Friday, February 27, 2009

Government to Take Bigger Stake in Citigroup

Citigroup announced this morning that the government will soon own up to 36% of its shares. This plan will not cost any more money; instead, Citigroup will repay up to $25 million of the $45 billion in government bailout in exchange for ownership stock. Even though this plan is probably necessary for restoring confidence in the banking system, it seems a little too close to nationalization.

6 comments:

Stephen Okin said...

Can someone please explain to me why nationalization is a bad thing is this instance? We need these banks to start lending again, but they have yet to do so even with the billions of dollars in bailout money. I say cut out the middle man for now and let the government take control of the banks and lend directly to the people. Once the economy gets back on track, give the bank back to the shareholders.

mlondon said...

To add on to this, the government has nationalized banks since the FDIC was first implemented. The whole point of the FDIC is to nationalize a bank when it is no longer solvent. The government has a lot of experience taking over these banks, and dealing with the mess.

Chris R said...

I can understand what your saying but isn't there then question must then arise as to when the government would turn the banks back over to shareholders. What the government calls a sound economy is very different from what the private sector would view it as. This is a similar situation to the Fed using 13.3 to lend out money to make secured loans to individuals, partnerships or corporations in unusual and exigent circumstances, additionally when the borrower is unable to secure adequate credit from institutions. The Fed claims 13.3 will, as they are required by law, be "wound down" when the financial situation improves. I don't think we can trust the government to nationalize in the short-term without thinking about the long term ramifications/ impact on our financial markets.

Katie Donlevie said...

I agree with Chris. While nationalization may be what we need in the short term, we can't forget the long run. Without a detailed plan for the government handing its shares back over to the banks, it's likely that the process will drag on long after the banks are stable again. A centralized banking system rings a little too true to the Soviet system to me, and I think that most of the public is against centralizing banks on a long-term basis.

Stephen Okin said...

People do not eat in the long run. In the long run we are all dead.

Charlie Ruff said...

Can you imagine the government making loans? The bureaucracy? The potential for corruption? Not only would nationalized banks suck but the process of nationalization would destroy the financial markets.

If the US government did nationalize banks, their goal would be to add stability to the market. Unfortunately, it is not as simple as the government just running the banks and handing out loans. If the US government nationalized banks, equity and junior debt would both be wiped out.

This means that if you hold Citigroup bonds or stocks, they will be worth $0. This would spark further sell-offs, thus exacerbating the problem of scarce capital in the markets.

In addition, the bailout to consumer loans process is not that simple. The government is struggling to fortify these banks with capital while playing a passive role. Lending has not returned to pre-crisis levels for good reason: the previous amount of lending was unsustainable.