RealEstateEconomyWatch.com

The U.S. government is exchanging up to $25 billion in emergency bailout money with Citigroup for as much as a 36 percent equity stake in the struggling bank, raising taxpayer exposure in the struggling financial giant even higher.

The deal announced Friday by the company and the Treasury Department represents the third rescue attempt for Citigroup in the past five months. It’s contingent on private investors agreeing to a similar swap.

The conversion will make the government the largest shareholder in Citigroup, but company officials said they still expect to call the shots.

“We remain in charge of the day-to-day operations of the company and none of that changes,” chief executive Vikram Pandit said in a conference call with reporters.

Investors have punished the shares of Citigroup and other banks in recent weeks out of concern the government could nationalize troubled banks, which would involve replacing management and wiping out shareholders. Investors sent shares plummeting 94 cents, or 38.2 percent, to $1.52 in afternoon trading. Stocks tumbled early but pulled off their lows as the Dow Jones industrial average came within 34 points of breaching the 7,000 mark for the first time in more than 11 years.

Treasury officials and Federal Reserve Chairman Ben Bernanke have said there are no plans to take such steps.

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America was a very different place the last time the Federal government was in the banking business. The demise of the Second Bank of the US at the hands of Andrew Jackson in 1836 ended our national experiment with owning and operating a central bank. The experiment’s end had little to do with its role in the econom—, where generally it had been highly successful—and everything to do with politics. Jackson was opposed not to central banking, per se, but to the Second Bank in particular, seeing it as an instrument of political corruption and a threat to American liberties. He felt it did not serve the interests of the agricultural West and South, his political base. The U.S. would be without an official central bank until 1913 when the Federal Reserve System was formed.

Historians view the Bank of the United States as a chapter in the ongoing debate between those who preferred a weak central government to those who desired a strong central government. How ironic that today a strong central government may find itself nationalizing banks in order to rescue a weakening financial system.