The Citigroup Treasury Kabuki dance

Both sides must know the end game is nationalization. Right now, they're just trying to make an ugly business look pretty.

By Salon Staff

Published February 23, 2009 6:04PM (EST)

Barry Ritholtz has a list of who he thinks are for or against nationalization. The first five names on the anti-list are Barack Obama, Tim Geithner, Lawrence H. Summers, Barney Frank and Bernanke.

What do those names all have in common? They are in the government, and their every utterance moves markets. Which means, according to David Kotok, the chairman of the money management advisory firm Cumberland Advisors, whose thoughts on the financial markets are frequently featured at Ritholtz's blog, The Big Picture, that they are almost by definition prohibited from forthrightly endorsing nationalization!

The insiders in the Obama Administration have avoided mentioning nationalization. They must stay silent. If anyone who holds a position within the administration mentions this possibility the markets will immediately respond with intense volatility as a reaction.

Whether or not "government by the Dow" is appropriate policy at this stage of the economic crisis is open to question. But the point is that even the consistent reiteration from the White House "that banks should remain in private hands" doesn't tell us what the Obama brain trust's true position on nationalization really is.

But we're going to find out, because Citigroup's decision to ask the government to convert its preferred shares into common equity is a clear signal that Citigroup is facing big trouble, in the short term. So far, however, there is little consensus from observers on what the gambit signifies. Ritholtz calls it an "accounting maneuver" -- an "absurd proposal" in which the government, which has already put $45 billion into Citigroup, only ends up with 40 percent of a public company currently judged by the market as worth just $10 billion. Felix Salmon also struggles to understand the math but concludes that perhaps this is a scheme for keeping the holders of Citigroup's debt intact, while greatly diluting the shareholder stake.

But possibly the most interesting theory is Kotok's surmise that the Citigroup move is "a way for the idea of nationalization to get vetted."

Some of the political sting of the word "nationalization" may already have dissipated, given the public statements in favor of some form of temporary government-mediated restructuring from the likes of Alan Greenspan and even some Republican senators. Citigroup's request that the government become a stakeholder owning 40 percent of its common stock would seem to be a preemptive admission that the bank will not pass the "stress test" due to begin this week. So perhaps this is some kind of kabuki dance in which both sides know that the ultimate resolution will be quasi-nationalization, but want to get to that point without Wall Street as a whole losing its mind over the specter of the second coming of V. I. Lenin. Not that we should worry too much about Wall Street's sanity, but a full-bore market panic could mean the difference between having to nationalize one or two or three big banks, or all of them.

This is just a theory. As noted earlier today, the real test will be what conditions the government requires in return for any additional help. There's also the question of how far the government will have to go. Will stabilizing Citigroup be enough? What about Bank of America? By the end of this week, we should have a much better idea of how all this is all going to play out.

Salon Staff

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