Slouching towards nationalisation: James Saft

James Saft is a Reuters columnist. The opinions expressed are his own.

By James Saft

LONDON (Reuters) - The Citigroup bailout is sure to succeed, but only if you count avoiding making unpleasant but needed decisions as success.

It won't work if you define success as building confidence and attracting private capital back to the banking system. It fails to work out a clearing price for rotten assets, and though it underwrites $306 billion (200 billion pounds) of them even this huge sum is not enough to suspend disbelief.

It won't even work if you define success as jump starting Citibank lending to private borrowers. The bankers have every reason to keep their heads down and pray they can slowly rebuild capital rather than lending into the biggest downturn in two or three generations.

At best it buys Citibank some time, though heaven knows what they can do in the next little while to stave off a cascade of writedowns in their housing and consumer loan books, much less their emerging market businesses.

It also, and I think tellingly, avoids taking a credible decision on whether Citigroup, and by extension the U.S. banking industry, can avoid explicit as well as effective nationalisation.

We are in a really dangerous moment when is it apparent not only that no one really knows what to do, but that the people making decisions now are not the ones who will be left to sort them out once a new administration takes power in Washington. That provides a ready excuse to simply kick Citigroup's can along the road.

One thing is very clear; the terms extended to Citigroup were a lot less difficult to bear than other earlier bailouts. I would guess that this is because the government is terrified that they have become the only game in town. The government is in a double bind; they must extend capital to banks or see them fail but every time they do it they make the banks less attractive to private money.