By Craig Torres and Brad Keoun
Feb. 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. government doesn’t plan “anything like” a nationalization of banks that would wipe out shareholders.
Nationalization is when the government “seizes” a bank, “zeroes out the shareholders and begins to manage and run the bank, and we don’t plan anything like that,” Bernanke said in response to questions at a House Financial Services Committee hearing today in Washington.
The Fed chief’s remarks were more specific than yesterday, when he spurned outright federal control of banks in favor of a public-private partnership that the government would eventually exit. Bank stocks have fallen this month amid concern among some investors that Treasury Secretary Timothy Geithner’s financial- rescue plan could lead to nationalization of some lenders.
Bernanke today continued to draw a distinction between nationalization and a government minority interest with strict oversight and supervision.
Some banks won’t need new injections of government funds after regulators complete stress tests to determine if they have enough capital to weather a deeper economic slump, Bernanke also said today.
In the case of Citigroup Inc., the government may end up with a “substantial” share of the lender’s stock, he said. Officials in recent days have been grappling with how much more help they can provide Citigroup without diluting the value of shares held by investors too much, a person familiar with their deliberations said earlier this week.
“We will see how their test works out, and we will see what evolves,” Bernanke said. “If in fact they have to convert even the existing preferred into common, then there could be a more substantial share of ownership of Citi by the U.S. government.”
The government has already purchased $52 billion worth of preferred shares in Citigroup.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: February 25, 2009 12:11 EST
| Written by ActionForex.com | Feb 25 09 06:14 GMT | | |
The Fed Chairman's Testimony: Nationalization Not Likely (Unless The Worst Case Occurs)Fed Chairman Ben Bernanke testified before the Senate yesterday. While making no new grounds on the economic outlook and forecasts, the Chairman rejected the idea that the 'stress test ' will lead to Government's takeovers of large financial institutions. This temporarily relieved the market's concerns of bank nationalization and CDS for Citigroup and Bank of America dropped from record highs.Bernanke stated that stress tests will be performed on 19 US banks with balance sheet of $100B or above and the Treasury will purchase convertible preferred shares from those found to have inadequate capitals as they may not be able to sustain a deeper-than-expected recession. Moreover, the shares would be converted to common shares only as extraordinary losses materialize. The Fed Chairman emphasized that 'it doesn't have an ownership implication until such time as those losses which are forecast in the bad scenario actually occur' and there's no reason to 'destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn't necessary'. In the credit market, CDS for Citigroup and the Bank of America dropped after the clarification. Bank CDS surged dramatically last week and those for Citigroup and the Bank of America reached record highs after they received capitals from the Government. Investors worried that nationalizations would eventually push losses to bondholders and common share owners. As of US close Tuesday, CDS on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada fell about 1.6 bps to 215.5. Contracts on Wells Fargo and Goldman Sachs also fell 35 bps and 15 bps respectively. Concerning the US economy, the tone of the Chairman's remark matched that of the recent FOMC minutes. The most important point is that risk on recession is still on the downside and uncertainty remains due to the global nature of the slowdown. The US economy is in severe contraction and there's chances of seeing an end of recession by then end of 2009 and recovery in 2010 only if 'actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability'. As to when the Term Asset-Back Securities Loan Facility (TALF) will begin, Bernanke said that it's expected to begin soon. This was in contrast with the saying on Feb 6 that a start day will be announced this month. source : Actionforex.com | |
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