Backdoor Bank Nationalization?

JPMorgan announced last week it will not participate in PPIP. “We have no intent on using PPIP at all. We don’t need it. We have our own assets. If we want to sell them, we’ll sell them,” said CEO Jamie Dimon who does not believe toxic legacy assets are restricting credit. “We hear this endless chatter about it, but the banks who are in the business are lending … are lending pretty much as they did in the past,” he said.

This statement is one of many thoughts swirling around concerns of increased government activity in the financial sector. Sources inside Treasury said last week that the government may maintain control even if the bailouts are paid back. Already Morgan Stanley, Goldman Sachs, and Wells Fargo have talked about returning the bailout money on fears that Treasury or Congress will too tightly control their banking activities.

And there is also hope the market is turning around. Business Week cited Alois Pirker, an analyst for the Aite Group, as saying if JPMorgan holds on to the assets, it may be betting the economy will turn around and they will be worth more.

But Washington doesn’t seem to want to give up its control easily. MSNBC reported this morning that the Obama administration is considering acting on options it purchased to take common stock in the banks, giving it controlling ownership interest.

It could be the government is doing this in light of luke warm response to the PPIP toxic asset bailout program. Sung Won Sohn, an economics professor at the Smith School of Business at California State University, Channel Islands says “If JPMorgan is not going to participate, chances are that other large institutions won’t be participating either.” Some large banks want to get away from doing business with the government over fears they will be subject to too many restrictions now or in the future, Sohn said.

Ultimately, the Treasury and others remain concerned about the viability of the banks. Given the importance that confidence plays in the health of the financial markets, this is understandable. Moody’s chief economist Mark Zandi says, “As long as troubled assets are on banks’ books, it creates a great deal of uncertainty… The banks don’t know how much capital they will need and neither do potential investors in the banks.”

But this concern shouldn’t be cause for the government to get even more involved.