Thomas C. Theobald has a unique perch from which to watch the banking bailout: He is the only person alive who has actually run a U.S. government-controlled banking institution.

In 1987, Theobald, a vice chairman of what was then Citicorp, was named the chairman and CEO of Chicago's Continental Illinois National Bank and its parent, Continental Illinois Corp., which the federal government had taken over three years earlier in a $4.5 billion rescue after it made billions in bad loans to oil and gas wildcatters and other marginal borrowers.

Under his leadership, Continental was returned to private ownership in 1991, and three years later it was sold to San Francisco's Bank of America, earning him a $50 million pretax gain on the exercise of stock options.

In an interview, Theobald, now 71 and a private investor, says that for any bank nationalized in this economic climate, including his former employer, now known as Citigroup, the road back to good health would be a lot more complicated.

It is inevitable, he says, that politicians and regulatory agencies, acting at the behest of various interest groups, will try to interfere in bank decisions concerning capital allocation.

For example, he says, advocates of low-income housing will surely lobby for more low-down-payment mortgages. Likewise, unions representing workers at struggling companies will press for expanded credit lines for these firms, even if the loans violate sound credit practices.

For Citigroup specifically, which operates in more than 100 countries, "there are a whole series of booby traps" internationally.

Protectionists will "demand that Citi stop allocating credit in other countries. When you're Citibank in Germany, you don't think of yourself as a branch of the U.S. Commerce Department. Members of Congress don't understand that at all," he says. "It's just a nightmare."

The government currently owns 36% of Citigroup.

Then there's the matter of an exit strategy for a nationalized bank. Because of his experience at Continental, Theobald is skeptical of a nationalized bank's ability to revert to private ownership even if it has flourished under government control. "Think of the outrage" if the government were forced, for example, to sell $80 billion in bank stock to foreign investors, he says.

Though it took four years for Theobald to cut Continental's ties to the federal government, it could have happened even more quickly, underscoring the difficulties inherent in leaving government control.

In 1988, Theobald assembled an investor syndicate that had signed an agreement with the Federal Deposit Insurance Corp. to buy the agency's stake. He says they were just minutes away from concluding the deal when an official with the FDIC telephoned to report that the agency's board had rejected it, without giving any reason.

Later, he learned from an FDIC staff member that the directors were worried that they would be criticized by Congress for selling too cheaply, because the syndicate included a prominent investor, whom Theobald declined to name, known for his ability to drive a tough bargain.

If the buyout had been completed in 1988 instead of 1991, Theobald contends, the all-inclusive cost to the FDIC of the Continental bailout would have been less than the final $1.1 billion price tag.

Still, despite some operational obstacles — like securing the FDIC's approval for routine pay raises — Theobald describes the agency's oversight as generally benign compared with what a nationalized bank would have to endure today.

Theobald concedes that he knows of no quick and easy way out of the crisis plaguing the banking community. But if government ownership is unavoidable, it is essential to minimize political interference, he says.

One way to put some distance between a bank and politicians, he says, might be to establish a board composed of financial managers whose mission would be to "deflect and absorb" political flak. A similar panel has been set up by British authorities. The United Kingdom has been more aggressive than the U.S. government has in taking majority stakes in troubled banks under their jurisdiction.

When Continental was rescued, nonperforming loans were segregated into a so-called "bad bank" that became a model for subsequent bank and savings and loan workouts. But Theobald has his doubts that a vast receptacle for the industry's toxic assets would work today, in part because of the huge book of derivatives transactions.

"At Continental," he says, "there was a specified list of loans to companies. You could see it, touch it, and deal with it." This time, however, the "spaghetti is so entangled it would be difficult to separate."

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