Bailout a chance to fix banks

NEW YORK -- It's time for the U.S. to be the ultimate activist investor.

Since the U.S. government has poured nearly $200 billion in taxpayer money into financial companies and more may be on the way, it hasn't required much discipline on the part of the nation's banks.

That's too bad because the government's muscle is far stronger than any other shareholder.

"When the government says move, banks have to move," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

The unprecedented ownership stake the United States has taken in the nation's banks has come by way of the $700 billion rescue program passed by Congress in October to deal with the most serious financial crisis to hit the country since the Great Depression.

So far, the Treasury, through its Troubled Asset Relief Program, has provided $192.3 billion to 257 large and small financial institutions in 42 states and Puerto Rico. Treasury officials have said the goal is to provide banks with $250 billion of the first $350 billion in bailout money, and more could come after that.

For all that money, companies have to follow some modest restrictions on executive compensation and not much else. That has allowed the problems at the banks to fester, as evidenced by the massive losses that are still mounting.

"Someone needs to say game over -- now. That has the best interests of the U.S. taxpayers and the financial markets in mind," said Roger Ehrenberg, a Wall Street veteran who now runs his own investment firm.

At Citigroup, the game is certainly changing -- finally. The government has lent $45 billion to the embattled bank -- more than anyone else -- and agreed to absorb the losses on a pool of mortgages and other troubled assets.

In November, CEO Vikram Pandit said Citigroup was using the right model with its universal banking structure. But that spin won't hold up any more, especially with Citigroup reported a $8.29 billion loss for the fourth quarter of last year on top of more than $20 billion in losses in the previous 12 months.

Recently, Citigroup announced that it would sell control of its Smith Barney brokerage to Morgan Stanley, giving Citigroup $2.7 billion in badly needed cash. The company is announced "long-term transformation" that splits up the universal bank.

Next up on the government's hit-list could be Bank of America Corp., which just got an additional $20 billion in aid to help it absorb the losses at its just-acquired unit, Merrill Lynch.

Bank of America had already received a total of $25 billion in capital injections from TARP, including $10 billion for Merrill Lynch.

The government should insist the Charlotte, N.C.-based company take some radical steps to bolster its financial position. That kind of government-driven dramatic action may be the only way to cure the financial crisis.