First, let's not fool ourselves anymore. If someone owned 36% of the stock in a company we would say that person is a majority shareholder and has huge influence on day-to-day operations. that is exactly how much stake the U.S. government now has in Citigroup (C). Let's get out of denial-Citigroup is effectively nationalized.
This is the third time Citigroup has been a real problem for our economy in the past 25 years. The first was the savings and loans crisis in the late 1980's/early 1990's. The second was the currency collapse of Asia and Russian debt default in the late 1990's. The third is now happening from the bursting of the housing bubble.
Compounding the Citigroup problem has been its hasty merger with Salomon Brothers and Traveler's Group with the repeal of Glass-Steagall. The synergies never meshed properly, management was poor, and it's size grew exponentially thus making the U.S. government the only institution able to absorb it in a time of crisis.
Traveler's has since been spun off and Salomon Brothers sold, effectively making Citigroup less than a group and just a bank with as much toxic assets as it has deposits. As in baseball, three strikes - yer out! It's time to send Citigroup to the minors. Here is the solution:
- Full government nationalization. We are heading further down that path every day anyway.
- Once under nationalization the U.S. government should have a bidding process for Citi's deposits among other banks. Instead of money, these banks should bid their troubled assets instead and based on today's market values or potential short-term recovery value of those assets be issued the appropriate percentage of Citi's deposits. Not only does this clear up the financial system's balance sheet, but it injects other banks with huge amounts of deposits with which to lend with once again. It is killing two birds with one stone.
- Turn Fannie and Freddie into the de-facto "bad" bank to hold these assets. Take Bill Gross up on his offer to manage them. As credit starts to unfreeze, markets stabilize, and the bank's balance sheets get healthier most of these assets should recover in value and the U.S. government then slowly sells it back to these same healthier institutions, hedge funds, and private equity over a period of 5 years. The tax payer will get a gain.
- Finally, the U.S. government can also sell their preferred shares they received from TARP banks back to the banks to un-dilute, and sell some to private investors, and even exchange some preferred shares to the Chinese for some of our Treasury Bills reducing our foreign debt.
Stock position: None.