made it clear last week that he favoured this model over the piecemeal approach taken in Japan, which many would argue is the direction US public policy appears to be heading.
“They [the Japanese] sort of papered things over,” Mr Obama said. “They never really bit the bullet41;.41;.41;.41;and so you never got credit flowing the way it should have, and the bad assets in their system just corroded the economy for a long period of time.”
Senior administration officials acknowledge that the financial rescue plan unveiled by Tim Geithner, Treasury secretary, last week could result in the temporary nationalisation of some weak banks.
The plan sets out a framework for revealing the extent of the likely credit losses facing banks. Most private sector analysts believe the exercise will reveal that some banks have large capital shortfalls.
Policymakers acknowledge that, if this is so, it will be difficult for those with the largest shortfalls to raise the required equity from the markets; in which case the government would probably have to take temporary control. Moreover, while nationalisation remains taboo in some political circles it is increasingly openly discussed among economic policymakers of all leanings.
“If necessary you temporarily nationalise some of these institutions,” said a former senior Republican policymaker. “There has been a lot of pussyfooting around because we don’t like the word – which strikes me as utter nonsense.”
The time for biting the bullet may be fast approaching. In early April, big institutions publish their first-quarter results. If Treasury stress tests have not yet revealed the true state of their balance sheets, first-quarter results might do so.
“The first week in April – that’s when the children’s party is over,” says Chris Whalen, co-founder of Institutional Risk Analytics. “That is when the obvious will become apparent.”
The Obama administration remains officially opposed to control. Mr Geithner last week said: “Governments are terrible managers of bad assets.”
Others say Mr Geithner may have no choice. “The danger we face is a Freddie Mac/Fannie Mae scenario where government gives the banking sector guarantees and then socialises the losses,” says Adam Posen, an economist. “That’s the worst thing we could do.”
