I am not so sure. I think lack of clear regulatory authority to wind Citi down is the real issue. Why?
Because if the Fed has clear authority to do it then it doesn’t have to involve Congress and it is when Congress gets involved that things really go boom. Lots of commentators mention that the government would have to “run Citi.” Well, no not really. Most shareholders don’t take an activist role in running the corporations that they own. The government doesn’t have to either.
The problem with nationalization is not that the government has to run Citi but that the government gets to run Citi if it wants. That is, when you go to Congress to ask for money Congress is now fully aware that they can ask you for favors that benefit their constituents or use you as a whipping boy to pull in more votes.
Cutting Congress out of the loop is key and it would allow the Fed to take care of the problem quietly. Even if it took months, that’s fine as long as creditors know that they will definitely get their money back. Indeed, since the Fed is going to guarantee everyone anyway and since they have the printing press they could simply cash out the short term creditors much the way the FDIC cashes out depositors. With this structure a failing Citigroup is much less of systemic problem.