Pros and Cons of Nationalization

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Includes: BAC, C
by: Saliq Khan

Bank nationalization has been one of the most popular topics in the financial industry recently. Many have argued for and against nationalization without having complete and accurate information. There are pros and cons to both sides and InvestmentHead has tried to show an unbiased depiction below.

What & Why?

Nationalization is the act of transferring ownership from the private sector to the public sector. It can occur through the transfer of company assets to the government or through the transfer of public shares, leaving the company to run the business under government control. The main fear with nationalization is that the government will seize control of the troubled institutions and run them how it sees fit, typically favoring the taxpayers and not the shareholders.

Current Situation

The government has taken an increasing number of shares in the troubled institutions, mainly banks, as the economic crisis has dragged on for over a year. Though this may have unforeseen consequences, the government has become one of the very few places for banks to obtain capital as private investors have taken their shares out and driven the stock market to near 12 year lows. For a firm to raise capital in the private sector when its stock is trading at very low prices is quite ineffective and improbable.

Pros

  • Possible upside for taxpayers.
  • Some institutions are unable manage their risks properly.
  • Government will provide more positive externalities.
  • Government will guarantee all deposits.
  • Access to loans with lower rates (no middleman to go through).
  • Rapid reorganization and write down of debts.

Cons

  • Costly for the government.
  • Wipes out common shareholders.
  • Closes door to private investors.
  • Drives stock markets down.
  • Nationalization of banks by other nations have proven to be unsuccessful.

Past State-Run Institutions in the United States

2008:

Federal Home Loan Mortgage Corporation

Federal National Mortgage Association

2001:

Transportation Security Administration (previously a private airport security was put under TSA)

1980’s:

Resolution Trust Corporation (seized control of hundreds of failed S&L)

1976:

Consolidated Rail Corporation (Conrail)

1971:

National Railroad Passenger Corporation (Amtrak)

1940’s (World War II):

Government took control of the pricing system of consumer goods

1933:

Tennessee Valley Authority

1917:

All U.S. railroads, but were made privatized after World War I