In a major change of course, Obama administration officials are saying they don’t have to ask Congress to add money to the Bush administration’s bank bailout and that they can convert the government’s existing loans into common stock. Although the move would turn federal bailout money already handed out into available capital for the banks, it would give the government a major ownership stake in the nation’s largest 19 banks.
Some Republicans are already complaining that the move will make the government the largest shareholder in several banks and that it is really just a back door to nationalization. Others are saying the administration is making the move because it is unwilling to ask Congress for more money when mass opposition to bank bailouts is so high.
In the next few weeks federal bank regulators will finish the so-called stress tests they are conducting on the nation’s largest 19 banks. Several major banks, including Bank of America, are expected to fail those tests with results showing that they need billions. Under the administration’s new approach the “stress” would be relieved, not by pumping in more federal tax dollars, but by changing existing loans to common stock.
Rahm Emanuel, the White House chief of staff, said, on a television news program Sunday, that the government had enough money to shore up the banks without asking Congress for any additional money. He did not elaborate further. The shift in administration strategy announced today clarifies his statement.
The 19 big banks have received more than $140 billion from the government, and all of that has been in exchange for nonvoting preferred shares that pay an annual interest rate of 5 percent.
The Obama administration already decided in January in its deal with Citibank what it is now prepared to do with more of the big 19 banks. The Citibank deal would convert $25 billion of preferred stock, in effect, a loan, into common stock, which represents equity for taxpayers.
After doing this, the government would hold 36 percent of Citigroup’s common shares, making it the largest shareholder and bringing it close to having nationalized a major bank.
If the common stock deal is done with all the other large banks that don’t perform well on the stress tests, the government could end up with the controlling interest in several major banks.
Republicans can’t be happy about the Obama administration’s apparent ability to gain so much political space on this issue. Some Republicans could hardly conceal their glee over what they expected would be a tough struggle for the administration in Congress, where Democratic leaders had warned that they would not be able to muster votes in support of more bailout money for financial institutions that had precipitated the economic crisis.
The Republicans are even less happy that there appears to be more support for steps that go in the direction of nationalization than there is for either the approach of more tax cuts for big business or for the approach, as some Republicans have advocated, of doing nothing about the economic and financial crises.
The labor movement has been, since the AFL-CIO’s January executive council meeting in Miami, calling upon the Obama administration to get some control over the institutions bailed out by taxpayers with measures up to and including nationalization.
If anything, labor can be expected to continue “upping the ante” by putting forward additional bold solutions for the nation’s economic problems. Author and economist William Greider, speaking to a crowd of 200 at the AFL-CIO headquarters in Washington D.C. April 17, said “It’s time for labor to dream bigger dreams” and that “our current economic crisis runs deeper than just the financial meltdown.” He urged workers and their unions to “jump into the discussion of the nation’s future in a large way. It is time for the union movement to lay down the markers and tell Congress, including the Democrats and the White House, that when they meet the marks, we are with them and when they won’t, we can’t support them. The ongoing economic meltdown demonstrates what working people have been saying for years – an economy built on what’s good for Big Business is not good for the country as a whole.”
AFL-CIO Executive Vice President Arlene Holt Baker, in her introduction of Greider, quoted from one of his books: “Our problem was made in America, not in foreign nations…defending society means not being willing to throw people over the side. Profit making is important, but it should not trump society.”
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