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Nationalizing Citigroup

Published: 02 Mar. 2009, 22:41

Citigroup, one of the world’s major financial institutions, finally succumbed to nationalization after failing to overcome the pressure of subprime mortgage insolvency. Despite a massive injection of financial aid from the U.S. government in two separate installments, Citigroup arrived at the conclusion that there was little hope of surviving on its own. The U.S. government will increase its share in Citigroup to up to 40 percent by converting into common stock the $25 billion in preferred stock invested in the bank from an earlier bailout.

Now, as the U.S. government becomes the bank’s biggest shareholder, the danger that Citigroup will collapse has been dealt with. However, there is a long and difficult road ahead before Citigroup can return to normal.

For the U.S. government, nationalizing Citigroup was inevitable, even though the U.S. Treasury had wanted to avoid the question of nationalization. Though it has invested bailout funds in several financial companies, it has tried not to take control of management. But the situation in the financial industry is moving too fast for it to seek other options. Citigroup was on the verge of collapse even before the U.S. government began reshaping the financial industry, but in a moment of urgency, the government decided to save the bank through nationalization.

Without interventions in the other major banks, the deteriorating financial situation could have led to bank runs, paralyzing the entire financial system.

The problem is that the nationalization of Citigroup is just the beginning of what will need to be done to overhaul the U.S. financial industry. There are more than a few insolvent financial firms other than Citigroup rumored to be on their way to nationalization, and the amount of money that will be needed to clean up their insolvent assets is difficult to estimate.

Another problem is that it is not clear how the U.S. financial industry will change when all is said and done. But it is clear that the U.S. government must again draw its sword and restructure, just as it did with the nationalization of Citigroup. It needs to be bold and to act quickly.

The U.S. government should formulate a restructuring plan and initiate it immediately, once the insolvent firms are sorted out from those that are sound. If it hesitates, not only will the U.S. financial system collapse, but the global financial market will be thrown into a chaotic mess from which it will be difficult to emerge.