Why Nationalizing GM and Citi 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.