Thursday, January 15, 2009

The N-Word   [Stephen Spruiell]

Clusterstock's John Carney asks, "Will Citi and Bank of America be Nationalized?"

The hottest rumor of the day is that the government is preparing to nationalize both Citi and Bank of America. The idea is that the government could put Citi and Bank of America into a conservatorship, much like it did for AIG. The idea has been floating around since at least last October but today many people think nationalization could be imminent. [...]

If forced to give odds, we'd say that while Citi could be nationalized nothing as drastic will happen to Bank of America. It seems far more likely that Bank of America would receive something like the asset value guarantee Citi already got from the government.

In either case, we could be headed into another bailout weekend.

Michael Lewis and David Einhorn suggested something like this in a widely-read op-ed published earlier this month:

THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

Some analysts are already predicting that Citi "will be forced to sell everything to competitors that can integrate its disparate parts into their own, better-managed franchises..." The question arises: Do we need the government to oversee that process, or can Citigroup dismantle itself without causing the thawing credit markets to seize up again?

01/15 03:44 PMShare