The Treasury Department announced its purchase of a large share of Citibank yesterday, about 36% of common stock, and the best that can be said is this plan could be worse.
After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake to 36 percent, from 8 percent.
The chief executive, Vikram S. Pandit, will remain, but Citigroup will shake up its board so that it has a majority of new independent directors, a move that federal regulators had been pursuing. The announcement comes as the bank said its 2008 loss had spiraled to $27.7 billion, among the largest in corporate history. Under the deal, the Treasury Department agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock, giving taxpayers more risk, but more potential for profit if the company recovers.
The Treasury will convert its stake to the extent that Citigroup can persuade private investors, including several foreign government investment funds, to go along. Treasury will match the private investors’ conversions dollar for dollar, and do so at the most favorable price and terms offered to any other private investor.
The plan was intended to reassure the markets and stabilize Citigroup, but plenty of uncertainty remains. Each rescue has made Citigroup more financially sound, yet its shares — a crucial sign of confidence in the company — continue to tumble. Shares were down 36 percent, to $1.57, on Friday afternoon, and analysts worry that regulators are running out of options.
And yet there is an option, one unpalatable to American government and its people, seemingly for reasons of semantics, that is really the only chance for us to get out of this mess instead of prolonging the agony and wasting hundreds of billions if not trillions of dollars. David Leonhardt does a good job of defining the difference between the scary nationalization demonized as the work of hippies, and what most on the left are actually advocating.
There are really two different kinds of nationalization. The first draws on a belief that the government can run large enterprises more justly and efficiently than self-interested capitalists can. This is the nationalization of Lenin, Chávez and Mitterrand, and its record is pretty dismal. France’s economy staggered through the 1980s, as government-run banks backed political pet projects that didn’t work out.
The second version of nationalization is the one that today’s advocates point to. It is a temporary takeover born out of crisis. Sweden pursued this kind of strategy in the early 1990s to clean up its banking system. Even the United States has nationalized banks on occasion, including IndyMac Bank last year.
In these cases and others, the government had none of the grand ambitions that Mitterrand-style nationalizers had. The same would clearly be the case with a nationalization of banks today. “Nobody in their right mind wants the government to be in the banking business any longer than it needs to be,” said Adam Posen, an economist in Washington and a prominent voice for nationalization. Instead, the federal government would declare a bank insolvent, wipe out its existing shareholders, fire its top executives and inject enough money to keep it functioning. The government could then siphon off the worst assets into a so-called bad bank — pooling them with toxic assets from other nationalized banks — and resell the bank’s healthy parts to private investors. Once the crisis lifts, some of the toxic assets may even have value.
We can keep trying intricate schemes that involve giving more money to the same people who caused the crisis, or we can rip off the band-aid and go with what history reminds us is the only way to definitively solve the problem. I know what a pragmatist would do. With the economy in shambles and the shortfall of investment and consumer demand so great that more fiscal spending will almost certainly be needed, setting piles of money on fire is not the prudent course of action.