Banking Law

Under Their Thumb

This weekend, the talking heads on the Sunday morning news shows were in full bleat about how the federal government must "nationalize" (only temporarily, of course) some of the biggest, most troubled banks, in the manner of Sweden, so that the government can stabilize them, clean them up, change their diapers, give them a bottle, burp them, put them down for a little nap, and then find a nice foster home for them. Today, the federal banking agencies and the Treasury Department issued a joint statement saying, I think, that "nationalization" wasn't going to happen. I say, "I think," because one can never be certain when bureau-speak means what it says or the exact opposite of what it says. Ask me in a year, and I'll tell you what the joint statement actually meant.

Today's Wall Street Journal (paid subscription required) made it clear that the federal government doesn't need to make a legal case for nationalization, because it's already "in fact" nationalized Citigroup.

"Between the capital injections and the asset protection, you've already got de facto nationalization of Citigroup," said John Duffy, chairman and chief executive of Keefe, Bruyette & Woods Inc., a New York investment and research firm that specializes in the financial-services industry.

Shareholders often don't need a 51% stake to effectively control a company. The largest shareholders are typically the most influential, and that is likely to continue to be the case if that big shareholder is the U.S. government.

"The government already has a lot of latent control in Citigroup, and when it wants to flex its muscles, it can. I imagine we will see that control become more explicit rather than implicit," said Bert Ely, principal at Ely & Co., a financial-services consulting firm in Alexandria, Va.

"Latent control." Not so latent, if you ask me. Maybe the Treasury Department's influence doesn't technically meet the definition of "control" under Regulation Y. Nevertheless, the way Citigroup turned tail and abandoned its banking brethren in the fight against cram down in bankruptcy, and its suddenly seeing the light on massive loan modification programs, are clear indications that when it comes to doing the government's bidding, Citgroup is "actually" under the government's thumb.

The Treasury (and the FDIC for that matter) can truly sneer, "Common stock? We don't need no common stock!"

In honor of Citigroup's status as the Treasury's new body servant, we bring you this excellent rendition of the Rolling Stones' classic, "Under My Thumb," performed by three of Treasury's  Gruppenführers assigned to "advise" Citibank.

Full post as published by Bank Lawyers Blog on February 23, 2009 (boomark / email).