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The Meaning of Nationalization

For decades now, "nationalization" has been a dirty word in U.S. business circles. The term conjures associations abhorrent to most economists--from dysfunctional resource-rich nations seizing the assets of foreign companies to bloated European government structures suffocating on bureaucracy. A government taking control of private companies, many economists said, was antithetical to free-market policy and dangerously close to socialism. But with the largest U.S. banks facing existential challenges, economic urgency has upended the debate over nationalization.

The issue came to a head as policymakers debated how far the U.S. government should go to stabilize commercial banking behemoths like Citigroup and Bank of America. Both are strapped for cash--NYU's Nouriel Roubini reckoned in a recent column that they "look blatantly near-insolvent." The U.S. Treasury Department in late February initiated a series of "stress tests" (FT) aimed at gauging the depth of these institutions' financial problems, saying it would then determine whether to inject money through private markets or take control of the firms through the Federal Deposit Insurance Corporation (FDIC). Federal Reserve Chairman Ben Bernanke defended this course, saying such a takeover wouldn't resemble a "nationalization" (Bloomberg) in which the government "zeroes out the shareholders and begins to manage and run the bank."

What, then, does "nationalization" mean in this context? Many experts consider a bank "nationalized" if the government takes a controlling stake (SFChron) of its voting shares, even if it doesn't buy all the bank's shares. Since October, Washington has accumulated preferred, non-voting shares of many U.S. banks through its Troubled Asset Relief Plan (TARP). On February 25, the Treasury unveiled its new Capital Assistance Program, through which banks will be required to sell common stock (i.e. shares with voting rights) to the U.S....

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