Just when you thought it was safe to stop worrying about the banks along comes the Obama administration to puncture your balloon. Two reports tonight — one from the FT and the other from the NYT — should have the blogosphere and MSM buzzing tomorrow.

First, the FT reports that the administration is philosophically in favor of permitting banks to pay back their TARP money but …

The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.

The official said former Treasury Secretary Hank Paulson was right to treat all the banks the same way in late 2008 at the peak of the crisis but it was now necessary to differentiate more between institutions. Stronger ones should be encouraged to raise more capital, while the government would target its interventions to support weaker ones.

“What we want is for the differentiation to be more based on knowledge rather than some big uncertainty.” He said the bank stress tests reaching completion would provide that basic information.

The official quoted here is the infamous “senior administration official.” The Cliff Notes version of this government speak is eat your heart out Goldman, we don’t want your stinkin’ money back right now. 

If you parse the statement, it’s total BS. They want to make sure the system is stable. What, after assuring everyone that things are under control? They don’t want to encourage deleveraging. I thought that was the problem we wanted to solve. We need enough credit to support the recovery. They are trying to give away money via the TALF and can’t get any takers. Guys, the problem isn’t a dearth of credit it’s a lack of demand for credit. Deal with it!

So here comes the kicker. Earlier today I put up a post that featured the noted administration economist Rahm Emanuel avowing that the administration had no intention of nationalizing banks. Here is what he said:

The Obama administration thinks it can avoid nationalizing U.S. banks that are currently under scrutiny to see how well they would fare if the recession were worse than expected, the White House said on Sunday.

“I think we will be able to avoid that,” White House Chief of Staff Rahm Emanuel said on ABC’s “This Week with George Stephanopoulos.” He added that bank nationalization was “not the goal” of the administration.

Well, that’s kind of true depending upon how you define nationalization. It seems, according to the NYT, that this is kind of in the realm of what “the meaning of is is.” Evidently, the administration has been told by the Congress it controls that they shouldn’t even think about asking for more bailout money. So the solution of the day is to, when necessary of course, convert TARP assistance to common equity and use the remaining money to invest in the equity of distressed institutions. 

What that amounts to is de facto or de jure control of the banks that it decides to assist. Naturally, attendant to that control is the ability to control the activities of the institution, what kind of loans it makes, compensation policies, trading activities, balancing the interests of tax payers against the other shareholders … you fill in the rest.

It also means that resolution of the banks’ problems can’t occur since in the case of a bank that is insolvent and in which the government owns a major slice of the equity, resolution would entail wiping out the interest of the government.  This is how you create Zombie banks.

If all of this reporting is on the money, we’re looking at the effective nationalization of the financial system. Whether it’s outright control through TARP or simply control through TARP restrictions, the result is still the same. The federal government controls finance in this country. The takeover whether intended or not will be complete. Whether it ends is a story still to be told.

If you read this blog at all, you may have noticed that I usually include a small picture depicting a train wreck with posts about this subject. Tonight I’ve decided to put the picture up full size. This is the real train wreck. Let’s hope that all of these articles are wrong!