As the stock markets head for lows not seen since 1997, and Citigroup shares hover around $2, the word nationalization is on the lips of Democratic and Republican Congressional leaders, not just economics professors. The White House on Friday said it really preferred a private banking sector. Treasury, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, of the Office of Thrift Supervision, and the Fed weighed in with an amorphous joint statement on Monday, February 23 that utterly avoided the word “nationalization” — as if omission meant reassurance.

The obliqueness of the communiqué was redolent of the lengthy texts accompanying pharmaceutical instructions and warnings, starting off with a sonorous “A strong, resilient financial system is necessary to facilitate a broad and sustainable recovery,” as if readers might think the opposite were true. The audience learned that the stress test of the country’s major banks would begin February 25.  If the examinations turned up bad news, “institutions will have an opportunity to turn first to private capital.” Given the state of the equity markets, the second treatment—a “temporary capital buffer…from the government”—would surely quickly follow.

This course of medication carries certain unavoidable side effects. “Any government capital will be in the form of mandatory convertible preferred shares,” the joint statement continues, “which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory.” The tortuous text concludes: “Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain private hands.” If the government capital is in the form of mandatory shares, how can said shares be retired before they’re mandatory? If institutions were well-capitalized, why would they need a capital buffer?

A suggestion as to how well this policy might work is the status of AIG, which is suspended between the government and private (the Fed “owns” 79.9 percent of it but doesn’t really manage it). AIG reportedly is facing a $60-billion loss, and that would mean further insurance and credit rating downgrades and require the insurer raise phantom collateral. Then again, AIG is not a bank.

It turns out investors keep asking the same questions. The Dow Jones Industrial Average closed at 7,114.78 on February 23, down 3.4 percent from the previous close of 7,365.67. Citigroup inched up 19 cents from Friday, closing at $2.14; its shares closed at $27.35 on January 2.

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