A sharper outline for bank rescue plan

For President Obama and other federal officials, this has been a week of pushback against criticisms that their efforts to defuse the financial crisis are weak or unclear.

In a series of public appearances, they have sharpened their explanations of why they hope to avoid outright takeover of weak banks, why it is in the public interest to put more government money into those banks, and how to reshape regulations in the hopes of preventing a repeat of the current crisis.

In effect, four horsemen rode forth to persuade Americans and investors that a banking apocalypse is not at hand: Mr. Obama, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and Sheila Bair, chairman of the Federal Deposit Insurance Corp.

The communication offensive had a positive effect on bank stocks. On Thursday morning they were up by double-digit rates over where they stood last Friday after a punishing week.

Financial experts say the path through this banking crisis will not be easy or inexpensive, however, and nothing this week has changed that view. And despite the official avowals that banks should remain in private hands, it’s possible that something close to government ownership will occur at some large institutions.

“The US banking system as a whole is capital-impaired” and needs an infusion of money one way or another, says Brian Bethune, a financial economist at IHS Global Insight in Lexington, Mass. “If you don’t allay the … uncertainty then all that does is generate a speculative frenzy like we saw [in bank stocks] last week.”

Fed Chairman Bernanke, while independent from the Obama administration, offered the words that may have affected markets most strongly this week. He aligned himself with Mr. Geithner’s view that it is far better to assist banks, while leaving them in private hands, than to place them for a time under outright federal ownership.

“Call it a public-private partnership,” Mr. Bernanke told a Senate hearing. “It’s not nationalization, because the banks would not be wholly owned or probably not even majority owned by the government. The government will be a shareholder, along with private shareholders.”

Bernanke warned that if the government were to take over a major bank, the process of cleaning it up and moving it back into the private sector would not be cheap or quick.

The costs could be high, in part because the bank’s value as a franchise might be diminished as business migrated to rivals not under federal control, he said. He also countered the view, held by some economists, that the most troubled large banks are effectively insolvent.

“I think ‘zombie’ was not an appropriate description for any of the banks,” he replied to one questioner. “I think they all have substantial franchise value. They’re all lending. They’re all active.”

1 | 2

Next