Nationalization should be last resort

President Obama and Treasury Secretary Timothy Geithner are resisting calls for the nationalization of Citigroup Inc. and perhaps other large banks. To many in the financial community, the idea of nationalizing one or more of

the major banks, starting with New York-based Citigroup, is anathema.

Such actions would take the United States a long way toward European-style socialism and all its inefficiencies, they fear.

To others, however, nationalizing Citigroup and perhaps other companies, such as Bank of America Corp., is a vital step toward stabilizing the financial crisis.

Such nationalization would be temporary, they insist. The government would merely take over the bank, replace bad management, sell off bad assets and some of the bank’s divisions, and then privatize it again.

Unfortunately, such a process seems much cleaner and simpler in theory than it would be in practice, and may produce unintended consequences, which is perhaps why Mr. Obama and Mr. Geithner so far have been reluctant to take the plunge.

Proponents of nationalization argue that the federal government nationalizes failed or failing banks every day when the Federal Deposit Insurance Corp. takes them over, as it took over Pasadena, Calif.-based IndyMac Bank last July.

Compared with IndyMac, taking over, reorganizing and then privatizing Citigroup would be an enormous task because it is far larger and far more complex.

The first problem would be finding competent managers to replace the fired managers. Few of the out-of-work Wall Streeters have the knowledge and skill to manage such a complex enterprise as Citigroup, and those with that experience likely are still employed and are unlikely to be willing to take on the task of fixing the company, given the salary caps that Congress has just imposed. A second problem is the disposal of Citigroup’s assets: Who will buy them, and at what price will they be sold?

Some of the units are profitable, but few institutions have the capital to buy them. And if the best units were sold to other institutions, would the remaining parts be profitable enough to be privatized?

Other assets, such as the mortgage-backed securities and collateralized debt obligations that the company holds, are hard to value. If the price is too high, no private investors will buy them; if it’s too low, taxpayers will take a hit.

Nationalization could mean that the federal government will own and operate Citigroup for many years, operating in competition with other commercial banks, overseen by a board appointed by and subject to the political interference of members of Congress.

Given the record of congressional interference with Fannie Mae of Washington and Freddie Mac of McLean, Va., such interference would be likely.

A third problem is that the nationalization of Citigroup, rather than stabilizing the financial markets, might further shake confidence in the financial sector, give ammunition to the short-sellers and drive other banks toward insolvency.

Any action taken by the federal government should restore confidence in the financial system, not weaken it further.

For these reasons, the government must take all other possible actions, such as suspending mark-to-market regulations while the crisis lasts and allowing banks to value mortgage-backed and other securities on a discounted-cash-flow basis, before plunging into nationalization of one of the largest banks in the world.