Nationalization is Not a Viable Option

Kevin Drum asks:

What would it take to nationalize an outfit like Citigroup? What are the likely legal, financial, diplomatic, and operational issues that would have to be resolved? It would be a real public service if someone with a credible background in this stuff could lay out the details in a way that's understandable for all the rest of us.

I don't have nearly enough time to lay out all the legal obstacles to nationalizing a bank like Citigroup, which would require several weeks, if not months, of legal work.

But here's one major legal issue: investment rights under Bilateral Investment Treaties (BITs) and some multilateral treaties such as NAFTA. For example, Article 1110 of NAFTA (which is representative) provides:

1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except:

(a) for a public purpose;

(b) on a non-discriminatory basis;

(c) in accordance with due process of law and Article 1105(1); and

(d) on payment of compensation in accordance with paragraphs 2 through 6.

2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place ("date of expropriation"), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.

3. Compensation shall be paid without delay and be fully realizable.

The disputes over valuations of Citi's equity and debt securities would be endless, fraught with uncertainty, and potentially very expensive for the government. What's more, claims under Article 1110 of NAFTA (and similar claims under some BITs) can be brought directly by private investors.

This is just one of the seemingly endless legal obstacles to nationalizing an international financial institution like Citigroup, which has operations in over 100 countries. The legal issues alone would immediately create so much uncertainty that international financial markets would be thrown into chaos.

What the blogosphere doesn't seem to realize is that nationalization is simply not a viable option. It's literally not on the table.