Bernanke Rejects ‘Anything Like’ Bank Nationalization (Update4)

Feb. 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said while the U.S. government may take “substantial” stakes in Citigroup Inc. and other banks, it doesn’t plan a full- scale nationalization that wipes out stockholders.

Nationalization is when the government “seizes” a company, “zeroes out the shareholders and begins to manage and run the bank, and we don’t plan anything like that,” Bernanke told lawmakers in Washington today.

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, at a House Financial Services Committee hearing 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.

Bernanke told the committee that a $200 billion joint Fed- Treasury program designed to jumpstart consumer lending is likely to provide “substantial support” to auto lending, and the central bank may revisit terms of the program if needed.

‘Layers of Seniority’

While the Fed is restricting its Term Asset-Backed Securities Loan Facility to supporting AAA rated securities, Bernanke said such securities “can be a senior tranche of a security which has different layers of seniority.”

The chairman was responding to questions from Representative Thaddeus McCotter, a Michigan Republican, who asked Bernanke to “assuage” his fears that the TALF would fail to help auto dealers get financing for cars.

Regulators set a six-month deadline for the biggest 19 U.S. banks to raise any new capital deemed necessary after a review of their balance sheets. The regulators will complete their so- called stress tests by the end of next month, the Treasury said today in a statement in Washington.

The Treasury said banks will have a choice of raising private capital or accepting taxpayer funds from the Treasury. Any new government money will come in the form of convertible preferred securities, which would acquire voting rights if converted into common stock.

Substantial Share

In the case of Citigroup Inc., the government may end up with a “substantial” share of the lender’s stock, he said. Oversight of the company would be accomplished through regulators and by exerting “shareholder rights,” Bernanke said.

“It may be the case that the government will have a substantial minority share in Citi or other banks, but again we have the tools between supervisory oversight, shareholder rights, and other tools to make sure that we get the good results we want in terms of improved performance,” he said.

Such a path might avoid “all the negative impacts of going through a bankruptcy process or some kind of seizure, which would be I think disruptive to the markets,” Bernanke said.

Bernanke said regulators can exert significant influence on banks even if they have minority stakes.

“If we had a 40 percent position of a bank, we would obviously have a great deal of influence on management, on the board, on policies, on capital structure, all of those elements,” Bernanke told Representative Michael Capuano, a Massachusetts Democrat. “It will not be a case of giving the money and going away.”

Diluting Value

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.

The Treasury Department, Federal Reserve and other banking regulators said in a joint statement on Feb. 23 that they stood ready to pump more capital into banks, or convert some of the government’s outstanding preferred shares into common, to prevent their failures. The stress tests are scheduled to begin today, according to that statement.

“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.”

Plunging Price

Citigroup had to sell $52 billion of preferred stock to the government after the bank’s plunging stock price fed concerns that its failure might trigger a market collapse. Bank of America Corp. also had to get $45 billion of bailout funds.

Some members of the House and Senate congressional leadership, including House Speaker Nancy Pelosi, say they don’t want the government to be a long-term owner of banks.

Senator Charles Schumer of New York, the No. 3 Democratic leader and a member of the Senate Banking Committee, said today that a “federal takeover of the banks should be avoided at all costs.”

“No one intends, ever, to have the government running these banks or insurance companies for a long period of time,” Schumer told reporters. “To come in, clean them out, take out the bad assets, put in new management -- that’s what’s in mind.”

The scenario that Bernanke describes, where the government is a shareholder and closely supervises management, might not be inviting to private investors, analysts said.

Investors will be confident to buy bank stocks only when “fairly convinced that the government’s embrace is going to end,” said Andrew Laperriere, managing director at International Strategy and Investment Group in Washington. Most investors “would have reluctance with the government making strategic decisions for big companies.”

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.netBradley Keoun in New York at bkeoun@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net