Feb. 25 (Bloomberg) -- The nationalization debate is a smoke screen. We’ve already nationalized the big banks. Let’s just accept it and move on.

Once that happens, the government can give investors clarity on whether nationalization will do more than dilute shareholders’ common stock. It can stop wasting time trying to fashion support mechanisms that don’t give the appearance of ownership. And it can get about the business of forcing weak banks into the hands of the strong, or the Federal Deposit Insurance Corp.

Instead, the government is trying to craft a plan that “uses nationalization to prevent nationalization,” according to a research note Tuesday from Christopher Low, chief economist at FTN Financial. In other words, the government, if it has to take common equity in banks, wants to avoid owning more than 50 percent so it can sidestep claims of nationalization.

In the meantime, officials try to bluff their way past the issue. During congressional testimony Tuesday, Federal Reserve Chairman Ben Bernanke said there was no rush toward nationalization. Senate Majority Leader Harry Reid struck a similar note when asked about nationalization in an interview with Bloomberg television Monday, saying there is “no need to even talk about it. It’s not necessary.”

Reid’s remarks followed comments Friday by Senate Banking Committee Chairman Christopher Dodd that short-term nationalization was in fact a possibility. On Tuesday, Dodd said his remarks should have been “better thought out.”

Agonizing Analysis

No wonder investors are confused and fleeing markets. Fundamental analysis of banks is now nearly impossible; it is all down to government whim. Investors may as well read chicken entrails to divine prospects for bank stocks.

The nationalization chatter also ignores one of the hard lessons banks learned during the financial crisis: even if you make it look like you don’t own an off-balance-sheet vehicle, it can still be your problem.

The key issue with these types of vehicles -- as Citigroup Inc. discovered with one form, known as structured investment vehicles, or SIVs -- isn’t whether you technically own them. It is whether you control them, or are on the hook when things go wrong.

That is certainly the case today for the government and banks like Citi, Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., which are now Uncle Sam’s own off-balance- sheet vehicles.

Government Ownership

The government has guaranteed debt issued by the banks, agreed to absorb losses of some of their toxic assets and taken ownership stakes through preferred stock in exchange for emergency cash.

The government drew another line under the big banks Monday with a statement from bank regulators, the Treasury Department and the Federal Reserve. “We reiterate our determination to preserve the viability of systemically important financial institutions,” the government said.

In other words, it will not let the Big Four fail. If that’s the case, the government is certainly in the driver’s seat. And as new accounting rules under consideration for off- balance-sheet vehicles make clear, if you control it, it’s yours.

That is why the government, even if it continues to side- step ownership tests, has already nationalized the banks. Semantic contortions designed to ignore this are a waste of time.

Reading Tea Leaves

Even worse, they fail to clear the air about nationalization and its implications for markets. Right now, investors can only assume the worst about nationalization -- it will toast all debt and equity and allow government bureaucrats to swarm the banks like Mao’s revolutionary guards.

So investors are forced to ponder every word in government communiqués, much as analysts once did with utterances from the Kremlin, or still do with the Federal Reserve. A case in point: Monday’s statement of support from regulators.

In a research note, analysts at research firm CreditSights were forced to contemplate the meaning of the word “commitments” as it was used in the statement.

“On one hand, the word ‘commitments’ could mean that the government wants to ensure these banks are able to continue making new loans and provide credit to the economy,” the report said. “On the other hand, a more optimistic interpretation of this statement could be that the government would support these institutions to meet all of their commitments, including debt obligations such as interest payments and principal and preferred dividends.”

Needing an Antidote

No wonder investors are feeling frustrated. The antidote is to make clear what nationalization actually entails. Only then can investors make rational decisions about what bank securities they want to buy and sell.

That will give banks, and markets, a chance to find their feet. Make no mistake, bringing about such bank stability won’t end the financial crisis. It is needed, though, before the government can deal with deeper problems in housing, credit markets and banks themselves.

To get it, the government needs to be honest about nationalization.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

Last Updated: February 25, 2009 00:01 EST