DrTdaxp

As I write this, it appears that Obama has chosen the worst of all possible paths and chosen to turn Citigroup into a Zombie bank.

Reports from CNBC, Wall Street Journal, Marketplace, Calculated Risk, and so on indicate that the government will in effect sell its preferred shares at a large discount to Citi in exchange for a 40% of the common stock. The government essentially is trading tens of billions of dollars of preferred stock that we bought as part of the TARP into $4 billion, or so, of common stock.

Citi is undead. Citibank is a zombie bank. We are using capital that could be used in other ways to save Citi. We are saving shareholder value for shareholders who helped create this crisis. A few cosmetic changes will be made, a couple people will resign on the board, but we will Citi to continue to act like a growth-oriented company while letting it socialize its losses onto us.

Citi is a zombie bank, like the Zombie banks Japan created in the 1990s. Now that we have demonstrated we care Citi’s shareholders more than the Treasury, and that we have invested in Citi in the most speculative and least safe form imaginable (common shares), does anyone believe that we will let Citi go bankrupt?

If not, there is no reason for any business to use any bank except Citi. Indeed, not doing so may open up officers to charges of negligence. There is some chance that some honest community bank may be seized by the FDIC, and deposits in excess of $250,000 may be lost. Is there anyone left who thinks Citi may suffer the same way?

Today, what remained of the functional parts of our banking system is gone. Instead, our banking system is as corrupt, politically-centered, irresponsible, and worthless as, say, the Chinese banking system in the early 1990s. The difference, of course, is that the Chinese did help pay for millions of dollars worth of bonuses annually. While signaling that shareholders of politically powerful banks should not be wiped out, that upper management of those banks should not be fired, that those who risked assets on such risky institutions should not be wiped out, Obama is clearly stating that he is behind the high salaries and bonuses of those who work in these institutions.

We have corporations in the United States that run on socialized, low-risk, heavy-government-influence lines. They are utilities. They are run to do a technical job well. Those who work in utilities tend to enjoy a middle class lifestyle. I see no signs that Obama is willing to allow his Wall Street fundraisers to fall to such depths. Obama is continuing to subsidize Citibank, allowing Citi shareholders and Citi executives to continue to hold and earn tremendous amounts of wealths while the U.S. Treasury is on the hook for all losses.

The government, by bailing out Citi in the worst way possible, cripples our banking sector.