Nationalization via Regulation

The Times published an article about how Bank credit decisions are hurting some businesses. In between the lines is who is making the decision:

...until recently, banks had largely chosen to keep past-due borrowers afloat, in the hope that a housing recovery might pave the way for them to repay their debts in full.

Only now, with the economic outlook darkening, are lenders stepping up foreclosures of troubled loans. Zelman & Associates, a housing analysis firm, estimates that losses on land and construction loans could eventually reach $165 billion, one reason federal regulators are pushing banks to come to grips with the problem.

“When we talk to regulators now, they say they’ve lost patience,” said Ms. Zelman, who is chief executive of Zelman & Associates.

There may be times and places where the regulator-as-coach is more appropriate then the regulator-as-referee, and the current crisis may well be one of them. On the other hand, this approach to financial service regulation well pre-dates the current crisis. It is also worth recognizing that the regulator-as-coach, more or less, amounts to nationalization.

On a related note, [Richard] Parsons to become chairman at Citigroup.

Citigroup's board has been the target of much scrutiny among investors for allowing the bank to invest so heavily in the risky housing market.
As that criticism escalated over the past several weeks, so did speculation that Parsons - one of the only directors with experience in both banking and leading a large company - would become chairman.

Before helping negotiate Time Warner's merger with America Online in 2000 and serving as the new company's CEO and chairman, Parsons was chief executive and chairman of Dime Bancorp, a thrift bank, in the early 1990s.

Parsons was also an economic adviser on President Barack Obama's transition team.

As the AOL merge was disastrous for Time Warner, Parson's service to President Obama, as opposed to his private sector accomplishments, likely drove this choice.