Nationalize Citigroup and Bank of America

Both Citigroup (C) and Bank of America (BAC) were down more than 20% in early trading Thursday, and I imagine that Hank Paulson and Tim Geithner are starting work on yet another weekend deal of some description, since at this rate it seems that neither institution is capable of surviving in its present form much longer. They should embrace the inevitable and just nationalize the two banks.

Any deal will be necessarily complicated by the fact that Paulson dragged his heels when it came to requesting the second tranche of TARP funds, even after he blew through the first $350 billion in no time. As a result, it's far from clear what money Treasury can use to shore up two of America's most systemically-important financial institutions.

On the other hand, this isn't a bank run: Citi and BofA aren't suffering from liquidity problems. They have all the liquidity they need, thanks to the Fed. The problem is one of solvency: the equity markets simply don't believe that the banks' assets are worth more than their liabilities.

I can't see a solution to this problem short of nationalizing both Citi and BofA, and summarily firing the hapless Vikram Pandit along with the overambitious Ken Lewis. Lewis thought he could buy his way out of trouble, by acquiring Merrill Lynch; instead, he was simply tying his own already-troubled institution to an even more troubled institution. Pandit, it's worth noting, tried the same hail-Mary technique, when he put together a deal to buy Wachovia, but that didn't last long.

Citigroup, at $3.50 a share, simply doesn't have the time to implement its new plan to get smaller slowly. And Bank of America, at $7.75 a share, doesn't have the capital needed to absorb Merrill Lynch (MER). Both are now trading at option value: on the hope, essentially, that somehow equity holders won't be wiped out entirely. But they should indeed be wiped out, as part of a nationalization, along with preferred shareholders, including the government. TARP will show an immediate loss on its investments, which will serve as a salutary reminder for whoever is in charge of disbursing the second tranche.

Nationalization is a messy solution, and one which will make no one happy. But it's better than desperately trying to kick the ball down the field until the banks come back in a few weeks for even more money. If we've learned anything from the last Citi bailout, it's that small interventions don't work. What's needed now is a complete revamp of both banks' capital structures, and a brand-new owner.

Comments

[winslow:]

When will these so called "leaders" be responsible for their fiduciary obligations to shareholders and to the citizens of this country. I say it is time to penalize these inividuals for their bad business decisions

Jan 15 12:35 PM

[informed in...:]

Felix, please do some more informed reading before making ludicrous claims about Bank of America. BofA not able to survive in its current form? Are you Illiterate or just plain dumb?

The government aid comes because BofA was about to *DROP* its acquisition of Merrill due to mounting losses at *MERRILL*. Not mounting losses at BofA. The government stepped in to give more aid so that BofA could *CONTINUE* its acquisiton of Merrill in order to prevent systemic damage to the markets if it pulled out of the transaction.

BofA's troubles have nothing to do with the problems Citi is experiencing, which has posted tens of billions of dollars in losses on its subprime assets and CDOs. BofA has yet to report a full year of earnings in the red, simply because it appropriately *EXITED* the subprime business many years ago.

Idiot.

Jan 15 12:43 PM

[nyorker:]

"Felix, please do some more informed reading before making ludicrous claims about Bank of America. BofA not able to survive in its current form? Are you Illiterate or just plain dumb?"

I'd venture to say both......or very, very, short.

Jan 15 12:52 PM

[DonSuper:]

I agree with Informed investor, you are very irresponsible Felix for creating this type of speculaiton on false premises.

For all we know it might even be a positive for BAC if they made some good negotiation with the FED in order to not CANCEL the acquisition of MER. Until jan 20 we wont know if the drop in share price is justified. And as Informed investor pointed out, BAC has not posted a single loss since the crisis started...you know, for a company to be insolvent it has to have negative earnings AND not have enough cash flow to pay its obligations, BAC is far, very far from that...

Jan 15 01:11 PM

[Louis777:]

They should just let these banks fail.New banks will fill the gap. This is going to be just another boondoggle of wasted money.

Jan 15 01:27 PM

[Jackson Cash:]

Nationalize nothing - let them fail.

For the love of God, quit paying these banks and the problem will go away!

Jan 15 01:30 PM

[Mr. Cynical:]

Felix, most other SA contributors include a disclosure at the end of the article....does yours say "none"?

Jan 15 01:37 PM

[junkyarddog:]

Nice job, Felix! You wrote a satire just to get people going.

It's too bad this kind of publication doesn't belong here; it's stuff for the "National Enquirer".

To make your "article" even more humorous, you should include GM, Ford, and Chrysler. Now, that's funny --- even though no one is laughing.

Jan 15 01:41 PM

[aarc:]

Our biggest problems since Sept 2008 was and still is - investor confidence or the total lack thereof.

Have we not learned enough?

Paulson nationalized FnF and AIG using his bazooka. What happened? Investors got crushed = lost of investor confidence.

FDIC nationalized Wamu and WB and sold them for pennies. Same result. Not happy punching investors to the ground, FDIC kicked them around.

Then Congress used the $700B "RTS type rescue package" by Paulson as a pingpong ball cracking it half to $350B initially with a promise of another half later. Too little too late - investors would rather have their money back rather than risk so much money with the dis-United States of America.

We are in this deep hole because of those "timely" rescues the government did with those companies and the Congress fiasco of Sept 2008.

Want some more "derailed" investor confidence's induced recession or rather depression this time around.

Jan 15 01:53 PM

[Eric L. Pre...:]

Fed Chairman Bernanke uses trillions of dollars of taxpayer money and the Treasury uses billions of dollars of TARP money to save the stock and bond holders of failed banks, thereby weakening the ability of the US economy to quickly bounce back from this recession because failure is rewarded rather than success. Bernanke’s futile attempt to prove that Milton Friedman’s monetarism theory is practical hasn’t worked because failed banks will continue their wayward policies as long as the taxpayers are making good their losses. Dr. Bernanke, the ivory tower academician, is acting like a megalomaniac who needs to be stopped before he dooms the American economy to the Japanese disease of a lost decade of economic growth. Using the tried-and-true Swedish model now is imperative.

Jan 15 02:15 PM

[Socialism c...:]

"They should embrace the inevitable and just nationalize the two banks."

"Citi and BofA aren't suffering from liquidity problems. They have all the liquidity they need, thanks to the Fed."

Um... Felix? Anyone home? Care to reconcile these two statements? Nationalization is fine for Communist China. Not here. No more TARP. Government is the PROBLEM, not the solution!!

----------------------...

* "I sincerely believe ... that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." – Thomas Jefferson

* "Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money." – Daniel Webster

Jan 15 02:24 PM

[anarchist:]

Aye yi yi Felix, what you said-the word <Nationalize>. I can hear all the critics above, they don't say it but they are thinking it <Socialism> What a nasty idea why I think you might be going to next be advocating a Single Payer National Health System or restraints on the obscene amounts of money spent of Political campaigns, reinstitution of the Glass-Spiegel Act-pinko stuff like that

Jan 15 02:42 PM

[EJW3:]

I fully support Felix's comments. There is no way Banks are truly reporting their losses - the fact that disclosure is so bad should be a good hint. The banks are technically insolvent and will not lend which will tank the economy. The quicker they are nationalised the better for all.

Jan 15 05:57 PM

[BlackyBlack:]

I think some of the above comments are protesting too much about this article. Something is smoking at BOA and Citigroup. We know the feds have said the won't let another big bank fail. So it's either nationalize or a new bailout. I'm not taking bets on either option, but I think a nice discussion of either is on the table. What's up with all the trolls lately coming out against negative discussions? It's not the shorts causing the problems.

No positions.

Jan 15 06:32 PM

[rmenton:]

The problem I see with the more aid maneuver is the dilution, and the fact that most likely the dividend will go, meaning that any BAC shareholders are now in the stock for 5 years, like it or not. Was this Ken Lewis' intention? John Thain is looking like the consumate salesman here. The whole thing stinks a bit, because of the lack of transparency. I can only imagine what is going on behind the scenes. Perhaps something like, "well we really can't do that...it would hand the shareholders out to dry." "Yes, but you have to understand that we have to show that the taxpayer is getting something." Very awkward, to say the least, and by no means near resolution.

Jan 15 10:02 PM

[Al-USA:]

Good article and I agree with all of it. Unfortunately, this government, after beating the ____ out of fascist Germany in WWII has revealed itself to be more fascist than capitalist, after all... Not a good thing at all folks.

Jan 15 11:10 PM

[Tradememe:]

After Lehman, the government just got scared of letting the banks fail. But it's too late now to go back. So, it's better to let others fail and give room for new ones to take their place.

Jan 16 12:53 AM

[sr9web:]

Let C continue to drag down the share price of BAC, then buy BAC. It's likely both will survive, but BAC is getting close to bargain territory.


On Jan 15 12:43 PM informed investor wrote:

> Felix, please do some more informed reading before making ludicrous
> claims about Bank of America. BofA not able to survive in its current
> form? Are you Illiterate or just plain dumb?
>
> The government aid comes because BofA was about to *DROP* its acquisition
> of Merrill due to mounting losses at *MERRILL*. Not mounting losses
> at BofA. The government stepped in to give more aid so that BofA
> could *CONTINUE* its acquisiton of Merrill in order to prevent systemic
> damage to the markets if it pulled out of the transaction.
>
> BofA's troubles have nothing to do with the problems Citi is experiencing,
> which has posted tens of billions of dollars in losses on its subprime
> assets and CDOs. BofA has yet to report a full year of earnings in
> the red, simply because it appropriately *EXITED* the subprime business
> many years ago.
>
> Idiot.

Jan 16 02:05 AM

[morph366:]

Nationalization of the US (and UK) banking system would lead to such a profound change in the global financial system that all current valuation models for assets -- to the extent that they are useful tools anyway - would have to be entirely re-cast.
Question is would banks run by public servants/politicians be any worse than what we have seen recently?

Jan 16 04:35 PM

[User 265729:]

Felix, Felix, Felix.

Nationalize them? NO THANK YOU! I don't want them. Give them as a gift to one of worst enemies and when they unwrap the box... POOF! They'll be sucked into oblivion.

Jan 16 04:58 PM

[James Higgi...:]

cancel the deal? it closed january 1st

Jan 16 05:48 PM

[Mbuna:]

The time for nationalization of these banks was a year ago when it was patently obvious that they were insolvent. It has clearly been a year of denial in the financial system, like watching a corpse rot. Felix you could and should have written this post a year ago. No one wanted to take responsibility then when it might have done some good. Certainly no one is willing to do it now unless the consequences of not nationalizing forces the governments hand, which it might. I can see from a number of posts here that far too many still live in fantasyland. Well, this is not Disneyland and the ride we've all been on will be over soon.

Jan 16 05:55 PM

[Mbuna:]

Here's a little "I told ya so" from a post I did in June 2008 exemplifying the rampant denial still so prevalent.
"It's nice to see a little dose of reality here but I wonder what it will take for someone with a larger platform start to speak out on the culture of lies and denial that is now so prevalent in the financial sector. There are so many white elephants in the room it is practically a frickin stampede! One example- it has been clear for around 6 months that Citibank was insolvent. Where was (is) the press coverage of that fact? The facts are there if you wade through the BS but there is some kind of taboo about telling the truth. Everyone knows all these quarterly reports are anything but truthful. It has reached the point of absurdity in my opinion."

When will someone start thinking outside the box?

Jan 16 06:53 PM

[GoBlue:]

Communism is not the answer. Citi was bankrupt in 1990 to....then they went on to out earn Europe over the following 2 decades.....This is not a GM situation....Citi may not have been optimal, but they sure did earn money until this crisis..... Kick the can until they're profitable again, then they'll be able to raise all the common they need and pay off the govt. That's the only plan that doesn't lead to a depression. They will earn their way out of it if given the time. Now would be a good time to outlaw all short selling of systematiclly important finacial companies, now and forever.....make it an amendmet....Then get rid of the ratings agencies and find out who is paying these guys off.....Who killed LEH and WB? MOODYs! Time to strip them of their destructive power..... Citi has raised about 115 BILLION iver the course of this crisis, how much more money could a company need? BAC has also raised SERIOIUS capital....Frankly, the market still seems to be valuing all liablities at zero.....Not reality....

Jan 17 12:49 PM

[Timmothy Posey:]

Can't we all just get along?

Jan 17 01:32 PM

[User 339760:]

BoA is down 50% in 2 weeks. Sure that's not a run on the bank? BoA was profitable and navigating the recession just fine until Hank and Ben came around and said "We really appreciate you saving us by scooping up Countrywide. But now we need you to take care of Merrill too."

That's when things started to hit the fan. BoA was the top bank in the nation before Merrill landed on their books and they would be the top bank again if Merrill was taken off the books. So why doesn't the government nationalize Citi and Merrill?

Citi and the auto industry are in the same boat. The government can't give them enough money to stay alive. But did you happen to notice that BoA only needed more bailout money after the government told them, "Sorry, we can't let you back out of the Merrill deal we pushed you into. Gotta stay the course."

If they would just nationalize Citi and Merrill, let Ford and GM merge and tell Cerberus to deal with Chrysler on their own, then we could all get on with our lives.

Jan 18 03:59 PM

[johnb1234:]

You said:
"But they should indeed be wiped out, as part of a nationalization, along with preferred shareholders, including the government. TARP will show an immediate loss on its investments, which will serve as a salutary reminder for whoever's in charge of disbursing the second tranche."

So you would have them wipe out everyone's investment to make a point to people in charge of distributing funds?
The people distributing the funds wouldn't be affected!!! How would it be a reminder to them? But I bet you people invested in other financial stocks would be. There goes the whole market.

Jan 20 10:21 PM

[Cory Baron:]

OK, lets look at the big picture and look at the facts: the fed, the trez dept, a handful of govt. departments and govt. backed "companies" (i.e.- Fanne and Freddie) been manipulating the markets to be so overvalued, people are now overextended.

The US people are now on a savings spree. You will get no private equity until there is sufficient real value for for the banks to draw upon for real growth.

As for nationalization, the best way to destroy a company, make it managed by everybody: give it public money, scrutinize it, make it a company not worth working for (cap top executive salaries, make them sacrifice for something they did not cause, make them accept unearned guilt) and now that it's management is destroyed the only thing we "have" to do is nationalize it.

"Public" equity infution (aka - federal bail out)? Well, we all know where that will come from: wiping out debt holders accounts at the expense of cash savings (the constitutional limitations on the federal govt be dammed!) Inflation here we come!

Will this drum up true opposition to the deadly ideas coming from the left and right, conservatives and liberals? Or will this give the current administration the opportunity to make another panacea of executive "emergency" orders and rushed bi-partisan bills to "save us" and destroy what is left of our our civil liberties.

Ask yourself about all of these federal measures, executive orders, bail out bills, tax policies, etc: at WHO'S expense? yes, you have it! a massive redistribution of wealth. Are we back in Germany 1933? There are some ominous parallels.

A democracy gets what is deserves, and it seems (with the current bad ideas driving it) is is only going to get worse.

Cheers!

Feb 21 12:25 PM