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The Nationalization Scenario


Foreign unit sales likely to take greatest priority.

I think the government will try at all costs to create the impression that only a limited number of banks are going to be nationalized.

To achieve this, Secretary Geithner has requested that the top 15 to 20 banks in the country undergo a stress test, whereby regulators will review banks' capital positions under a variety of economic scenarios. And, based on these reviews, those banks that fail will be given convertible preferred stock to boost their capital levels to some yet-to-be-determined level.

In many respects, we've already seen this scenario play out here in the US, with Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG), where the government has purchased a controlling interest in these entities through various securities. And in the UK, the British government now "owns" (and consolidated) both RBS (RBS) and Lloyds (LYG).

What happens with nationalized entities is tough to generalize, though a quick look at AIG's press releases since the US government came in would suggest that divestitures of valuable non-US businesses is clearly a priority.

Also -- though not intending to condemn Citigroup (C) to this list -- I think we're likely to see some form of the Citibank/Citiholdings structure adopted for nationalized banks, where good operating businesses are separated from bad assets and discrete businesses to be sold (such as Smith Barney).

At the end of the day, though, what happens depends largely on the number of institutions nationalized both here in the US and abroad. While governments aren't eager to be operators of undercapitalized institutions, they also don't want to be saturating the market with a global garage sale of business units. At the same time, there's enormous local political pressure to retrench, so foreign unit sales are again likely to take greatest priority.

In any case, should nationalization expand, we should expect to live with it for a period of years, not months or weeks.
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