Friday, February 27, 2009

The 36% Solution

The government of the U.S. is now, merely a few months after assuring us that it had no such interest, about to become a major voting shareholder in Citibank. But it will not become a majority owner, converting its stake only to 36%. A lot of the financial-press attention has focused on the impact on the existing shareholders. Why did the government settle for less? The conventional wisdom, as the hourly radio news assures me as I am writing this, is that it is a sign that “the government hasn’t given up on Citi.”

I wonder. If you wanted to have control over Citi assets, and wanted to use them for controversial purposes, what would you do? You wouldn’t simply grab control, which would bring to mind the dreaded socialist phrase “nationalization.” But you would obtain enough control to have de facto veto power over major decisions. You could then use that power to increase diversity, cut the executives’ pay, increase the accountability to the “stakeholders,” and all that other stuff that will get you re-elected but end the bank’s effectiveness in performing its core historical tasks. Citi shareholders and managers have no credibility in objecting; they elected to dance with the devil, and now the devil is calling the tune.

But seeing it that way would be too cynical.


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