Financial Regulators Reiterate Faith in Failed Banks to Spend Well

Responding to the creeping notion that the government might be forced to swoop in and nationalize some of the country’s flailing banks, Washington’s financial regulators chimed in late Monday to proclaim their confidence in Wall Street’s financial titans to manage the current storm themselves. In a statement, the regulators maintained that the role of the Wall Street bailout — now dubbed the Capital Assistance Program – is to ensure the banks “have sufficient capital to perform their critical role in our financial system,” not to micro-manage their use of the funds.

The statement — issued by the Treasury Department, the Federal Insurance Deposit Corporation, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Federal Reserve — arrives as the government is reportedly on the verge of taking as much as a 40 percent stake in Citigroup. The struggling bank has already received $45 billion in direct funding under the $700 billion Wall Street bailout, as well as loan guarantees totaling more than $300 billion.

The news that banks are still hobbled despite Washington’s largesse has caused several lawmakers — notably Sens. Christopher Dodd (D-Conn.) and Chuck Schumer (D-N.Y.) — in recent days to float the idea of temporarily nationalizing the banks. Stock prices of those firms fell last week on the murmurings of a government takeover, creating even more urgency in the regulators to dispel the concept.

But with the banks charged with maximizing profits — not maximizing lending — many economists are beginning to question whether throwing more money into the troubled institutions will fix the economy. Instead, many experts say, a government-mandated restructuring would be the better route. “We’re pretending that a bank like Citi is solvent,” said Desmond Lachman, economist at the American Enterprise Institute. “It’s really a bust.”