The Bush legacy: A nationalized banking sector

No Democratic administration would ever dream of achieving what has transpired under the Republicans: Government ownership of Wall Street.

By Andrew Leonard

Published January 16, 2009 3:17PM (EST)

From the Federal Reserve's official statement announcing the latest bailout news; an additional $20 billion in Troubled Assets Relief Program (TARP) funds and guarantees against a potential $118 billion in losses for the Bank of America, which is finding its purchase of Merrill Lynch rather indigestible:

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

Barry Ritholtz at the Big Picture sees things a bit differently.

Why do we give billions of taxpayer dollars to incompetent managers who failed to protect their assets, who destroyed shareholder value? These people have demonstrated a marked INABILITY to run these firms. Why reward them with 10s of billions of dollars?

It's nothing short of madness...

Ritholtz believes the only answer for Citigroup and Bank of America is an orderly liquidation. Other commentators not normally associated with raving socialist revolutionary rhetoric have declared that the time for nationalizing both banks is now. Why either Ken Lewis, BofA's CEO, or Vikram Pandit, Citigroup's chief executive, still have their jobs is hard to fathom.

They certainly aren't likely to have them much longer. Because one of the most astonishing aspects of this ongoing drama is that, with five days still to go before a Democratic president takes office, a quasi-nationalization of the two biggest financial institutions in the United States is already in effect. The Financial Times observes that, in exchange for its infusions of capital, "the government already owns the rights to become Citi's largest shareholder through warrants to buy a 7.8 per cent stake in the bank." The same is rapidly becoming true for Bank of America.

Edmund Andrews at the New York Times lands a great quote:

"We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "We are going to go back to a time when the government controlled the banking system."

The Bush administration, with former Goldman Sachs CEO Hank Paulson leading the way on economic policy, has been ideologically opposed to exerting direct control over the banking sector, and has done everything possible to shore up failing financial institutions without requiring onerous conditions or outright telling them what to do. Barack Obama and his economic team are hardly Marxists, but it's hard to imagine that they won't be a bit more inclined to use their leverage with the banks, attained for them by a Republican administration, to establish some new ground rules for how the game is played on Wall Street.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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