A front-page story in the February 23 Wall Street Journal describes a plan to let the government convert its preferred shares in Citigroup to common stock, taking 25-40% ownership.
It could be worse. A brilliant February 19 Journal report by Peter Eavis warned that “Government capital injections sit like ill-disguised Trojan horses in the nation’s largest banks,” showing that under Treasury Secretary Geithner’s socialist scheming the government could seize 74% of Citigroup.
The February 23 report says:
When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions. . . . Citigroup’s low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake could backfire, potentially spurring investors to flee other banks, even healthier ones.
Why is this a surprise? In the October 20, 2008 issue of National Review I wrote:
Conservative legislators who expressed fear about letting the Treasury buy mortgage-backed bonds were strangely enthusiastic about inviting the Treasury to acquire equity in companies. Critics of derivatives became enthusiasts for warrants . . . which would give the Treasury secretary virtually unlimited power to confiscate the wealth of stockholders of any company foolhardy enough to play this game.
More recently, in a February 11 New York Post piece (subtly titled “A Plan to Kill Banks”) I explained that:
Once a bank or insurance company gets in bed with the government, the property rights of that company’s stockholders become uniquely insecure. When the government jumps into the cockpit, smart stockholders bail out. And depressed stock prices deflate the banks’ capital cushion.
If “few experts” predicted this dangerous outcome of Treasury purchases of bank-preferred shares and warrants, as the Journal reports, then only a few were experts.
– Alan Reynolds is a senior fellow with the Cato Institute.