So why is everyone talking about the nationalization of Citi?
Is it some conspiracy of short-sellers? Irrational panic? Fear that the government is run by raving leftists who hate capitalism and want the government to control the means of financial production?
Of course not. The simple fact is a tale of the tape. When Citi was initially bailed out under the TARP, the government gave it tens of billions in exchange for preferred shares. Back then Citi had a market cap that was close to $70 billion. A capital injection of $25 billion massively diluted the shareholders but didn’t mean the government owned the entire bank. With a market cap of just over $10 billion, there’s not a lot of room for that kind of thing anymore.
Citi just doesn’t have any more room for the government to purchase equity of any sort without wiping out shareholders.
We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.
And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.
What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.
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