Why Nationalizing GM and Citigroup Makes Sense

The government needs to stop giving money without getting either control or a reasonable chance of repayment of the money. If it doesn't do so, it won't be able to fix the economy.

When Citigroup got its bailout, the market capitalization of Citi was about 20 billion dollars. The government basically guaranteed about 250 billion dollars of bad Citi debt, in exchange it received 7 billion of preferred shares without voting rights, paying 8% dividends (less than the 10% Buffet got). Warrants were also given, at a price about 4 times what Citi was trading at at the tme.

So, let's summarize: in exchange for 7 billion and some warrants that may never pay back, the government put itself on the hook for 250 billion dollars. For 20 billion dollars or maybe a bit more, the government could have simply bought out Citigroup.

Now, it would make no sense for a private investor to buy Citi, but if the government has decided that it will never let Citi fail, and it's hard to read the Citi bailout any other way, then it's already on the hook for all of Citi's debts anyway. And if it is, then there is no downside to owning Citi: it gets all the upside if it turns Citigroup around, after all--not just a few warrants, but the ability to issue stock and pay dividends when it chooses, to itself. There's no taxpayer protection like that.

Add that to the fact that the current management of Citigroup is clearly incompetent, and there's no reason not to take over Citi. And with Citi under control, one of the world's largest banks, the government could have used it as a policy instrument, having it lend in the overnight market at the rates the government determines, having it give out credit directly to consumers and businesses at government rates and so on.

So, Citi should have been taken over. There was no reason not to, and every reason to do so, unless the first concern was to make sure executives kept their jobs rather than that Citi be viable, taxpayers be protected and the credit logjam be broken.

Now we move to GM.

GM's market cap as of this writing is slightly under 3 billion dollars. Having GM go under would very likely bring down both Chrysler and Ford, because shared suppliers would go under at the same time. Job losses would be in the 2 million to 3 million range. GM going under could quite possibly turn a very bad recession into an actual depression.

Which is to say, in real economic terms, GM is just as much "too big to fail" as Citigroup is. The question here is not "how much is it going to cost", the question is "are we willing to let it fail?" If the government really is, after throwing trillions at the financial industry, and the travesty of Citigroup, then the government is so captured by the financial interests who donate to it that it is no longer capable of looking after the interests of all Americans, but only key donors.

If, on the other hand, the decision is made to help GM survive and restructure, then the government is essentially on the hook for all of GM's debts, in the same way it announced to the world that it will effectively back up all of Citi's debts (after 250 billion, are they going to blink at the rest?)

If that's the case, the simplest thing to do is just nationalize GM. Buy out the shareholders for the 3 billion their shares are worth, or hey, be generous and pay them double--6 billion. In the current context, that's not even real money. Get the best auto people in the world and have them go in and restructure GM. Spend the necessary money and make the necessary cuts. Restructure the company to serve America's interests--get the Volt working, increase mpg ratings, restructure the dealer network. Do it all. Fix the company and make it viable again. Then, once it's working again in a few years, start selling it back to the private sector. Do it right and the government will make a significant profit.

But, more to the point, there are no halfsies here. This is like being "slightly pregnant". The government either decides to keep companies like Citi alive or not. If it's in, it's in all the way. And if you're on the hook for a company's debts anyway, there's no reason not to own it. That way taxpayers don't just get the downside, taxpayers get all the upside. And while in control of the company you can both fix it properly and use it to fix the US economy.

The number 1 rule of the financial crisis so far has been that the people who caused it must be left in charge of everything. Going forward that has to change, because if it doesn't change, the money being thrown at the situation, even if it papers over the problem, won't fix the underlying flaws and it won't be paid back to taxpayers. Which means that when the geniuses who screwed up the Big 3 and the financial sector screw it up again (this is their track record, they will do it again) there won't be enough money next time. The world may be willing to let the US print 10 trillion dollars once and pretend it's real money. They won't do it twice.

This is "do it right" time. You will be graded. There will not be a retest. And the penalty for failure is a depression.

(Ian Welsh is the managing editor of FireDogLake)

Comments

[SolarPowerGuy]

"And if you're on the hook for a company's debts anyway, there's no reason not to own it."

You mean, there's no MORAL reason not to own it.

If the goal is to keep money flowing into the pockets of fat cats, even in the face of ifnancial disaster, then this "half-pregnant" approach to getting the government involved in the private sector makes perfect sense.

Socialize risks, privatize profits.

[leftLibertarian]

Just get all the bailout money back from every one and give it back to the taxpayers.
They'll gonna need it. This recession is gonna be long and nasty.

[Overd0g]

Where exactly in the constitution is the federal government authorized to buy and operate private companies? Must have missed that one.

[research]

"provide for the general welfare"

[research]

Buy them out don't bail them out.

10B$ to buy the big three.

Versus 100B$ to pay for 2 Million unemployed for 72 months.

[dhinds]

What's needed is Oversight, not a Bailout, nor Expropriation. Chapter 11 allows for a Restructurization and both the Creditors (i.e Suppliers) and Employees could become Partners.

[dhinds]

Part II

with the Government helping drive the Technology Agenda.

Mexico's biggest bank is owned by CitiGroup, which should be able to restructure and continue operating.

BTW - in the USA, only Chase (which fused with JP Morgan and Bank One) has anywhere near the capitalization as CitiBank. None of the others (Bank of America, Wells Fargo and Nations, for instance) come anywhere close.

[FearlessFreep]

Companies that are too big to fail are too big to be left to the private sector.

[Overd0g]

In other words, no company is too big to fail.

[wigglwagon]

It makes no difference what is done about the automotive industry. The Big Three are only one symptom of the problem. A few weeks ago it was Wall Street. What industry will it be next week? Does anyone remember about 20 years ago when a lot of the old reliable trucking companies started going bankrupt? That was just the beginning. Ever since then we have had a steady procession of problems in one industry or another. Does anybody ever wonder why the airlines are having so many problems? What happened to our textile mills, our sewing factories, furniture factories?? I'll bet we have lost a lot of industries I never knew existed.
For the last 25 years we have been systematically disassembling the fundamentals that built the strongest economy in the world. Those fundamentals are a well paid work force, government regulation of essential industries, and protective tariffs on imported products.
Until we ABOLISH FREE TRADE, all of the efforts toward bailouts are nothing but hot air and wasted money.

[beef33]

amen brother

[DuganS1]

Tens of thousands of companies have gone bankrupt throughout the history of the country. This is not a recent phenoma. Re airlines, many companies have had problems since the industry was deregulated in the 1970s when more competition, more routes, and lower airfares became available. This was bad for union airlines and union workers, but great for millions of consumers who could now afford to fly and had more routes to take. For textile mills, Warren Buffet knew it was a terrible business after buying Berkshire Hathaway in the 1960s. Too much capital is required and there is very low to no return on capital. For pay, it depends what industry you are in and where in the country you live (cost of living). As for protectionism, in the old days it was good for businesses because foreign competitors were priced out, but it was terrible for consumers paid higher prices to subsidize company profits and higher pay for those industry's workers. Moving toward freer trade has been the policy of the US since WW2, much longer than 25 years . Forcing consumers to pay higher prices to subsidize inefficient businesses and inferior products and to limit consumer choice is not a path to prosperity. And deregulation BTW has been great for consumers. The dereg of the telecommunications industry, trucking industry, and airlines has resulted in lower prices and more choices for consumers. And much of it was done in the 70s under Jimmy Carter BTW.

[wigglwagon]

You can defend it all you want, but it has weakened the demand and caused the the problems we have now. It makes no difference who you try to blame it on. Placing blame does not solve problems. Maybe I am wrong. But! I want solutions, not worthless finger pointing. If it puts people to work with good pay and benefits that will help heal the economy. Let's hear it.

[ReasonIsMyReligion]

As long as there are more arsonists than house fires, we can keep this up forever.

Unfortunately, it looks like the house fires are winning.

[Sundialsvc4]

Okay, Ian, I get it...

"From each according to his abilities, to each according to his needs."

We'll have the State Airline (Aeroflot). We'll have the State Automobile-maker (Volkswagen, maker of "the people's car.") We'll have the State Bank. And we'll all just run as servants of The State because "as we all know," we can't be trusted to take care of ourselves anymore.

"NUTS."

My GM-produced car (a Saturn) runs just fine, thank you. Helluva car, actually, and I plan to buy another one.

Citigroup? I dumped their credit-cards years ago because I refused to pay 35% interest even though I have good credit, and I also got tired of submitting payments on-line ... having them be posted "one day late" ... and having to contest it EVERY MONTH by once-again proving the payment date by their own clock.

There was a reason why Usury is an ancient crime; why swindlers once got their hands chopped off (sans anesthesia) like a common thief's. Crime isn't supposed to be tolerated; there's hell to pay as a society, when and if you do.

We don't need to "nationalize our nation." It runs just fine the way it is ... provided only that, when there are crooks running about (whether they are bankers or "any civil officer"), we bust 'em. Quickly.

If you put up with crime, Ian ... if you "coddle" it and "accept" it ... it will kill you and kill your nation. "Don't."

[keriheb]

So your suggestion is what?

[BeefJerky]

If you plan on buying a Saturn, you'd better hurry up; looks like GM is going to dump it.

[DuganS1]

People who are charged 35% interest on a credit card have either missed payments or have very bad credit.

[T35stryker]

"Socialism in general has a record of failure so blatant that only an intellectual could ignore or evade it"
-Thomas Sowell

[HappyIdiot51]

The United States has a culture that celebrates laissez-faire capitalism as the economic ideal, yet the practice strays at times. Over the last century, the federal government has occasionally taken stakes in railways, coal mines and steel mills, and has even taken a controlling interest in banks when it was deemed to be in the national interest.

The corporate wards of the state typically have been returned to private hands after short, sometimes fleeting, stretches under federal stewardship.

http://www.nytimes.com/2008/10/14/business/economy/14nationalize.html?hp

[Overd0g]

Hopefully our government Frodo's will be able to give up their undeserving (and constitutionally unauthorized) grasp on the Ring Of Power when the time comes.

[FearlessFreep]

Beware of generalizers.

[Overd0g]

Generalizers are always wrong.

[beef33]

I guess I am a little confused in both cases. Rubin is the "brains" behind Citigroup and is making 15 million a year. His disciples are involved with Obama. Yet that company has been run into the ground to the tune of 250 billion? REally all this can be traced back to the rule changes under clinton engineered by old Rob himself to deregualate which led to the derivatives i.e. credit swaps mortgage "backed"(esstentially no backing) securities. AS Nader said these companies should have to pay it back. Period.
then the big gorilla in the room with the carmakers is that the cars are too expensive and people are too broke to buy them. they really have not been built that well as compared to toyota, honda, etc. If it is a depression so be it we need to drive less, more mass transit and the like. Anyone heard of carbon emissions, global warming etc.? that is what nobody is really dealing with. PLus I don't want to buy into their business which I guess is what nationalize would mean. Let the chips fall. Bankruptcy. Tough times are here the denial days are over. lets get to it. Some rich guy roadtripping to washington in a hybrid. who cares?

[Overd0g]

The sooner it starts, the sooner it is over.

[Hoelder]

There is another assumption that is rarely challenged: Big government is wasteful and inefficient while private or public enterprises do a better job and return more dividends for the Dollar invested. That paradigm has been proven wrong. The government might be more efficient considering it's size and spread of services it provides. Clearly the CEO's of these big banks and car makers are not capable to steer their large ship as a autocratic society while the government with all it's changes in political direction has, even under the 30 years of near death starvation, proven that it knows how to run things and when under a Republican "anti government" agenda it survived. That is one more reason to take companies "that cannot fail" because of their size and impact on the economy, into their fold. I know this is so anti American, but it is also "Anti American" to give some one money without strings attached or keep an entity alive without any assurance for return on the investment. We need to nationalize rail and public transportation, including the car makers, a truly national federal bank with incorporating the Federal Reserve, City Group and create a national health insurance etc.

[Nofuzzydreams]

Now what makes you think that the Government can appoint competent managers? They don't seem to be able to do that in the case of themselves. In fact if the Government takes over GM, it will probably make political decisions like building too many green cars too fast at a high cost that consumers are not willing to pay and rewarding UAW. Arranged bankruptcy is thr right answer. Clear the creditors, get rid of the union contracts and start over. Build cars that they have in Europe and Asia here so you save on design costs and suspend the cafe standards while increasing the gasolene taxes so people are drifted towrads more fuel-efficient cars. Use these gas taxes to shore up medicare and social security. As for incompetent management, they will be taken care of by the process if that happens.

[smoore2614]

We have all been talking about nationalizing the auto industery for two days. My question is besides leaving a message with our congress person- how do we get ourselves heard. We need to nationalize these different entities to get money back. I am and others are all for this.

[Overd0g]

How about letting some other country nationalize them? I'm not interested as an American.

[Oldbuck]

I am ready to take over management of Citi Bank during the Saving & Loan crisis of the 1980s. I was the President of a small Saving & Loan in East Texas when it was put into one of the Group of S&L they were closing at the time. To make long story short they gave the management of these S&Ls to a couple of Nixon boys who worked in his election few year before who wound up in jail for fraud of airline miles rebates. Anyway I figure its my turn since I was fired when I had nothing to with the S&L problems. Send me up I will help Citi Bank out. Ha Ha