Though sources say Treasury Secretary Geithner's banking plan is still weeks away, it's clear Obama doesn't want the government to take over the banks. Trouble is, it pretty much already has.
It's pretty clear that Treasury Secretary Tim Geithner, the president's economic team, and maybe the entire Obama administration doesn't want to nationalize the banking system. How do I know this? Aside from the comments made by press secretary Robert Gibbs late last week, every signal, every private comment coming from the White House to reporters, and to the bank executives themselves about the soon-to-be unveiled bank-recovery plan leaves out the word "nationalization." No one, of course, can completely rule out a government takeover of the big banks given the tsunami that has roiled the financial markets over the past two years, particularly the past two weeks. Yet for every positive that nationalization presents (including an immediate cleanup of the toxic assets clogging up the banking system), the Obama people and their advisers on Wall Street come up with about three negatives—including most of all, the massive cost of a takeover, which will make the current pricetag of the stimulus package seem insignificant.
Does the president of hope and change want thankless job of running Citigroup? I think not.
And yet it may not matter what the Obama administration wants to do, even as Geithner is working on what is being described by executives on Wall Street with knowledge of what the Treasury is trying to accomplish, as a "comprehensive" bank-bailout plan. This plan, at least as it has been communicated to the Wall Streeters I speak to, will include stress tests for troubled institutions, capital infusions, and some way to get the toxic assets off the banks books. I am told that Geithner's team is working nearly nonstop trying to convert the loosely strung together set of principles first unveiled nearly two weeks ago—which sent the Dow Jones Industrial Average down nearly 1000 points—into policy, and it ain't easy.
One big problem: Even as Obama's people tell the markets that nationalization isn't in the cards, the markets are saying it is, as are people close to two of the firms most rumored to be taken over by the government, Citigroup and Bank of America. Both firms sit on billions of dollars in toxic assets and both firms, if they sold those assets under the Geithner plan, would have to write down losses and need capital to make up for those losses. Given where their stock is trading ($1.95 for Citi, around $3.50 for BofA), the government would be the source of that funding. What people at the firms fear is that the government would then be their de facto owners. Market-research firm Strategas puts in in perspective: The government has seeded both Citi and BofA with capital already in exchange for stock that can convert into common shares later. If that stock is converted now, Strategas says the feds would own more than 100 percent of Citigroup's market value; and more than 70 percent of Bank of America's. More money from the government, as some people expect, would mean an even greater position. The government probably wouldn't be running things on a day-to-day basis since the shares are of the common stock variety, but both Citi and BofA would certainly have to answer to government bureaucrats on a regular basis. That's the nightmare scenario shareholders and people at the firms worry about even as they and the Obama administration downplay nationalization and the reason why the market has launched the assault on both firm's share price.
As the markets take their pound of flesh, Geithner faces another daunting problem. Aside from a few senior staffers, Geithner is having difficulty putting together an economic team to fully implement the plan, converting the ideas—many of them quite worthy, such as enticing private capital to buy the toxic assets off the banks books—into a coherent plan that can pass through Congress. And it isn't because people don't want to work for Geithner.
Ironically, the Obama administration's own lobbying restrictions are making it difficult to bring in people who had worked on Wall Street to now work on Treasury's bank-bailout plan. "I would be perfect for some job at Treasury," said one lobbyist who asked not to be named. "I worked in the business, I worked on the Hill, and I know how Wall Street works. But they can't touch me."
The lobbying restrictions are only part of the problem facing the administration in filling Treasury's senior ranks. Wall Street executives are scared to death of the vetting process. "A lot of these people are rich so they have maids and drivers, and may have not been perfect in paying taxes or may have hired illegal immigrants," one executive told me. In addition, the administration has had an unofficial ban in bringing people into Treasury who have worked for firms that either imploded (Bear and Lehman) or took bailout money (just about everyone else). That leaves bureaucrats and academics to fill spots, and finding qualified people from these professions has been daunting.
For now, Geithner has a staff that is pretty bare-bones, particularly compared to his predecessor, Hank Paulson. And as Geithner waits to assemble his team, as his bailout plan remains in limbo, the markets and banks stocks in particular are tanking. It didn't help that in recent days former Fed Chairman Alan Greenspan and US Senator Chris Dodd raised the specter of nationalization.
Executives at BofA and Citi on Friday put out word that they had so much capital that nationalization was out of the question. They may be right—before its acquisition of Merrill, Bank of America was one of the strongest banks in the country, and its CEO Ken Lewis is considered one of the banking business’ most-savvy players. It hard to believe that because of one bad acquisition (Merrill Lynch unexpectedly lost $15 billion because of its holdings of soured real estate-related debt), Bank of America would have to be taken over by the government. But their denials, supplemented with the comments from the president's chief flack, did little to sway already-nervous markets.
Absent some concrete proposal from Geithner—which my sources tell me is weeks away (although he's expected to give the markets some reassurance that he's on top of the situation and provide some details as early as today)—the markets continued to bet that both were on the verge of being taken over. How much do markets matter in this scenario? They certainly aren't insignificant. Such a low share price is reflecting the growing Wall Street consensus that the banks will be taken over by the feds and shareholders will get zero for their investment. The more this belief spreads among investors—and as share prices fall—the greater the likelihood that the government will have come in with some solution to stabilize the situation through a takeover or another massive solution that will mean, for all intents and purposes, America's two biggest banks will be wards of the federal government.
That's at least what the markets are telling us, and this week, probably as early as today, I believe the Obama administration will repeat its position, more forcefully perhaps than what Robert Gibbs said last week, that it has no plans to nationalize the big banks, and in fact, Geithner's plan will prevent such a thing from happening. But some of this comes down to semantics. The Obama administration says it doesn't want to nationalize the banks, and that might be true. Does the president of hope and change want thankless job of running Citigroup? I think not. But consider the following: The federal government is already a major shareholder in both Citigroup and Bank of America, having turned over tens of billions of dollars in bailout money in exchange for some ownership.
If both banks are forced to sell their toxic assets, they will be taking writedowns and losses and will need to raise more capital to stay in business. Since they can't raise capital with such a low share price, guess were they will be getting the money?
In other words, what looks like a duck, and walks like a duck…
Charlie Gasparino appears as a daily member of CNBC's ensemble. He is also a columnist for Trader Monthly Magazine, and a freelance writer for the New York Post, Forbes and other publications.