Would the U.S. Government Actually Nationalize Citi?

By Miranda Marquit

February 23rd, 2009

The more we find out about the state of our financial and banking system, the darker things look. And what we’ve been finding out about banking giants and major mortgage lenders has been that they are nowhere near as solvent as we have been thinking. It doesn’t seem as though the trillions already used to prop up the banking system have been working, and yet the government is prepared to spend more — trillions more — if possible.

Indeed, earlier today several government agencies joined forces to issue a statement about the government’s commitment to our banking system. Once again, the government has reaffirmed that it is prepared to do whatever is necessary to buoy up our banking system — even at the risk of turning some banks into the same sort of “zombies” that populated Japan during the “lost decade” of economic stagnation.

Is nationalization an option?

It does appear that nationalization may be an option. Not the sort of nationalization that conjures up images of socialism, but rather the type of nationalization that has the U.S. government owning a significant (or even controlling) stake in some of the banks. Indeed, rumors are circulating that Citi and Bank of America are prime candidates for just that sort of nationalization. Both are on the verge of collapse, and both have been begging the government for assistance.

If the government could buy up some shares of stock, it could help things: Banks would be capitalized and the government would own some potentially valuable stock. And, if the government manages a controlling stake, it could tell the banks how to restructure. But, there are also pitfalls as well, since government control also has the potential to make things worse than they already are.

Bank stocks rallied initially on the news, bringing optimism to the stock market. That has faded, though, and the Dow is down nearly 200 points.

Citibank asks government to invest more cash into bank (americablog.com)
Market Becomes Convinced That Banks Will Be Nationalized, Freaks Out [Panic] (consumerist.com)
Nationalization, or Pre-privatization? (gregmankiw.blogspot.com)
Capital Assistance Program to Start Wednesday (blogs.wsj.com)

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