"Rubin Sees ‘Serious Problems’ in Nationalizing Banks By Gregory Roth
From our colleagues at DealBook:
Barely two weeks after Robert E. Rubin stepped down as senior adviser to Citigroup’s board amid the bank’s disastrous credit losses, Mr. Rubin warned against increasingly loud calls for troubled banks to be nationalized.
“Nationalization as an alternative has some serious problems,” Mr. Rubin, a former Treasury secretary under President Clinton, said Tuesday night at a discussion sponsored by the 92nd Street Y in New York. “You certainly don’t want a bank’s lending practices subject to political pressure.”
Whether or not banks move closer to full nationalization, the government has already purchased large equity stakes in return for badly needed capital. At Citigroup, the government is the largest shareholder after having contributed $45 billion in new capital, along with $269 billion in guarantees for the bank’s portfolio of soured credit assets.
Mr. Rubin, 70, has come under criticism for failing to prevent Citigroup’s rapid decline. Once America’s largest financial institution, Citigroup has dwindled sharply in value. At one point valued at nearly $250 billion, Citigroup is now worth a mere $19 billion and has made plans to shed nearly one-fifth of its global work force of 375,000.
Two weeks ago, Citigroup reported a fourth-quarter loss of $8.29 billion, on top of a loss of $9.9 billion during the third quarter.
Seeking to rebut some of the criticism he has faced for pushing to repeal Glass-Steagall rules while Treasury secretary, Mr. Rubin said the rules would not have put a lid on the reckless risk-taking that led to the current economic mess.
“There is nothing that banks have done in this crisis that was not allowed under Glass-Steagall,” he said. “The reality is that none of the activities would have been prevented.”
Glass-Steagall was created during the Great Depression to separate investment banks from their retail bank counterparts. The lifting of Glass-Steagall rules in 1999 allowed banks like Citigroup to have a role in nearly every area of finance and to market themselves as financial “supermarkets.”
Not once in his speech did Mr. Rubin mention his recent tenure at Citigroup, where he worked for nearly 10 years.
Instead, he sought to emphasize his tenure as Treasury secretary, when he called for greater regulation of derivatives, urging lawmakers in the 1990s to increase capital and margin requirements. That effort failed to gain traction, Mr. Rubin said, because there was not a large appetite for such reforms at the time. But there is now, he said, owing to the current financial crisis, and he urged lawmakers to move swiftly in that direction.
A key adviser to President Obama during his presidential campaign, Mr. Rubin said the new president was focused on moving the economy out of recession. One key to achieving that, he said, would be to create a very large program to renegotiate the mortgages of troubled homeowners.
“Better consumer protections in the mortgage market will help institutions, too,” he said."
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“You certainly don’t want a bank’s lending practices subject to political pressure.”
Of course not. Much better to have government actions subject to lobbying by banks, which is what we have now. Is there no amount of money we won’t waste so that these banks can stay private?
Few people advocate having the government run banks in the long term, just long enough to weather this crisis. Leaving the banks and bankers currently on life support from the taxpayers in place will forever imprint on banker’s minds that big is better. We’ll have about as much chance of stopping banks getting enormous again as we did stopping North Korea from getting nuclear weapons. This has become Immoral Hazard.
— Don the libertarian Democrat