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Somebody fetch a cattle prod. The US government is taking another reluctant step towards public control of its largest banks, starting with Citigroup. It will assess banks’ strength in “more challenging” economic conditions and, if necessary, top up capital with convertible preferred shares. Existing government holdings can be exchanged for the new securities which, while not providing new money, would then convert to common equity as needed. The “strong presumption” is that banks stay privately owned.

This strains credulity. Faith in many banks’ capital strength has long since vanished. Repeating parrot-fashion that they remain well capitalised dents confidence that official stress tests will be sufficiently taxing. JPMorgan Chase on Monday set a possible base case, slashing its dividend to guard against, for example, a double-digit unemployment rate. Unclear also is when and how banks will be required to exchange preferred stock for common equity.

Citi, at least, presents a numerical conundrum. Horror of public ownership apparently dictates that any government stake in Citi remain below 40 per cent. Setting the conversion price, as announced, at a “modest discount” to share prices on February 9 ($3.95 for Citi) is tough on taxpayers. At a 5 per cent discount, say, converting $45bn of existing government preferreds results in a stake of 68 per cent, against about 80 per cent if converted around last week’s close of $1.95. Converting about $14bn keeps the government’s stake close to 40 per cent, but only boosts Citi’s tangible common equity ratio from 1.5 per cent to 2.3 per cent.

Raising private capital or persuading other owners of preferred shares, about $30bn, to convert into common eases the strain. The former looks tricky. Even if others prove willing, the authorities still could swap only some of their preferreds (about $30bn-$35bn) and keep their stake below the rather arbitrary threshold. This is a juggling act too far. It is time for tough decisions to be taken.

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