The Wall Street Journal has an editorial this morning calling on the Federal government to put Citigroup out of business as an independent entity "by either forcing it into a strategic partnership, if anyone will have it, or selling off its assets and breaking it up." Such a move, the newspapers editorialists argue, would be a "signal that regulators are starting to cull the weakest institutions in earnest, which could be good for confidence in the overall system." The editorial also argues that "Citi has proven itself unmanageable."
Elsewhere in the paper, the Journal reports that, following a conversion of preferred shares into common, the government will own "as much as 34%" of Citigroup, which "would make the government Citigroup's largest shareholder."
The editorial is an example of the kind of thinking that has come to hold sway even in usually reasonable precincts amid the financial crisis. It's a view that puts the needs – or what are asserted to be the needs -- of "the overall system" ahead of the property rights of individuals, such as the shareholders that own the other 66% of Citigroup – a majority of the shares. A sale that is forced by the government is unlikely to bring those shareholders the highest price for their property. The rule of law would seem to dictate that any sale should be the decision of the majority owners, not of the Journal editorial page or of the 34% owner, even if it is the largest single shareholder. There's a case to be made that empowering government regulators to "cull" weak institutions will hurt confidence in the overall system rather than help it, because there is little or no transparency about why or when the regulators will decide an institution is weak enough to deserve to be culled, and little or no assurance that the rights of shareholders will be protected. That was one thing the "stress tests" were supposed to address. For Citi to be "culled" essentially outside the stress test regime seems arbitrary. It is reminiscent of the nationalization of Fannie Mae, which the Journal editorialists also supported.
Over the long haul, the Journal editorial page has amassed quite an impressive record of standing up for the individual and property rights and the rule of law against arbitrary government actions that are claimed to benefit the overall system. It's hard to square today's editorial with those principles.