Posted Oct 11th 2008 11:10AM by Douglas McIntyre Filed under: Citigroup Inc. (C), Financial Crisis
As had been expected, The Treasury will begin to take equity positions in major U.S. banks. According to MarketWatch, “The plan calls for banks to be recapitalized with public and private funds, but makes no specific mention of another common suggestion.”
The part of the plan that is rarely mentioned is that the government could end up owning huge percentages of very large banks. Citigroup (NYSE: C) has a market cap of $76 billion. What if the Treasury has to put $25 billion of equity into the big bank? The agency might not want to have a board seat, but it would need to have a substantial say in what happens with the financial firm. Otherwise, how are the shareholders protected?
It would be better for the Treasury to give banks very long-term loans. It would be less risky for taxpayers if the debt was senior to all other debt and common shares. And, someone in the government would not have to look over management’s shoulders to make sure the average citizen was likely to get his money back.
Douglas A. McIntyre is an editor at 247wallst.com.
