090201: Dodd: Short-Term Bank Takeovers May Be Necessary

(Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for "a short time" to help lenders such as Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years.

"I don't welcome that at all, but I could see how it's possible it may happen," Dodd said today on Bloomberg Television's "Political Capital with Al Hunt" to be broadcast this weekend. "I'm concerned that we may end up having to do that, at least for a short time."

Bank of America and Citigroup, which received $90 billion in U.S. aid in four months, tumbled as much as 36 percent today on concern they may be nationalized. The Obama administration today said a "privately held" banking system is the "correct way to go" and House Financial Services Committee Chairman Barney Frank said nationalization ought "to be avoided."

Dodd, a Connecticut Democrat, also said Treasury Secretary Timothy Geithner has "an awful lot of leeway" in interpreting how the executive compensation restrictions he wrote into the economic stimulus legislation will be applied for banks that take federal aid.

Dodd's statement gives Geithner the flexibility to say the rules don't apply to firms that participate in the public-private partnership Treasury announced Feb. 10 to buy banks' toxic assets, but only to companies that get cash injections under the Troubled Asset Relief Program.

Treasury Questions

"That's one the Treasury has to respond to," Dodd said. "That's the kind of question that really ought to be reserved for them."

Compensation consultants including Alan Johnson, founder of Johnson Associates Inc. in New York, have said the rules may be "catastrophic" to Wall Street's talent base.

"I'm sort of stunned in a way that some people are reacting the way they are about all of this," Dodd said. "At a time like this, everyone needs to pull in the same direction."

Dodd said additional aid to the automobile industry should come from funds already allocated from TARP, as there is "zero" tolerance in Congress to offer more funding for the government aid program.

General Motors Corp., the biggest U.S. carmaker, or Chrysler LLC could end up being forced into a merger, or a prepackaged bankruptcy filing, Dodd said. "I'm fearful it might turn into just a liquidation," he said.

Dodd softened his Feb. 5 position on nationalizing U.S. banks, when he told reporters he didn't think it was time to nationalize Bank of America, which had fallen to the lowest level in New York trading since 1984.

Nationalization

Former Federal Reserve Chairman Alan Greenspan told the Financial Times in an interview this week that the U.S. may have to temporarily nationalize some U.S. banks until the industry is restructured.

The Obama administration turned aside questions about a U.S. takeover of banks, saying a "privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," White House spokesman Robert Gibbs said today at a briefing. "That's been our belief for quite some time and we continue to have that."

Frank, a Massachusetts Democrat who heads the panel that crafts banking legislation, said he didn't see the likelihood of U.S. banks being nationalized, and Geithner's bank bailout plan unveiled this month should be given time to take effect.

"If that works, then we don't have to go beyond it," Frank said in a telephone interview today.

'Out Of The Question'

Senator Jon Kyl, the second-ranking Republican and a member of the Finance Committee, agreed with Frank, saying nationalizing U.S. banks is "out of the question" and isn't going to happen.

"I don't think it's something the market has to worry about," Kyl, an Arizona Republican, said today in a telephone interview, after Dodd spoke. "There are plenty of tools that we have short of that to deal with the crisis."

The banking industry said speculation about government intervention was hurting investors and eroding consumer confidence in banks.

"We believe that the whole discussion about nationalization is impairing the financial sector and making the credit situation worse," Edward Yingling, president and chief executive officer of the American Bankers Association, a Washington-based industry group, said in a statement.

Citigroup tumbled 22 percent, to $1.95, the lowest since Jan. 29, 1991. Bank of America, the biggest bank by assets with $883 billion in deposits, plunged as much as 36 percent before recouping most of the drop after Chief Executive Officer Kenneth Lewis said the bank can survive the recession "on our own." The KBW Bank Index of 26 companies fell for a sixth straight day, extending its decline to 51 percent so far this year.

Pay Restrictions

Dodd said the executive-pay restrictions on banks that get TARP funds are necessary to draw taxpayer support for more government action.

"As long as they think their money is being squandered on bonuses or super salaries at a point like this, the job of getting people to support what we need to do is going to be that much more difficult," Dodd said.

Dodd wrote a provision into the $787 billion stimulus bill that restricts bonuses for senior executives and the next top 20 employees at companies getting more than $500 million from the government rescue package. Limits on bonuses apply to other companies on a sliding scale based on how much aid they received.

Obama and Geithner this month announced the government will require firms getting "exceptional" assistance in the future to cap salary for top officials at $500,000 a year.

SEC Chairman

Dodd expressed confidence in new Securities and Exchange Commission Chairman Mary Schapiro, saying "she's already been aggressive about getting the enforcement division of the SEC up and running to do their job." Schapiro this week named Robert Khuzami, a former prosecutor of white-collar criminals and general counsel at Deutsche Bank AG in the Americas, to be enforcement chief.

Congress has to "immediately" begin considering revamping U.S. financial regulation, Dodd said, adding that there are too many oversight agencies.

"We need to have a far more consolidated effort with a lot more authority and power in a supervisory function if we're going to restore the confidence and credibility that are going to be critical," Dodd said.

Dodd endorsed the $275 billion housing plan Obama unveiled this week, which is aimed at keeping as many as 9 million borrowers from losing their homes. He acknowledged the "moral hazard" of helping borrowers who made bad decisions, and said relief is needed because foreclosures drive down home values in neighborhoods.

Obama's plan includes $75 billion for financial incentives to the industry and interest rate subsidies to cut monthly loan payments and make them more affordable for struggling homeowners. It also expands the role of government-run mortgage giants Fannie Mae and Freddie Mac to keep mortgage rates low and refinance loans when the owner owes more than 80 percent of the home's value.

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