Treasury Secretary Tim Geithner is walking a tight rope, where he is bound to fall.
Geithner is feverously working to keep Citigroup’s ATMs working. Treasury knows by now that Citi cannot survive the “stress test.” Not the worst-case scenario test that Fed chief Ben Bernanke told Congress yesterday but the simple balance sheet accounting of debits and credits.
Should Treasury convert its existing preferred Citi shares to common, Uncle Sam would be the majority shareholder and Citi would still need further common share injections to be considered viable for this week.
Further downgrades of the toxic paper on the balance sheet such as: Credit cards, auto loans, Alt-A mortgages as well as prime mortgages and home-equity loans.
The timeline of Treasury’s eventual takeover of Citi is like viewing slow motion crash.
What is the delay? It’s threefold.
The principle concern is how do you treat common shareholders. Do you wipe them out? Do you bail them out? These shareholders include large global players that will be needed in the future for further bailouts, so you need to make them whole, according to Washington insiders.
The second leg of capital market interference is what to do with the debtholders. If you wipe them out then the bank have no other options for raising capital except government handouts.
The other problem is how do you keep the banking playing field level if some banks have Uncle Sam leading the boardroom and other firms have to go without the government providing support.
Third point is that Dick Parsons — an big Obama supporter — has just moved into the chairman’s suite, so he may be given a short period of time to assess the situation before the government lowers the boom.
Remember Capitalism is no longer the driving force within the markets.
For more on Wall and Washington and the cratering economy see: https://mgray12.wordpress.com