The New “Nationalized” League

Despite all protests to the contrary, and avoiding actually using the “n” word – nationalization – the government “nationalized” Citigroup last week. The February 28^th dailyFinance.com: “The truth is, Citi's deal with the Treasury Department comes largely at the expense of the company's current common shareholders, who will be left owning just 26 percent of its stock. Other investors in its preferred shares, like Saudi Prince Alwaleed bin Talal and an investment fund run by the government of Singapore, will own as much as 38 percent.” Since preferred shareholders don’t vote, and the U.S. government looks like it will own 36% of the company’s common – voting stock. Who’s kidding whom?

Citi’s CEO, Vikram Pandit tells the world that management will “run Citi for the shareholders.” That means that the bank is not yet an unleashed public policy vehicle, won’t be spewing credit into a world that desperately needs it, and will be applying the same rigorous asset and borrower analysis that federal bank examiners are currently requiring. We don’t want a repeat of the subprime crisis in yet another segment of our economy, they say. Citi’s stock dropped to as low as $1.42, 43% off Friday’s close, and the bank has signaled that they may issue a further $50 billion plus in new stock (now that’s a stock I want in my portfolio… er… not).

Exactly how much has Citi received from the government so far? dailyFinance.com: “In total, Citi has received $45 billion in capital injections from the government. It has also issued $20.6 billion in short-term bonds under a guarantee program run by the FDIC, according to SNL Financial.” So they can’t just start lending their hearts out; they still have to make sure they are not lending against declining assets, questionable receivables from customers who may or may not have the ability to pay or folks with declining incomes or even threats of possible job loss. In short, in a managed depression, where virtually everyone in this economy has those negative attributes, they really cannot lend to almost anyone who really should be getting credit!

The eventual solution, once the feds have ascertained which banks are good, which deserve federal money and which need to die? In the pure credit markets, not looking at housing at all (a whole ’nuther solution I’ve blogged about before), the government needs to (i) guarantee bank-to-bank lending (the ability to spread risk and credit syndicated credit lines which supports jobs and businesses) for at least six months, since banks don’t even trust each other, (ii) a segregated, government issued or guaranteed loan fund (the bank can get a piece of the loan as upside) where this direct release of funds through government efforts can be issued to that risk pool identified above (not the new subprimes, but the people and businesses who need the lending capacity to restart the economy, even if they are not perfect risks) and (iii) sanction credit-backed derivatives under new ratings standards where the issuing banks much retain at least 15% of the loan bundles on their books (they have to have skin in the game) in order to restart the cycle of replenishing credit, but this time under solid economic terms.

As the government continues its “nationalization under another name” policy, sooner or later, it is going to have to inject that “lending cash” directly into the marketplace, because banks and investors are still loathe to (if not prohibited from) lending in a falling market against assets of unclear value to borrowers who may lose income. And without this jump-start, we are stuck in neutral with little hope of getting this engine moving again.

I’m Peter Dekom, and I approve this message.