Bank bailouts: Loans, or long-term leases?

By Jennifer J. Foster

Stuart Varney had a column in The Wall Street Journal a couple of weeks ago wherein he charged that the reason the Obama Administration isn’t welcoming back with open arms the money the federal government loaned to banks to get them through the credit crisis is because Uncle Sam wants to control those banks, and holding those billions over their collective heads is the best way to do it.

A Sunday piece from the Financial Times appeared to lend credence to Varney’s argument:

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bail-out funds.

And then there was this, from Reuters:

Obama administration officials have determined they can avoid asking Congress for more bank bailout funds by converting existing loans to the largest U.S. banks into common stock, The New York Times reported on Sunday.

President Barack Obama’s top economic advisers now say such a conversion would let them stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, the paper said, citing administration officials it did not identify.

Converting the loans to the 19 biggest U.S. banks into common shares would turn the government aid into available capital and give the government a large equity stake in return, the newspaper said.

Equity shares? Isn’t that code for ownership?

Meanwhile, Treasury Secretary Tim Geithner is testifying today before the Congressional Oversight Panel set up within the bailout package to answer charges from a watchdog agency that warned Obama administration initiatives could increasingly expose taxpayers to losses and make the government more vulnerable to fraud.

According to Fox News, Geithner said the plan “‘strikes the right balance’ by letting taxpayers share the risk with the private sector while at the same time letting private industry use competition to set market prices for the assets.“

For his part, the president is maintaining his middle-of-the-road rhetoric, pressing the pragmatic approach and eschewing the sweeping, philosophical language that typified his campaign for the White House.

President Obama could put an end to all this speculation about whether his endgame is broader government control of the financial sector by stating in the plainest language possible that—well, that it isn’t. He should come forward with an unequivocal statement that it is his goal to return the banks to private control, that this bailout arrangement is a short-term fix and that he has no intention of taking ownership of those banks over the long term.

Such a statement wouldn’t hamstring the president from pushing for and implementing greater oversight functions and accountability standards throughout the financial sector. After last fall’s collapse, it would be folly to go on without them.

The question is, will the president provide that concrete assurance to lawmakers, investors and taxpayers as a whole?

Of course, I’m assuming a return to private-sector ownership is the president’s endgame—and maybe Obama’s reluctance to provide that clear statement is the most compelling evidence yet for Varney’s argument.