Federal Reserve Chairman Ben S. Bernanke on Tuesday defended the Obama administration's bank plan, saying it would not lead to nationalization of some of the largest U.S. banks because the government does not intend to take ownership of the banks as it pumps money into them.
"Call it a public-private partnership. It's not nationalization, because the banks would not be wholly owned or probably not even majority owned by the government," he told the Senate Banking Committee. "The government will be a shareholder, along with private shareholders."
Stock investors took heart and major indexes rebounded from 12-year lows on Mr. Bernanke's defense of the administration's plan. The Dow Jones Industrial Average soared 236 points and bank stocks jumped 10 percent as taut nerves on Wall Street were soothed by Mr. Bernanke's assurances that the government would only gradually acquire ownership of some major banks if deepening losses force them to shore up their capital with government acquisitions of stock.
Mr. Bernanke also defended Citigroup and Bank of America - the two banks considered most likely to be taken over by the government - against charges that they have become "zombie" banks because the heavy loads of bad loans they are carrying have essentially rendered them insolvent.
"I think 'zombie' was not an appropriate description for any of the banks. I think they all have substantial franchise value. They're all lending. They're all active. They have substantial international franchises."
Mr. Bernanke said one of the goals of the Treasury's bank program is to ensure the banks don't lose their franchise value, and that is why the government will not attempt to take complete control of them.
Still, Mr. Bernanke said the Treasury will impose "tough" conditions on the bank with the goal of returning them to financial health so that they will attract private investors once again.
Mr. Bernanke stressed that the bank recapitalization program must succeed if the United States is to enjoy a recovery from "severe" recession this year. He said he expects the economy will only start to grow again once stability is achieved in both the banking system and in devastated credit markets.
"If we don´t stabilize the financial system, we´re going to founder for some time" and the recession could continue into next year, he said. The Fed chairman added that the $300 billion the government already has spent recapitalizing banks probably prevented an even worse financial crisis.
"If we hadn't had the [bank bailout] money in October, we would have had a global banking crisis. Many, many banks would have failed, and the results would have been extremely bad."
Sen. Richard C. Shelby, Alabama Republican and ranking minority member of the committee, questioned whether the government shouldn't be closing down troubled big banks rather than trying to prop them up. He noted that private investors are refusing to put money in them out of fear the banks won't survive.
But Mr. Bernanke said the spectacular collapse of Lehman Brothers and AIG last fall showed that allowing such large, interconnected institutions to fail can cause severe damage to the financial system.
He added that Congress has not devised legal procedures for closing down a large institution that is not just a bank but has many appendages such as brokerages, insurance companies and investment houses.