Federal Reserve Chairman Ben Bernanke said on Wednesday there was no plan to nationalize Citigroup, causing stocks on Wall Street to trim losses briefly.
"Nationalization to my mind is when the government seizes the bank, zeros out the shareholders and begins to manage and run the bank, and we don't plan anything like that," Bernanke said during his semi-annual testimony to Congress.
"It may be the case that the government will have a substantial minority share in Citi or other banks, but again we have the tools...make sure that we get the good results we want... without all the negative impact of going through a bankruptcy process of some kind of or seizure."
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Speculation that the government would be forced to nationalize some troubled financial institutions, including Citigroupand Bank of America , has weighed heavily on U.S. stocks in recent days.
"This debate over nationalization kind of misses the point," said Bernanke, adding that there were two parts to the government's rescue plan for the financial sectors.
These included ensuring stability and ability to lend, and using supervisory powers to make sure banks did not misuse the capital they received from the government and did not continue taking excessive risks, he said.
In the case of Citigroup, Bernanke said: "We'll see how their test works out and what evolves." The Fed chief was referring to new "stress tests" that regulators will start conducting on the biggest banks to judge whether they can hold up if the recession were to worsen.
The tests will help regulators decide whether the banks have sufficient capital—and the right mix of it—to withstand any additional shocks to the economy over the next two years.
The results will help regulators decide whether banks may need additional assistance so they can carry out the critical mission of boosting lending to customers, a key ingredient to the economic turnaround.
Bernanke told the House panel that if the stress test reveals that a bank needs more capital, it will have up to six months to raise it from private companies.
If it can't, then the government would provide assistance.
One option for help, laid out by the Obama administration Monday, would allow the government to sharply increase its stake in banks. It would be done by converting the government's stock in banks from preferred to common shares.
The strategy, which could be applied retroactively to banks that received money in the first incarnation of the bailout, would give the government voting shares and more say in a bank's operations.
Citigroup has been involved in talks with regulators over ways the government could help strengthen the New York-based bank, including use of the stock conversion plan.
Citigroup already has received $45 billion in bailout money, plus guarantees to cover losses on hundreds of billions of dollars in risky investments.
Bernanke also said that he had an exit strategy from the U.S. central bank's recent massive monetary expansion that will keep inflation under control as the economy recovers.
"We are quite confident that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences," Bernanke told the House Financial Services Committee as he delivered a second day of testimony on the Fed's monetary policy report.
Bernanke also said recent sharp declines in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals.
"The risk appetite of investors changes over time and right now the standard measures of the risk premium that investors are charging to hold stocks are at very high levels relative to anything we have seen in recent decades," Bernanke said in semi-annual testimony to Congress.
"The stock values reflect not so much the fundamentals, the long-term profitability of the economy, but they also reflect investor attitudes about risk and uncertainty which right now are at very high levels," he told lawmakers during questions.
U.S. stocks have fallen to 12-year lows this month, with the benchmark S&P 500 down about 15 percent and the Dow Jones industrial average off about 16 percent since the start of 2009.
Bernanke said that while the stock market was one of the important financial indicators, other key variables like credit markets were painting a different picture.
Bernanke attributed the rapid and sharp decline in stock prices to investors being "skittish about holding any risky assets and (who) have moved in a very substantial way toward the safest assets like Treasury securities."