WASHINGTON — News early Monday that Washington's preferred stake in Citigroup Inc. might convert to common stock — expanding regulators' reach deeper into the company — raises a disturbing question: Does the government know what it's doing?

During the crisis, it has been consistently behind the curve, and appeared to languish while major events played out in public. Is the government saving Citi? Is Bank of America Corp. next?

There are few answers to an ever growing list of questions.

The vacuum is undercutting the government in various ways, and this is worsening the industry's problems. Take regulatory capital standards. No one trusts them anymore, so in their place analysts are using a much harsher yardstick, tangible common equity. This makes the banks look weaker than many experts say is reasonable.

And with every twist of the bailout, regulators have lost credibility. Regulators assured the market that Fannie Mae and Freddie Mac were well capitalized just before putting both companies into conservatorship. They tried to fix what was wrong at Wachovia Corp. by merging it into Citi. The new administration promised a comprehensive overhaul of its predecessor's efforts and delivered more of the same.

Politics is a big obstacle to taking the steps needed to resolve the crisis.

"Helping banks is hugely unpopular," said Charles Calomiris, a professor of finance at Columbia University. "Neither the Bush administration nor the Obama administration wants to stand in front of this train. Anything that would really have an effect — that would be a real game-changer — to reverse the death spiral that we're in the middle of is going to have to raise market value of bank assets and thereby raise the market value also of bank stocks."

Others said the government itself is too divided on what to do next, with some wanting to at least partially nationalize banks and others saying more capital injections are the answer.

"What we've seen is a series of stopgaps, with hopefulness that somehow the market will be able to turn itself around on its own," said Arthur Wilmarth, a law professor at George Washington University. But "all the market sees is uncertainty."

The plan unveiled by Treasury Secretary Timothy Geithner on Feb. 10 was a near total failure, at least so far. Short on details, Mr. Geithner said he wanted to stress-test large institutions to determine whether they had sufficient capital.

But he left it unclear how the stress tests would work, and by the time regulators provided more details on Monday, there appeared to be yet another policy shift.

When the stress tests were announced, observers thought the idea was that regulators would examine which institutions were healthy enough to get more capital. Those that failed the test would be subject to supervisory action.

But by Monday, it appeared the only consequence of failing a stress test would be to receive yet more money from the government.

"Under this program … the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment," the regulators said in a joint statement. "Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government."

Far from sorting out the healthy from the sick, the stress tests, which are to start Wednesday, now appear geared to determining how much money an institution should receive. The stress tests "seem to me to be window-dressing that was included probably to placate Congress, and to me it doesn't mean anything," said Bob Clarke, a former comptroller of the currency and now a partner at Bracewell & Giuliani.

As a result some have begun to wonder whether the Obama administration is just as lost as the Bush administration was when it comes to fighting the financial crisis.

Investors' "fear is that, despite their best intentions, this White House has no more idea of what will cure the problem than the last one," said Steve Blumenthal, the former deputy director of the Office of Federal Housing Enterprise Oversight, or OFHEO.

Many continue to fault the government for not attempting to address mark-to-market accounting rules that have forced massive writedowns at banks and other financial companies. Combined with short-sellers who try to spread rumors of an institution's impending collapse, pressure continues to build around a financial institution until the government finally acts, or refuses to.

Last year, this was true for Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, American International Group, Washington Mutual Inc., Wachovia, and Citigroup.

But even those that get help — such as Citigroup and Bank of America Corp. — continue to be caught in a net of expectations on Wall Street. Though regulators have provided unprecedented assistance to these two banking companies, including billions in capital and hundreds of billions in loan guarantees, investors have continued to talk up the possibility that they will soon be taken over by the government.

Assurances from the White House, Treasury Department, and regulators that no such massive takeovers are in the offing have done little to stem the tide.

"The mark-to-market mechanism is pernicious," said Eugene Ludwig, a former comptroller of the currency and founder of Promontory Financial Group. "It has driven economic realities — not reflected them. It's an unholy alliance between mark-to-market and short-sellers that have driven us to this point."

The situation has turned into a "feeding frenzy," Mr. Ludwig said.

But the situation has been aggravated by the government's own continued missteps — and an appearance that it does not have a grip on the industry's problems. The best example is last year's forced merger of Wachovia.

In late September, regulators sought to merge Wachovia with Citigroup. Such a move, everyone now agrees, would have been a disaster, making Citigroup's problems even worse than they are (Wells Fargo eventually made a surprise bid for Wachovia). But it showed how little regulators knew of the problems at Citi.

"One, they didn't grasp the extent of Citi's problems," said Karen Shaw Petrou, the managing director of Federal Financial Analytics. "And two, they were still under the profound misapprehension that putting two troubled banks together somehow makes it better. Wells Fargo was a saving grace."

But government errors predated that point. The Federal Housing Finance Agency and its predecessor, OFHEO, repeatedly emphasized the health of Fannie and Freddie as rumors swirled around both companies last year. Time and again, the agency said the two companies were well-capitalized — which, by regulatory standards, they were. But the market continued to believe, correctly as it turned out, that massive losses were unaccounted for in both companies and refused to accept that they held enough capital.

As a result, then-Treasury Secretary Henry Paulson asked Congress for additional powers over the GSEs — powers he promised he would not need to use. From the time they were granted in July until the time the government seized the GSEs in September, however, their future was uncertain and fed a constantly churning rumor mill. The situation looks that way for several large banks now, Ms. Petrou said.

"You had an unwillingness to state policy that led investors to refuse to recapitalize the GSEs," she said. "You have the same situation with the banks because investors say: Why would I invest if I could be diluted again tomorrow?"

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