The US Banking System's Nationalization Proceeds with Citigroup's "Rescue"

It's official. The US government has formally nationalized Citigroup by taking a larger equity position than the today's net worth of the bank.

Further, as taxpayers, we've agreed to absorb the losses, beyond $29B, on some $306B of the bank's questionably-valued assets.

With this action, which is very similar in effect to Paulson's original plan of buying troubled assets with the TARP, Citigroup has been rewarded for its inept and inappropriate lending, buying and securitization behavior of the past few years under ex-CEO Chuck Prince.

The moral hazard risk has been completely removed with this act, in an attempt to prevent worries that the bank's equity would become of such little market value as to leave the bank in violation of various regulatory capital requirements and, of course, subject to further speculation, both verbal and financial, that it would shortly be bankrupt.

Then, this morning, Henry Paulson also announced the TALP for government purchase of shorter termed assets for which markets are currently 'frozen,' including car and student loans.


Back in October, I wrote this post regarding the past and probably nationalized future of US banking.

In that post, I contended, in part,

"Simply put, you cannot have a system dependent upon an illusive, nearly non-existent resource: the well-informed, experienced, competent bank CEO. There simply are not sufficient, qualified business people available to staff each of hundreds of US banks. So allowing that many banks to exist is to invite the next financial panic, courtesy of thousands of bad credit and investment decisions on the part of hundreds of inept, boneheaded, mediocre small- and medium-sized bank CEOs.

Far better to so rigorously nationalize core banking via draconian regulation of allowable businesses, lending standards, etc., and government ownership of preferred shares, as to reduce this sector to a barely-disguised government-guaranteed conduit for safekeeping savings and making consumer mortgage and revolver loans.

Further, each of the classical Glass-Steagall era bank functions can be largely reduced to automated, pre-determined, quantitative standards with little or no room for subjective judgment.

To achieve a truly safe, well-regulated US core banking system, I believe you need the following (there are more, I've just included one for this post):

-Federal government guarantee of all core banking businesses, i.e., deposits, credit card balances, mortgage balances, trust accounts. In short, by forcible, draconian regulation of lending and deposit-investment practices, the government will be able to insure all banking activity, because it will all be reduced to ultra-safe, near-riskless levels.

That's a financial sector in which you could place trust. Core banking functions would be safe, heavily-regulated and totally guaranteed by society, i.e., our government. Riskier financial functions would be totally firewalled from core banking and well-capitalized. Trading of financial instruments would be safely confined to exchanges."

And that is nearly where we are. The strict confinement of trading important, widespread instruments, such as mortgages, mortgage securities and CDSs still require exchanges. But, other than that, Paulson, Bernanke and Bair have pretty much arrived at my prediction in just a month.

Will these steps be eventually retracted by the next administration, or a subsequent one?

I doubt it. Like a new stake in a garden supporting plant growth, new financial services structures will develop around these programs, necessitating their continuing existence.

Whether we ever formally identify these steps as nationalization of the US banking sector, it's what we've done. And, as I argued in that linked post, and others, probably a good thing.