Citigroup's last stand?

By Michael Burgevin

The Federal Government reached an agreement with Citigroup to increase governmental ownership from eight percent to 36 percent in an effort to revive the deteriorating bank, the Treasury Department announced Friday evening. The plan marks the third consecutive attempt by the U.S. government to save the company in the past five months, after two lifelines of a combined $45 billion failed to shore up the weakened organization.

As outlined in the plan, the government will convert $25 billion of their preferred stock holdings into common stock, increasing Citigroup's potential to boost their profit after five successive negative quarters. Depending on how many companies follow suit and convert their holdings, Citigroup’s tangible equity could increase from $29.7 billion to $81.1 billion by the end of this year. Although Chief Executive Officer Vikram Pandit will be allowed to stay on, many of the top Citigroup administrators will be replaced in a move backed by the Fed.

News of the deal broke just two days after Federal Reserves Chairman Ben Bernanke announced that the government does not plan to nationalize major American banks. In a House Financial Service Committee hearing, Bernanke described nationalization as “when the government seizes the bank and zeros out its shareholders ... we don't plan anything like that.” He did say that the government may end up owning a “substantial minority” of some failing financial companies.

However, many experts see this move as just another step towards the ultimate nationalization of the banking sector. In a recent interview with Bloomberg Radio, former chairman of the U.S. Securities and Exchange Commission Arthur Levitt stated that the United States is in the process of an "economic revolution" and reiterated the inevitability of nationalizing weakened banks. The Nobel Prize winning economist Paul Krugan explained recently that Citigroup is essentially nationalized already and only continues to exist because the U.S. government has been implicitly guaranteeing all of its obligations.

Regardless of whether or not the government’s minority ownership of Citigroup marks a continued march towards nationalization, there is little doubt that the U.S. government has become a longtime player in the company’s existence. The government has not owned a large, long-term stake in a major bank since 1984 when it bought 80 percent of the failed Continental Illinois. Even in a bull market, it took the federal government seven years to sell off its holdings. Brookings Institute Fellow Douglas J. Elliott compared the two cases, stating that “I think we're going to own a substantial portion of Citigroup for years.”