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Roubini: Fully Nationalizing Citi and Bank of America Would Be Better

Posted Feb 27, 2009 06:15pm EST by Aaron Task in Newsmakers, Recession, Banking
Related: ^dji, C, BAC, XLF, SKF, FAZ, DIA
Friday's announcement the government will convert up to $25 billion of its Citigroup preferred stock into common equity represents Uncle Sam's third direct attempt to rescue the floundering bank.

The conversion would give the government up to 36% control of Citigroup stock and leave existing common shareholders with as little as 26% of the company's common stock. That explains why the stock tumbled 39% to $1.50 Friday despite CEO Vikram Pandit's strange declaration: "In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest."

Pandit's claim is "like saying you're half-pregnant," says Nouriel Roubini and economics professor at NYU's Stern School and chairman of RGE Monitor.

"The government has already taken over the financial system," Roubini says, noting U.S. policymakers have committed $9 trillion to rescue the financial system and already spent $2 trillion. "So let's stop the delusion about 'no nationalization.'"

Roubini, who has publicly advocated for temporary nationalization of insolvent banks, says fully nationalizing Citigroup and/or Bank of America would have a minimal effect on the Dow, which is a price-weighted average. More importantly, he believes full nationalizations (vs. the current partial, piecemeal effort) would be better for the market and the economy because it's the first step in the process of cleaning up "bad" banks so they can later be sold back to private investors, i.e. "re-privatized", as was the case last year with IndyMac.

Tune in Monday as we'll have more from Roubini on:

  • Why nationalization is the right course and Bill Gross is wrong.
  • Why Ben Bernanke's "reasonable prospect" for a recovery in 2010 is unreasonable.
  • What the Tresaury's ongoing "stress tests" of big banks means, and doesn't mean.
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