Nationalized Banks: Why They Might Work

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IndyMac will soon earn the first half of its name back. The government, which seized the failed bank last summer, is expected to close a deal in the next week that would return the California mortgage lender to private ownership. For IndyMac, the deal means independence in less than eight months. For the government, the IndyMac sale provides a shining example that takeovers can work at a time when the Obama administration may soon begin pushing for more nationalizations. (See 25 people to blame for the financial crisis.)

"The fact that the government ownership of IndyMac is coming to an end in just eight months is successful," says Kevin Stein, a former associate director of resolutions at the Federal Deposit Insurance Corporation and an investment banker at FBR Capital Markets. "Nationalization is a tool that has been used in the past and can be effective in the future in certain situations."

A how-to model for nationalizations could prove valuable in the months ahead. The government is in the process of stress testing the nation's largest banks as part of Treasury Secretary Timothy Geithner's plan to fix the ailing sector. And many think the outcome of those tests could lead to more takeovers. So far, Geithner and other officials have denied they are interested in running banks. But in the past few weeks, a number of prominent Republicans and fiscal conservatives, most notably former Federal Reserve Chairman Alan Greenspan and Senator Lindsey Graham, have joined those who think the government should consider nationalizing the most troubled institutions. Bank of America, Citigroup and Wells Fargo could all be candidates for increased government ownership and control.
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