What to do with Citi and Bank of America?

It would be one thing if we could look at Citi and Bank of America and say there's hope at the end of the tunnel. But as of right now, there's no light out there. If there were, most would assume its the proverbial on-rushing train. This is because Bank of America just took in nearly $140 billion in taxpayer funds and guarantees and after Citi announced a staggering $8.3 billion loss.  

So what to do? People are increasingly starting to mention the unmentionable: Nationalization, the nuclear option. The government, and by extension taxpayers, are really all in right now, and there appears to be no going back. The nuclear option would be painful for many. Shareholders would be wiped, including preferred shareholders, which of course includes taxpayers. Some bond holders may also lose everything. 

As a Portfolio commentary notes, depositors are not at risk. This is not a liquidity crisis. Thanks to the government's intervention, long lines are not forming at branch offices. The basic question now is solvency. "The equity markets simply don't believe that the banks' assets are worth more than their liabilities," the commentary notes. Part of this has to do with negative perceptions of Citi CEO Vikram Pandit and Bank of America CEO Ken Lewis, the Banker of Year not so long ago. 

Lewis "has very little credibility with the investor public right now," said Paul Miller, analyst with Friedman Billings Ramsey Group told the Wall Street Journal. 

Given such dire prospects, we indeed need a radical change. One could argue the government is already calling the shots at Citi. Most assume, fairly or not, that Pandit isn't really in charge, neither is the board. Rather, it's the government forcing it to pare down its two core operating units, and get rid of everything else. At Bank of America, we may well see the government start to wield a stronger hand.

Outright nationalization is an extreme measure, akin to a preventative radical mastectomy. That we are even talking about it suggests the depth of despair when it comes to our national banks. - Jim

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