The Administration Gets Tough?

And then , of course, just as I say the administration is probably going to play it safe until after the stress testing has finished they send out a stern warning. Here’s the New York Times story: Latest Plan Could Give U.S. a Voting Stake in Banks

So the nationalization saga continues. The cloud of dust hanging over the big banks is now so dense we won’t know what happens in there for a while.

Today’s statement, though, is blunt. The Treasury Department is laying down the nationalization marker with a vengeance. For the first time we have an official policy statement opening up the door for government equity stakes rather than the previous preferred stock option.

Is this just another move in the bluff-double-bluff game the administration is playing with the stock markets?

I have to think not. They seem to mean what they say.

So the banks have been forewarned: pass the stress test. Or …

Then again, the negotiations that are ongoing with Citibank are designed to avoid nationalization. They impose some strict terms on the bank including the ability to get very involved in management decision making. But this came at a price: the government gave up its dividend opportunity. Presumably this was to allow Citi to retain the extra cash as capital. Still, I think the taxpayers could do with an infusion of cash too, thank you.

So confusion abounds. Bank stocks rose because the market interpreted today’s activity as stepping back from the brink of nationalization. I think that’s wishful thinking. I still see the political downside of shoveling endless loads of cash into failed banks as a losing proposition, especially as the recession bites harder and the auto makers start to slash their workforces. Eventually nationalization will look easy when compared with all the alternatives, such as they are.

There’s a long way to go in this story. And if today is anything to go by, it will have more twists than an Oscar winner.