U.S. Lawmakers Clash Over Nationalizing Banks to Stem Declines

Feb. 21 (Bloomberg) -- U.S. Senate and House Democrats who steer financial-industry legislation clashed over having the government take over some banks as a way to help lenders that have been hammered by the worst economic slump in 75 years.

Senate Banking Committee Chairman Christopher Dodd said yesterday some banks may have to be taken over for “a short time,” and his House counterpart, Financial Services Committee Chairman Barney Frank, along with Republican Senator Jon Kyl rejected having the government step in to run banks.

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd, a Connecticut Democrat, said on Bloomberg Television’s “Political Capital with Al Hunt,” broadcast this weekend. “I’m concerned that we may end up having to do that, at least for a short time.”

Citigroup Inc. and Bank of America Corp., which received $90 billion in U.S. aid in four months, tumbled as much as 36 percent yesterday on concern the U.S. may take over the banks. The Obama administration in response said a “privately held” banking system is the “correct way to go.”

Dodd, a Connecticut Democrat, also said Treasury Secretary Timothy Geithner has “an awful lot of leeway” in interpreting how the executive compensation restrictions he wrote into the economic stimulus legislation will be applied for banks that take federal aid.

Dodd’s statement gives Geithner the flexibility to say the rules don’t apply to firms that participate in the public-private partnership Treasury announced Feb. 10 to buy banks’ toxic assets, but only to companies that get cash injections under the Troubled Asset Relief Program.

Treasury Questions

“That’s one the Treasury has to respond to,” Dodd said. “That’s the kind of question that really ought to be reserved for them.”

Dodd softened his Feb. 5 opposition to nationalizing U.S. banks, when he told reporters he didn’t think it was time for the government to take over Bank of America, which had fallen to the lowest level in New York trading since 1984.

A possible government takeover has gained support. Former Federal Reserve Chairman Alan Greenspan told the Financial Times this week that the U.S. may have to temporarily nationalize some banks until the industry is restructured. Republican Senator Lindsey Graham, a member of the Budget Committee, said on ABC’s “This Week” Feb. 15 he wouldn’t reject the idea of nationalizing the banks.

The Obama administration turned aside questions about a U.S. takeover of banks, saying a “privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” White House spokesman Robert Gibbs said yesterday at a briefing. “That’s been our belief for quite some time and we continue to have that.”

Frank, Kyl

Frank, a Massachusetts Democrat who heads the House panel that crafts banking legislation and often collaborates with Dodd, said he didn’t see the likelihood U.S. banks would be nationalized, and Geithner’s bank bailout plan should be given time to take effect.

“If that works, then we don’t have to go beyond it,” Frank said in a telephone interview yesterday.

Senator Jon Kyl, the second-ranking Republican and a member of the Finance Committee, agreed with Frank, saying nationalizing U.S. banks is “out of the question” and isn’t going to happen.

“I don’t think it’s something the market has to worry about,” Kyl, an Arizona Republican, said yesterday in a telephone interview, after Dodd spoke. “There are plenty of tools that we have short of that to deal with the crisis.”

Bank Shares Tumble

Citigroup tumbled 22 percent yesterday, to $1.95, the lowest in 18 years. Bank of America, the biggest bank by assets with $883 billion in deposits, recouped most of a 36 percent loss after Chief Executive Officer Kenneth Lewis said the bank can survive “on our own.” The KBW Bank Index of 26 companies fell for a sixth day, extending its decline this year to 51 percent.

Dodd said the executive-pay restrictions on banks that get TARP funds are necessary to draw taxpayer support for more government action.

“As long as they think their money is being squandered on bonuses or super salaries at a point like this, the job of getting people to support what we need to do is going to be that much more difficult,” Dodd said.

Dodd wrote a provision into the $787 billion stimulus bill that restricts bonuses for senior executives and the next top 20 employees at companies getting more than $500 million from the government rescue package. Limits on bonuses apply to other companies on a sliding scale based on how much aid they received.

Dodd said additional aid to the automobile industry should come from TARP, as there is “zero” tolerance in Congress to offer more funding for the government aid program.

General Motors Corp., the biggest U.S. carmaker, or Chrysler LLC could end up being forced into a merger, or a prepackaged bankruptcy filing, Dodd said. “I’m fearful it might turn into just a liquidation,” he said.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

To contact the editor responsible for this story: Alec D.B. McCabe at amccabe@bloomberg.net