Ross: Nationalizing Banks Is a Slippery Slope

Nationalizing banks is a slippery slope which won't do the mired down economy any good, says Wilbur Ross, chairman and CEO of WL Ross & Co.

Ross told CNBC on Wednesday that while beneficial ownership of financial institutions is appropriate for governments, being in charge of banks is not. His reason? America is becoming too dependent on government loans, which puts the Federal Deposit Insurance Corporation (FDIC) at risk.

“Now if you also make the big commercial banks government-owned, it will be that the government is the only place where you can get a loan and if you nationalize a few government banks, why would a big depositor deposit his money anywhere but a government bank? Remember we have a limit on the FDIC insurance and it's not a huge limit.”

Ross is also not convinced that governments should have complete control over banks because it means business and politics have to be mixed, and this is never a good idea.

Giving the example of the multi-billion dollar government bailout of Citigroup, Ross says government control of the financial institution hinders its business activity overseas.

Citigroup is a major international institution and there is a concern that business transactions outside of the U.S. will be influenced by political interest.

“How does Citibank do a lot of business with foreign governments if its controlled by the U.S. government? And do it free of political interest?  Does it really make any sense to potentially have the U.S. state department running Citibank?  I don't think that's the right thing to do from a public policy point of view."

So far, Ross says the U.S. government has been fairly scrupulous about avoiding governance but cautions there are huge, negative implications to actual nationalization. He adds that board control and management control are the bright line difference between economic ownership and governance.

And what of the risk of banks becoming “walking zombies” without government aid?

“They are also walking zombies under government control. So I don't think you're freed from being a zombie just because you're controlled by the government.”

© 2011 CNBC.com