The evaporation of the banking sector — Citigroup (C) sub-$5 per share, Goldman Sachs (GS) nearing $50, and so on — shows that the TARP has been a failure. It may have briefly forestalled a total collapse, but that’s obviously a distant memory. At this point, the current administration and its pointman Hank Paulson have zero political, but if they don’t want “the sucker to go down”, they may be forced to try something big, again. Certainly, the market is pushing the government to act.
Economists Peter Boone and Simon Johnson lay out three options for the government:
- Repeat the initial TARP injections. Use the rest of the cash to save the key banks (like Citigroup), and try to send a sting to those would would bet against the big banks.
- Major recapitalization, but with tougher terms. This would represent a partial nationalization, with an eye towards protecting creditors at the expense of equity.
- Conservatorship. Do what you can to protect the few remaining good banks out there. Those not under the conservatorship are given fresh capital injections.
There aren’t really any good options here of course, as all have big drawbacks, including the possibility that they just won’t work. Another option, which Boone and Johnson don’t address, cause it’s too scary: let ’em fail and may god show mercy on us all.
Of the options, we suspect some type of nationalization is the most likely outcome. There’s no will to try new injections, nor, really, would there be much of a point. Does anyone think that Citi’s problems would go away if only it got $20 billion? Probably best to get ready for AIG2.0 (AIG). Unfortunately, Citi’s just one of the many fires that needs putting out. It just happens to be the biggest.
For some irony, and some perspective on how much the world has changed in just a few months, back in August, Citigroup itself came out with a prediction that the GSEs, Fannie and Freddie, would not be nationalized. And now here we are talking about that possibility for them. Unreal.
Meanwhile, the falling knife catchers are getting slice marks on their hands. As Reuters notes, a number of big funds bought into Citi last quarter, when it just couldn’t go any lower. Whoops, it did.
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