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February 27, 2009

On Friday, February 27, responding to continuing troubles at Citigroup, the Obama administration unveiled a complex stock transaction that would increase the nation's stake in the failed bank to 38%. According to experts, by purposely avoiding a more than 50% ownership stake in the bank, the Obama administration remains consistent with its publicly stated opposition to nationalizing major banks. The move increases the risk to taxpayers, but also potential reward, should the bank turn around and become profitable.

>>Read more about the stock transactions used by the government at THE BASELINE SCENARIO

Robert Johnson, former managing director of Soros Fund Management and an expert in emerging markets, believes the government's approach — which he calls "drip intravenous capital injection" — wastes taxpayer money and won't solve the financial crisis. The government's approach, Johnson argues, is too cautious. Recent developments in Central Europe only reinforce that the world faces a possible economic collapse, Johnson told Bill Moyers on the JOURNAL, in which "the architecture of the integrated world would be shattered."

Johnson calls for more drastic intervention, but thinks nationalization is the wrong word, "People talk about nationalization. I just call it restructuring. Restructuring is a part of capitalism. That's how the airlines get restructured when they go through bankruptcy. Or you might have to deal with the auto industry, how you deal with venture capital projects. Do the same thing with the banks." Johnson explained on BILL MOYERS JOURNAL how a restructuring would work:

I would ask for letters of resignation from the top executives of all the major banks [...] You might not honor all those letters, but you'd have them. I would then say, "The stock is worth zero. The balance sheet is too far negative to continue risking the taxpayer's money." The examiners, somewhat like FDR did in the bank holiday, would examine the depth of the hole in those balance sheets.

Fill that hole with money, taxpayer's money, to recapitalize. Send them back out into the marketplace where people know they're wholly capitalized. And the last thing I would do is I would separate the toxic assets from the bank that you put back in the marketplace.

So everybody knew the resulting creature was sound and confidence could rebuild. Inner bank credit could start to flow again, because they aren't afraid of each other.

>>Track how the financial crisis is playing out around the globe.

Robert Johnson
Dr. Robert Johnson is the former managing director at Soros Fund Management where he managed a global currency, bond and equity portfolio specializing in emerging markets. Before that, Johnson was a managing director of Bankers Trust Company and served as Chief Economist of the US Senate Banking Committee under the leadership of Chairman William Proxmire. He also served as Senior Economist of the U.S. Senate Budget Committee under the leadership of Chairman Pete Domenici.

Published February 27, 2009.

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References and Reading:

"Remarks of President Barack Obama -- Address to Joint Session of Congress"
February 24, 2009.

"Obama Vows, 'We Will Rebuild' and 'Recover' "
By Jeff Zeleny, NEW YORK TIMES, February 24, 2009.

"Bernanke Again Rejects Bank Takeovers "
By The Associate Press, NEW YORK TIMES, February 25, 2009.

"Bank Test May Expand U.S. Regulators' Role "
By Edmund L. Andrews and Eric Dash, NEW YORK TIMES, February 25, 2009.

"Special Report: A World of Trouble"
Get up-to-date international news and perspective from GlobalPost.

Robert Johnson

"Nationalize Failing Banks? Think Twice "
By Thomas Ferguson & Robert Johnson, THE NATION, February 21, 2009.

"Bridge Loan to Nowhere? "
By Thomas Ferguson & Robert Johnson, THE NATION, September 24, 2008.

Guest photos by Robin Holland

Also This Week:

Bill Moyers talks with economist Robert Johnson, who decodes this week's news on the bank bailout, with a hard look at the international ramifications of the plan and a discussion of why nationalization has become a flash point.

Find out how the economic turmoil is playing out around the world.

Scholar John McWhorter weighs in on whether the U.S. is "a nation of cowards", as Attorney General Eric Holder suggests, on racial issues.

Discover John McWhorter's work on the poetry and politics of American English.

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