Days ahead of the release of the bank stress test results, reports have surfaced that Citigroup (NYSE: C) may attempt to raise capital from private investors rather than take more U.S. bailout funds. Such a move could strengthen the firm's equity without giving the government more control.

Although the results of the test haven't been released, it is widely known that Citigroup is considered one of the banks that will need to raise cash to continue (some reports state more than $10 billion).

American International Group (NYSE: AIG) just can't get out of its own way. Seriously, if you want a blueprint of how not to spend "free" money from taxpayers, just read the media's coverage of the bank.

According to MarketWatch, the company is going to pay $450 million to employees of the unit that was basically responsible for the bank's collapse, you read that right.

It definitely seems that this decision is not resonating well across the nation's capital, as Larry Summers (economic advisor to the President) said that the payments are "outrageous." Democratic senator Barney Frank told Fox News that the government needs to look into whether or not these bonuses are "legally recoverable." Yet another Democrat, Elijah Cummings, wants AIG CEO Edward Liddy to resign.

President Obama has presented a budget that will yield a $1.75 trillion deficit --12% of GDP. But he promises to slice that deficit in half by the end of his current term. The budget has many items in it, but I found two to be particularly interesting -- the decision to more than double the original TARP and the move to repeal a loophole that enables hedge fund and private equity managers to slice their tax bills in half.

The budget could add as much as $750 billion for bank bailouts. The TARP had allocated $700 billion to that bailout task last year. $350 billion of that has been spent and if the latest $750 billion is added to the yet-to-be-spent second half of the TARP, that leaves $1.1 trillion of taxpayer money going out the door. But for what purpose? We know $16 billion went to bonuses and there have been the multi-million parties as well. But as far as getting more lending out to individuals and companies, the zombie banks that got the money have kept their purse strings tight.

Meanwhile, the budget does do something good. It makes private equity and hedge fund managers pay income tax on their income instead of treating that income as if it was a capital gain -- subjecting it to the lower 15% tax rate. I argued this point on CNBC back in July 2007 with the Wall Street Journal's Alan Murray (and he ended up agreeing with me). Unfortunately, closing this loophole would have done much more good when hedge funds and private equity firms were actually making money.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

The arguments about the value of shares in Citigroup (NYSE: C) rage back and forth most trading days. The shares can run up or run down 15% during any given market session.

On days when it looks like American banks will be bailed out with common shareholders remaining intact, Citi runs up. On days when nationalization of the banks seems more likely, it heads toward new lows.

Mortgage applications fell almost 25% last week with new loan applications for home purchases hitting an eight-year low, according to the Mortgage Bankers Association. People continue to sit on the sidelines, waiting for prices to drop. Who wants to buy a home today if the price for that home might be lower soon after the deal closes?

Adding to that wait-and-see attitude are some major incentives that could be part of the stimulus package making its way through Congress. The biggest incentive of them all is a Senate provision that would give all home buyers a $15,000 tax credit. Who wouldn't wait to see if that provision survives the House/Senate negotiations?

The U.S. stock market drops 381 points and you ask why. News analysts say that investors were not satisfied with the details of the bank bailout plan.

Well, if you dig a little deeper you will find out the real reason for the stock market's sell off. As part of the bailout plan, the Obama administration plans to conduct a "stress test" across the nation's largest banks. This "stress test" is mandatory for about 20 of the country's largest banks. This is exactly what the banks have been avoiding, that is, to come clean about their losses. Now the whole world will be able to see the extent to which these guys were leveraged out and the kinds of outrageous risks they took.

How would you like it if the government spent $4 TRILLION to bail out our banks? How would you like it if this $4 trillion amounts to 1/3 of our Gross Domestic Product?

We started with $700 billion. Then now there is talk of setting up a 'bad bank" to buy up toxic assets. Then some people started tossing around $1 to $2 trillion. Now we are up to $4 trillion..Goldman Sachs says that 4 trillion is their estimate. Senator Schumer and a group experts have also come up with the $4 trillion dollar number The IMF has estimated $2 trillion for this year.

At the same time the Obama team wants to take bold action to solve this problem once and for all.

Dear Mr. President: Use the next $350 billion of TARP and set up a "good bank" that is solvent and let the banks take their losses. They created this mess. Don't worry about big banks going bankrupt. You will gain immediate support from the American people. An like Lincoln who said: "My paramount object in this struggle is to save the Union," so too our primary goal is " to save the Union," not the banks.

Simon Johnson, a former IMF chief economist and MIT professor, estimates it could cost $4 trillion to bail out our banks. That's $3.25 trillion more than we've already allocated to the problem. Johnson, who argued on behalf of nationalizing our banks last week (a position I debated with him), bases his calculation on the 5% to 10% of GDP that other nations have used to bail out their banks (I think his math is off because 10% of U.S. GDP of $14 trillion is $1.4 trillion).

As posted, I would approach the problem differently. First, I would create new banks that could lend money instead of using it to buy $50 million corporate jets while cutting back on lending after receiving $45 billion in bailout money. Second, I would send an army of financial engineers to reverse securitize all that toxic waste that's causing the huge losses. This process would separate out the, say, 10% of mortgages in default from the 90% of mortgages whose holders are still paying.

It's not often that I urge readers to listen to a radio debate -- but there's a first time for everything. The reason for my recommendation is that the government could soon nationalize our banks -- something that has never really happened in our history. And I think you should consider listening to this radio debate yesterday on KCRW's To the Point with Warren Olney involving a former International Monetary Fund Chief Economist, a reporter from the Washington Post, a blogger from Portfolio, and yours truly discussing the pros and cons of nationalizing the banks.

It's not precisely clear what it means to nationalize our banks. In general, it means that the government takes control of the banks and runs them. In many cases, such as Bank of America (NYSE: BAC) and Citigroup (NYSE: C), the U.S. is already the largest shareholder thanks to the $45 billion each we invested in Bank of America and Citi. In fact, these investments exceed the value of their publicly-traded common shares -- which are valued at 81% and 38% of that investment, respectively -- Bank of America ($36.5 billion) and Citi ($17 billion).

This highlights one of the negatives of nationalization -- common shareholders who are among the innocent (and often ridiculed) victims of managements' poor decisions get wiped out. In theory, the board of directors is supposed to protect the interests of the shareholders. But in the case of the banking industry, they made sure that the executives and "top producers" got enormous bonuses by letting them take on risks that put the financial system at risk -- creating a $2.2 trillion capital shortfall. While my fellow radio debaters argued for nationalization, I argued against it.

The senate yesterday approved a bill aimed at stimulating the housing market. According to the AP: "The plan contains $4 billion in grants to local governments to buy and refurbish foreclosed homes, new authority for states to issue bonds to be used to refinance subprime mortgages, and a temporary $7,000 tax credit for people buying new homes or properties in foreclosure."

So the Senate decided that local governments should get $4 billion to get into the real estate "flipping" market. They will buy these homes, fix them up and then re-sell for a profit? Is that the business government is supposed to be in?

Most local governments have problems fixing potholes and keeping streetlights working, and our wise senators believe that they will solve the housing crisis?

The real problem right now with foreclosed homes is that the banks refuse to bite the bullet and sell these homes for lower prices. I have spoken with a few people in the real estate market trying to buy foreclosures and they all said that the banks aren't prepared to take a loss. So now here comes the senate and says let's give $4 billion to local governments and they will overpay the banks for these properties. Great, so in an election year the US Senate has basically screwed prospective home buyers, choosing instead to bailout the banks.

What a surprise.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/3/08