The rehabilitation and restructuring of Citigroup (C) was supposed to take months, or maybe a year. The big bank got a cash infusion when it sold a part of Smith Barney to Morgan Stanley. The plan for the creation of a new Citi was based on its ability to limit its losses so that it could buy time to unload other parts of its family of financial companies.

Things did not work out that way. Citi announced that it had lost $8.3 billion last quarter. There was no confidence in management.  The general belief that the banking system is so badly broken fueled the fear in the government and the public that matters were going to get even worse.

The Fed will step in and do what it did for Bank of America (BAC) as its Merrill Lynch unit posted a $15.3 billion loss in the fourth quarter. Citi will also get a program which will guarantee the value of certain bad assets and keep the bank from failing.

Under the government’s aid program for Citi the government will share losses on over $300 billion in assets, with a term on the guarantees up to ten yeas.Citi will immediately separate its banking unit from its brokerage and money management units. There is simply too much risk in the investment operations to keep them married to a commercial bank.

Citi will have access to loans from the Federal Reserve in additon to the loss sharing program. This federal support is based on extremely complex rules, but the net of it is that the bank will have access to the cash it needs to keep from failing.

While the moves to step in and save two of the nation’s largest banks may keep the national financial and credit systems from collapse, the action also make the federal government the de facto owners of these companies.

Americas big banks are being nationalized whether the banks and the Fed want to put it that way or not.

Douglas A. McIntyre

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