[corp-focus] Public Ownership -- But No Public Control

[robert weissman]

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Public Ownership -- But No Public Control
By Robert Weissman
October 14, 2008

It is an extraordinary time. On Friday, the Washington Post ran a 
front-page story titled, "The End of American Capitalism?" Today, the 
banner headline is, "U.S. Forces Nine Major Banks to Accept Partial 
Nationalization."

There's no question that this morning's announcement from the Treasury 
Department, Federal Reserve and Federal Deposit Insurance Corporation 
(FDIC) is remarkable.

It was also necessary.

Over the next several months, we're going to see a lot more moves like 
this. Government interventions in the economy that seemed unfathomable a 
few months ago are going to become the norm, as it quickly becomes 
apparent that, as Margaret Thatcher once said in a very different 
context, there is no alternative.

That's because the U.S. and global economic problems are deep and 
pervasive. The American worker may be strong, as John McCain would have 
it, but the "fundamentals" of the U.S. and world economy are not. The 
underlying problem is a deflating U.S. housing market that still has 
much more to go. And underlying that problem are the intertwined 
problems of U.S. consumer over-reliance on debt, national and global 
wealth inequality of historic proportions, and massive global trade 
imbalances.

Although it was enabled by deregulation, the financial meltdown merely 
reflects these more profound underlying problems. It is, one might say, 
"derivative."

Nonetheless, the financial crisis was -- and conceivably still might be 
-- by itself enough to crash the global economy.

Today, following the lead of the Great Britain, the United States has 
announced what has emerged as the consensus favored financial proposal 
among economists of diverse political ideologies. The United States will 
buy $250 billion in new shares in banks (the so-called "equity 
injection"). This is aimed at boosting confidence in the banks, and 
giving them new capital to loan. The new equity will enable them to loan 
roughly 10 times more than would the Treasury's earlier (and still 
developing) plan to buy up troubled assets. The FDIC will offer new 
insurance programs for bank small business and other bank deposits, to 
stem bank runs. The FDIC will provide new, temporary insurance for 
interbank loans, intended to overcome the crisis of confidence between 
banks. And, the Federal Reserve will if necessary purchase commercial 
paper from business -- the 3-month loans they use to finance day-to-day 
operations. This move is intended to overcome the unwillingness of money 
market funds and others to extend credit.

But while aggressive by the standards of two months ago, the most 
high-profile of these moves -- government acquisition of shares in the 
private banking system -- is a strange kind of "partial 
nationalization," if it should be called that at all.

Treasury Secretary Henry Paulson effectively compelled the leading U.S. 
banks to accept participation in the program. And, at first blush, he 
may have done an OK job of protecting taxpayer monetary interests. The 
U.S. government will buy preferred shares in the banks, paying a 5 
percent dividend for the first three years, and 9 percent thereafter. 
The government also obtains warrants, giving it the right to purchase 
shares in the future, if the banks' share price increase.

But the Treasury proposal specifies that the government shares in the 
banks will be non-voting. And there appear to be only the most minimal 
requirements imposed on participating banks.

So, the government may be obtaining a modest ownership stake in the 
banks, but no control over their operations.

In keeping with the terms of the $700 billion bailout legislation, under 
which the bank share purchase plan is being carried out, the Treasury 
Department has announced guidelines for executive compensation for 
participating banks. These are laughable. The most important rule 
prohibits incentive compensation arrangements that "encourage 
unnecessary and excessive risks that threaten the value of the financial 
institution." Gosh, do we need to throw $250 billion at the banks to 
persuade executives not to adopt incentive schemes that threaten their 
own institutions?

The banks reportedly will not be able to increase dividends, but will be 
able to maintain them at current levels. Really? The banks are bleeding 
hundreds of billions of dollars -- with more to come -- and they are 
taking money out to pay shareholders? The banks are not obligated to 
lend with the money they are getting. The banks are not obligated to 
re-negotiate mortgage terms with borrowers -- even though a staggering 
one in six homeowners owe more than the value of their homes.

"The government's role will be limited and temporary," President Bush 
said in announcing today's package. "These measures are not intended to 
take over the free market, but to preserve it."

But it makes no sense to talk about the free market in such 
circumstances. And these measures are almost certain to be followed by 
more in the financial sector -- not to mention the rest of economy -- 
because the banks still have huge and growing losses for which they have 
not accounted.

If the U.S. and other governments are to take expanded roles in the 
world economy -- as they must, and will -- then the public must demand 
something more than efforts to preserve the current system. The current 
system brought on the financial meltdown and the worsening global 
recession. As the government intervenes in the economy on behalf of the 
public, it must reshape economic institutions to advance broad public 
objectives, not the parochial concerns of the Wall Street and corporate 
elite.


Robert Weissman is editor of the Washington, D.C.-based Multinational 
Monitor, <http://www.multinationalmonitor.org> and director of Essential 
Action <http://www.essentialaction.org>.

(c) Robert Weissman

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