Citigroup Questions

March 10, 2009

Are you reading thousand-word stories about how Citigroup managed to propel the stock market upwards on Tuesday? Bear in mind this: Citigroup rose the grand total of 40 cents per share — which means that its contribution to the 379-point rise in the Dow was a whopping 3 points. And at $1.45 a share, Citi is still, to all intents and purposes, trading at zero.

The optimism about Citi wasn’t that Citigroup itself might actually be solvent, so much as the idea that if even a seemingly-insolvent bank like Citi managed to eke out a profit this year, then everybody else in the banking sector might actually have something approaching a future.

All of which provides me a good excuse to answer some questions I just received via email from Sarah Jaffe, and then add one of my own.

First off, can you break down what’s really meant by "nationalization" as is currently being discussed by people from Paul Krugman to Alan Greenspan? What’s being called nationalization isn’t really complete nationalization, but more like receivership, right?

I can’t speak for Krugman or Greenspan, and it’s certainly true that different people mean different things by the term. I generally use it to mean a situation where the government controls the bank: the easiest criterion to use, I think, is to ask whether the government can appoint a majority of the board of directors. That’s entirely consistent with the government owning less than 100% of the equity in the bank, of course, which might be considered "complete nationalization". But it’s not receivership.

Do you remember when nationalization became a part of the debate over the financial crisis? Was it Bernie Sanders’ alternative bailout proposal, or somewhere else?

Speaking personally, I started pushing nationalization seriously in mid-January, in posts like this one. But the real debate over nationalization is older than that: I date it back to the debate over the original TARP, when there were a lot of people saying that if the government was going to inject $350 billion into troubled banks, it should get a concomitant ownership stake in return.

A USA Today/Gallup poll showed that Americans favored the idea of nationalization but were opposed to the word. We see the term "socialist" being tossed around a lot in reference to Obama, so I wonder if he’s afraid to propose nationalization because the term itself is scarier than the actual practice. What do you think?

Of course language matters, and there’s a good chance that if major banks do end up being nationalized, the government will try its best not to use the word. After all, no one has really used the word "nationalization" to describe what has happened to Frannie and AIG, despite the fact that they have surely been nationalized.

Steve Waldman wrote "We nationalize because, in a capitalist economy, investors get to keep the profits they endow, even when the investors happen to be taxpayers." Do you agree? Disagree? Is nationalizing the banks a "socialist" idea or is it in fact the proper capitalist response, expecting a return on government investment of tax dollars?

Nationalizing banks can be a socialist idea, if it’s done in the way that, say, Francois Mitterrand did it in 1981. If you’re an ideologist who believes in "the common ownership of the means of production, distribution and exchange", then you’ll naturally want to nationalize the banks. On the other hand, the likes of Alan Greenspan are hardly socialists, and it’s an equally natural consequence of the idea that capitalism is all about letting businesses fail. If you have a bank which is too big to fail, and the government is forced to step in with public funds in order to keep that bank alive, then it’s invidious and full of moral hazard to let the former owners retain any of the upside. That’s much more capitalistic than socialistic.

Is it primarily the giant banks, like Citigroup and Bank of America, that are in trouble, while smaller institutions are just fine?

Yes, pretty much. Obviously the FDIC has been closing down quite a lot of smaller institutions of late, but they’re not systemically important, and most smaller institutions really are fine.

Finally, my own question:

I bought some tickets on the internet, and paid using my Citibank credit card. The gig is in New York, where I live, and the tickets were priced and paid for in dollars. But when I got my credit card bill, there was a 3% "foreign transaction fee" added on top, on the grounds that the website in question — although it billed in dollars — was actually located in the UK, not that that’s remotely obvious by looking at it.

When I phoned Citibank to ask about this, they seemed a bit confused, and couldn’t work out whether the "foreign transaction fee" was for simply sending money abroad, or whether it was for currency exchange. In any case, they said, it wasn’t their fee, it was a fee imposed by MasterCard, and I should really take this up with MasterCard. They transferred me, and MasterCard weren’t particularly helpful, but did say that they’d never charge more than 1% for anything.

My favorite part of the conversation with Citibank was when I asked how I was meant to know that the website had a foreign billing address and that therefore I would be charged this 3% fee. Oh, they said, you should phone them up and ask before you buy anything from them. Does Citi really think that I should try to get through on the phone to any website I’m thinking of buying from, just to make sure that they don’t have a foreign billing address? Any light that anybody could shed on this whole issue will be gratefully received.

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