USA Today has joined the rest of the media in helping to paint a bright picture for the health of the banks. (Can we stop the Fed and FDIC subsidies now?) It goes along with a bit if slight of hand in telling readers about how Citigroup was so easily able to deal with much of its capital shortfall: "Citi made a deal in February in which the government would be able to convert up to $25 billion of its preferred shares into common stock, for a 36% stake." The problem in this story is that at the time of the conversion, Citi had a market capitalization of about $20 billion. This means that the government effectively spent $25 billion to get a 36 percent stake in Citi that could have been purchased on the market for just $7 billion. When banks can arrange deals like this with the government, it is not surprising that their books look good. Most businesses would be doing quite well if they could get the government to pay them more than three times the market value of their stock.
--Dean Baker
