John McCain best pal Carly Fiorina …

“If we don’t change, we’re going to go back to the old ways, and we’re going to continue to lose,” said Maldonado, who faulted the party’s hard line against illegal immigration. “They don’t get it on illegal immigration,” he said.

But a tough stance toward illegal immigrants was a given for the 1,250 delegates and guests at the convention. Carly Fiorina, a possible contender in the party’s U.S. Senate primary next year to challenge Democratic incumbent Barbara Boxer, made them the butt of a joke in a hotel penthouse breakfast speech. When her family first moved to California, Fiorina recalled, her little brother asked, “Mommy, do they speak English there?”

“Wasn’t that prescient,” she joked, sparking a burst of guffaws.

A former Hewlett-Packard chief executive who left the troubled company with a severance package worth an estimated $21 million to $42 million, Fiorina also bucked the populist tide against lavish corporate salaries by denouncing President Obama’s effort to cap annual pay at $500,000 for leaders of banks taking federal bailout money.

Halfway down into Edmund Andrews’ piece in the Times about the bank ‘stress tests’ which start this week …

In yet another sign of distress for the banks, Citigroup officials were in active talks with federal regulators on Sunday night about the government’s potentially buying a bigger chunk of the giant bank, according to a person with knowledge of the talks.

Citigroup officials approached the regulators with a plan that would allow them to convert a substantial amount of the $45 billion of preferred shares held by the government into common stock, this person said. That would give the government a much bigger ownership stake in the company, and would probably increase the government’s influence in the bank’s business dealings. Federal officials have already pressured the company to shrink itself and shake up its board.

Eric Dash has more at DealBook. Seems to be an effort to get the government to convert its preferred shares into common stock (and perhaps get other sovereign wealth funds to do the same — good point since the USG sort of is a SWF at this point) to get into a better position ahead of the ‘stress test’. This is all to avoid having to come to the Feds for another lifeline. And I confess I don’t fully grasp the value implications of the stock conversion. But it doesn’t exactly inspire one with a great deal of confidence in Citi’s viability.

And come to think of it, TPM banks with Citi. Hmmm …

Late Update: FT has a bit more. They say it would leave the US govt. with a 40% stake in Citigroup, though it seems unclear how the current shareholders can really offer anything less than a controlling stake now since the bank has essentially zero value. It all seems like some sort of desperate last minute gambit in advance of the stress test when Citi’s really not holding any cards. Sort of like proposing mini-nationalization (USG owning just under half) to get the government off the idea of eating the full meal. (The best discussion I’ve seen is this one in the Journal.)

Latter Update: As I read more about what’s happening here, I almost wonder if this is the nationalization decision, just in a way that no one quite wants to concede, since it makes even more explicit that the US is effectively in control of the bank. That said, the whole thing just seems to show that the institution is not viable. So why are the existing shareholders holding on to anything? They’re trying for yet another ad hoc temporary fix. Which may be why the Feds appear to be hesitant, if not outright balking.

You know we’re not in a good place when a piece in Bloomberg starts like this …

Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

The GOP wants to party like it’s 1993. That and the day’s other political news in the TPMDC Morning Roundup.

Despite all the “honeymoon is over” silly talk (starts at 3:28 mark), Gallup polling shows that the drop off in Obama’s approval ratings from January highs is attributable solely to disenchantment among conservatives — and that his standing among Democrats and independents has either held steady or actually risen.

The economic stimulus package has been signed into law by President Obama, guaranteeing billions of dollars to individual states. Most governors are taking the money, but some Republican governors are refusing it in opposition to the stimulus package. And still others oppose the stimulus, but are taking the money anyway, because hey, it’s free money. The question in today’s Sunday Show Roundup: who wants it more?

Full-size video at TPMtv.com.

As we noted last night, Citigroup had gone back to the Feds for a further restructuring of the government’s ownership stake in the company based on converting preferred shares to common stock. According to this article in the Post, the federal government has agreed to that and also made the same terms available to the 350 other banks that have accepted government money. Bloomberg has more details. Here’s the joint statement from Fed, Treasury, FDIC, et al.

Perhaps because there’s so much else going on, the fact that this is budget week still doesn’t seem like it’s really broken through in the headlines. Today you’ve got the president’s ‘fiscal responsibility’ summit. Tomorrow he gives his speech to a joint session of Congress — which is like a quasi State of the Union address — to present the outlines of his budget. And then the president’s actual budget is presented on Thursday.

The White House has been saying they want to find significant savings from Medicare and Medicaid to free up money for a major down payment on health care reform this year. My own sense is that a lot of the chatter about the administration wanting to move in any way on Social Security is overblown.

In this post Jon Cohn games out what the White House has in mind on the health care front.

Over at US News, Rick Newman has an article on why bank nationalization is allegedly such a scary prospect. Now, let me start by saying that it is scary. Not because it’s ‘nationalization’ and that’s somehow inherently scary. But because we’re in a midst of an historic financial crisis — and it’s global. There are so many moving parts that the results of any potential actions are inherently unpredictable. And the stakes are very high. (The biggest fear I have is that the take over of a few big banks could start a cascade effect with runs on others, though I don’t have the specialized knowledge to have a good sense of how likely that is, what steps you’d take prevent it.)

But one point in Newman’s list stuck out at me — that nationalization would ‘vaporize’ a lot of wealth.

This is why the markets freak out every time there’s a rumor, or a rumor of a rumor, about nationalization. If the government took over a bank, public shares would suddenly be worthless and shareholders would lose everything. With Citi and Bank of America shares down more than 90 percent over the last 12 months, many shareholders have already lost a fortune. But there’s still a chance they’ll get some of it back if the bank recovers. That potential upside would disappear if the feds stepped in.

Even worse, the banks’ bondholders and other creditors could lose a bundle too. Same with depositors and institutional customers whose account balances exceed the amount guaranteed by the FDIC. To prevent a panic, the government would probably cover those stakeholders up to a certain level – with taxpayers footing the bill once again.

Now, this is a key point. I’m frequently told that the whole issue of wiping out the shareholders is a non-issue, or an overblown issue, since the shareholders are already basically wiped out, having lost like 90% or 95% of their investment on some of the big bank stocks. But this is the point — if the US government takes responsibility for keeping Citigroup on life support and nursing it back to health over 5 years or so at massive taxpayer expense, the value of that stock is going to go way up. That’s especially the case since the equity the government is getting doesn’t come close to market value for the money being invested. So yes, it’s scary how many people could ‘lose a bundle’, unless you come to grips with the fact that that bundle has already been lost and that the only thing preventing them from coming to grips with that fact is the assumption that the taxpayers will come in and make all those folks whole.

As Joe Stiglitz says (and many other do too) it really is a zero sum. How much do the investors pay for and how much do the taxpayers pay for?

TPM Reader AC reacts to ‘Scary Nationalization‘ …

Rick’s conclusion that “nationalization” would remove shareholders’ chance of recovering their losses misses two important points. First, the only reason that the 90% to 95% losses that many have taken is not 100% is because of the chance that the feds bail out the banks but leave some equity outstanding (e.g., the 40% Citi solution). This, of course, is just a transfer of wealth from taxpayers to bank shareholders–like Paulson’s funding of Citi greater than their market cap, to take meaningfully less than a 100% stake. The second point that he misses is that if it’s just about keeping some money in the game with a chance of a recovery, bank investors can always sell their remaining investment in banks and put the funds in another investment with a chance of growth. The only thing that makes the bank investment more attractive than any other equally high risk investment is the chance that the bank investors will get a free transfer of wealth from taxpayers. With apologies for the double-negative, Rick’s “leaving the equity in the game” argument is no reason not to temporarily nationalize the banks.