To be honest, I’m not quite sure how to read this Wall Street Journal piece, since this is a spat between two parties, with a “he said, she said” quality to it. However, the title, “Citigroup Chafes Under U.S. Overseers:” suggests a bias in favor of Citigroup.”Overseers” is a weak word, suggesting Uncle Sam really doesn’t have legitimate authority to take the actions it is demanding.
But that assumes both viewpoints are equally legitimate, when the case can be made that they aren’t. Poor abused Citigroup is unhappy that the government is trying to leash and collar the behemoth company. They somehow seem unable to process the fact that if they had done the same lousy job with a smaller institution, it would already have been seized by the FDIC and put in to receivership.
This viewpoint is not an exaggeration of the facts on the ground. As former bank regulator William Black points out in “Why Is Geithner Continuing Paulson’s Policy of Violating the Law?“:
Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take “prompt corrective action” to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks.
The other bit of bias is in how the piece characterizes the relationship. It mentions the 7.8% equity state the government holds, but fails to acknowledge the additional guarantees of what amounts to $250 billion of loans (once you parse out first losses and loss sharing arrangements). The story also depicts a possible effort to break up the bank as politically motivated, as opposed to something that would make managerial sense. The span of control in the bank is simply too large, and the synergies between many of the businesses are weak to non-existent. Plus every study ever done of banks in the US had found that banks, once they exceed a certain asset size, show a slightly INCREASING cost curve, as in their costs/revenues rise. Big banks are not more efficient; the evidence is that they become a tad less efficient the bigger they get.
So why were banks so keen to consolidate? Might have to do with the fact that CEO pay is (was) correlated with asset size of bank.
From the Wall Street Journal:
Citigroup executives are attempting to strike a seemingly impossible balance: Run the business in a way that will please their new federal masters, but also help the bank rebound from $28 billion in losses over the past five quarters.
Yves here. That is another company-serving bit of spin. Does anyone think, with pretty much all advanced economies contracting and deleveraging likely to continue, that there are great profit opportunities out there?
The “help the bank rebound” bit makes it sounds as if the Citi crowd is really trying hard to do the right thing, when looking high returns in a market like this is what economist Tom Ferguson calls a “Hail Mary pass”: taking risk with taxpayer money.
Remember the original terms of the TARP funds: preferred stock with a 5% coupon for five years, then the dividend rate increases. One could argue that for a not-so-large loan, that might be a good incentive (I don’t subscribe to that view), but the fact is it gives the bank reason to gamble. And the more they’ve borrowed, the higher the desperation level (until the debt reaches a level where it is clear, like AIG, that there is no way out). Back to the piece:
Former federal officials have dubbed Citigroup the “Death Star,” comparing the bank’s threat to the financial system with the planet-destroying super weapon in the “Star Wars” movies. Privately, in the words of one official, they regard the banking giant as “unmanageable.”
Complicating the issue is the government’s back-and-forth between bouts of micromanaging the banking giant and periods of ignoring it. In trying to be neither an active nor a passive investor, the U.S. is directing the business without a firm strategy or particular expertise.
Yves here. That sounds completely plausible. But if you have ambiguity in the relationship, Citi could have used that to help define it, by being very pro active on certain axes (of course, ones that suited them) and hope that the display of seeming good faith (and keeping supervisory personnel busy) would buy them slack on other fronts. Back to the piece:
Central to the confusion: There’s no one individual or entity in charge of the federal oversight of Citigroup.
That’s because banks like Citigroup are regulated by a patchwork of agencies including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Treasury Department also has oversight because it’s the one that is injecting government capital into the banks. And members of Congress, who initially approved all that money, have their own stake in how things play out. All these interested parties have been handing Citigroup a jumble of sometimes conflicting orders, advice and critiques.
Officials with the Fed, for instance, informed Citigroup executives they have “observer rights” that entitle them to participate in the bank’s board meetings. Though the government hasn’t joined in so far, the fact that it might has led some Citigroup executives to complain privately that the U.S. now has “unlimited power” over the bank. One person close to the company compared the government’s role to the sword of Damocles, an ever-present evil hanging over their heads.
At a minimum, the powers that be should be getting minutes of board meetings. But the sword of Damocles is par for the Citibankers not getting it. They are wards of the state, yet want the rights of a private concern. Back to the article:
But even as the government has ensured Citigroup’s survival for now, bank executives say they have been left to read tea leaves about how to implement federal directives.
U.S. officials say Citigroup’s problems are wide-ranging, presenting issues for various governmental agencies — all of which are also engaged in handling problems involving other banks and the economy. Some officials say they have given Citigroup executives broad outlines of what they’d like the company to do. They say thus far it’s not been the government’s position to give Citigroup a specific playbook about how to put directives in place. The current talks for federal assistance, however, could result in more direct orders on how Citigroup should proceed.
Without having more detail, it is hard to know what to make of this. The Citi staffers are unhappy that the government is giving orders, and then unhappy that the orders are vague? The various government officials may indeed be being vague to try to avoid being overdirective.
But if Citibank isn’t sure what will fly, why not write a plan or program back as a forcing device? The fact that this wasn’t done makes me think the complaints are mere kvetching. There is more that Citi could do to make this messy arrangement less ambiguous, and they don’t appear to be taking those steps. This bit argues otherwise:
In recent weeks, Citigroup executives have reached out to various government officials for guidance — with little to show for their effort. Last week, Mr. Pandit met with Lawrence Summers, the government’s chief economic adviser, in the White House’s West Wing. Mr. Summers made clear that he wouldn’t discuss Citigroup specifically, and Mr. Pandit emerged from the meeting with no better idea of where the Obama administration stands in managing ties with the big bank.
Yves here. I would not have recommended a meeting of that sort without doing groundwork. And how involved is Summers with Citi on a day-to-day basis anyhow? It is impossible to tell, but it give the impression that Pandit walked in trying to get an answer from Summers, who is probably unfamiliar with the details anyhow even if he had been inclined to answer? An approach more along the lines of “we’d like to have a productive relationship, here is our impression of where things are working well, here are areas where we have a lot of uncertainty. Should I look to you to help work this out? If not, how do you suggest I proceed?” Now that may have been what happened, but the article does not give that impression.
And then we get this:
Amid the anxiety, Edward Kelly, a senior investment banker and one of Mr. Pandit’s closest confidants, used his personal misfortune to ease tension within Citigroup. After a trying visit to Washington to brief regulators, Mr. Kelly returned to his Baltimore home tired — and soon woke up to a screeching smoke alarm. Finding flames in his home office and working to halt the fire from spreading, Mr. Kelly burned his right hand and arm so badly that doctors kept him home for several days to prevent infection.
In a flurry of phone calls while he was home recuperating, Mr. Kelly joked to colleagues that he was putting out fires at both his home and his company.
What does this have to do with the thrust of the article? And we have this:
Communications from government officials, meanwhile, have been spotty. Friday afternoon, after the bank’s shares had closed the week at an 18-year low of $1.95, top executives reached out to the Office of the Comptroller of the Currency and the New York Fed. They wanted to discuss Citigroup’s proposal to substantially enlarge the government’s ownership stake. The conversations were constructive, but they couldn’t progress much until they heard from Treasury, the government arm that had invested in Citigroup’s preferred stock and therefore would need to bless converting that stake into common shares.
Through the weekend, Citigroup didn’t hear from Treasury officials. Then on Sunday evening, Mr. Pandit’s phone rang. It was Treasury Secretary Timothy Geithner, calling with a message: “I think we just need to do something.” Mr. Geithner was short on specifics, but said he was ready to entertain Citigroup’s idea of converting a big chunk of the government’s preferred stock into common shares.
Yves again. Citi wanted a weekend special. Team Obama has a lot on its plate (auto bailout, G20, need to flesh out details of housing plan). As we indicated at the time. we did NOT see Citi getting a deal over the weekend. Why? With all the government backstopping, a tanking share price isn’t the big deal it once was. In the absence of a depositor or counterparty run, this indeed COULD wait a few days, But Citigroup characterizes it as poor communications. Heck, they were the ones who called in a panic.
And we have this:
Citigroup’s guessing game also extended to congressional hearings held earlier this month. Legislators pounded Mr. Pandit and other bank executives for putting their institutions in jeopardy. As Mr. Pandit prepared for the hearings, some Citigroup executives urged him to make two concessions: apologizing for the corporate-jet fiasco and agreeing not to get paid until Citigroup returns to profitability. Others argued that such conciliatory gestures would validate unfair criticisms of the company. Mr. Pandit ultimately made both concessions at the hearing.
Yves again. Huh? A guessing game? Lee Iaccoa knew exactly what to do when he asked for a bailout for Chrysler (merely a Federal guarantee of its bonds). He took a $1 salary until the debt was repaid. The “guessing game” monicker makes it sounds like its the government’s fault that Pandit was getting conflicting advice from his team. No, he was merely getting bad advice from some that he needed to reject, as he did. Anyone who didn’t live in the Wall Street entitlement bubble would have known better.
There is a good deal more in the piece, but you get the point. That does NOT mean the Administration is handling Citigroup well either. It’s a new team dealing with an unprecedented situation. But my reading of this article says it should be taken with a fistful of salt.
Yes these institutions are used to telling the government what to do more than the reverse. Especially so since Pandit is from Morgan Stanley which had more power and less oversight than Citi.
It’s a cultural problem. The government at the highest levels should tell Geithner that things can wait, we can take some time. The share price doesn’t matter. I wish someone would say exactly what the cause for panic is.
I’m not saying there is no cause for panic. I am saying that before we pay for it, we should know what we are paying for. And after a year and a half of this, we are adults now and deserve to hear the truth. We can handle it, at least as well as the bankers can.
Don’t worry about destroying confidence in C. There is none left to be destroyed.
Thank you for linking to the WSJ article. I think it gives a good though unpleasant view into the minds of top management at banks that have been allowed to become too big to fail. It makes me wonder what it will take to convince them that, in view of the mess they have made, they simply are no longer in a position to make demands or complaints. (Like objecting to having to travel by train.)
The very fact that a collapse of an institution the size of Citigroup endangers the entire financial system means that the government should have the power to step in **before** a collapse takes place.
Let me put it like this. I’m Dutch, and we have a complex system of dikes to keep the country from flooding. Without them, about one-third of the Netherlands would be permanently flooded, and about a quarter would be flooded regularly. The major dikes are owned and maintained by the government. Small ones -and the side of a drainage ditch can be classified as a dike- can be part of private property, but don’t anyone dare to start digging in them. The regional water authority sends in its builders, and makes the digger pay for the repairs. And possibly he ends up in a criminal court. (In the past the consequences could be even more severe: until the invasion by Napoleon, the water authorities had their own courts and gallows.)
In case of emergency: once the Water Authorities Emergency Powers Act is invoked, all power rests with the engineers. All able-bodied men can be called up, although in practice the authorities have standy contracts with building contractors and the like, and of course they mobilize the army. Areas can be evacuated, anybody found there after 24.00 today will be arrested and kept in jail until the police has, at some unspecified moment, time to ask him what he was doing there.
What this means, converted to the financial world: if you see somebody creating a potentially very dangerous situation, that may harm not only himself but also lots of innocent bystanders, the authorities have a duty towards the potential victims to act before things go wrong.
Please, let somebody bring in whatever sort of government is required to end this mess. It’s not my money. But I would expect that US taxpayers might object to this recurring process of throwing money into a black hole.
Some history on Citi and Romancing Dugan
Nov 4, 2005 – In a recent speech, John Dugan, Comptroller of the Currency, said option ARMS “have a legitimate use in the right hands, but they need to be handled with extreme care,” because they can be risky for both consumers and lenders.
Dec 1, 2005 – In this month’s RMA Journal interview, John Dugan, Comptroller of the Currency, discusses how things have gone well up to now because of a very favorable two-year period that may have reached its zenith in July. Now, he says, is the time to watch trends very carefully to ensure that …
Jan 1, 2006 – John C. Dugan, comptroller of the currency, said in a speech before the Consumer Federation of America on Dec. 1 that regulators are watching the situation and hope to protect consumers strapped for money. “We recognize that the change in required minimum payments will make it more …
Mar 3, 2006 – Comptroller of the Currency John Dugan said he had instructed examiners not to “second-guess” the decisions made by bankers when renegotiating loan terms … In a speech in New Orleans, Comptroller of the Currency John Dugan said Thursday that a longer extension might still be granted. …
May 12, 2006 – Comptroller of the Currency John Dugan defended his agency’s approval of three national banks’ commercial real estate projects that critics, including Rep. Barney Frank, D-Mass., said could blur the line between banking and commerce.
I like that one above:
American Banker Friday, March 3, 2006
Regulators at the conference restated their commitment to flexibility and said they expect bankers and examiners to be creative and innovative.
“We regulators will need to consider doing things we have never done before,” said Office of Thrift Supervision Director John Reich.
Comptroller of the Currency John Dugan said he had instructed examiners not to “second-guess” the decisions made by bankers when renegotiating loan terms with customers.
Regulators also finalized CRA guidelines on Thursday that say financial institutions will be granted community development credit for loans, investments, and services to distressed areas.
The guidelines say that investing in middle- and upper-income areas (particularly in rural areas, to attract businesses or residents) that revitalizes a designated disaster area will also satisfy CRA standards. The guidelines extended to three years, from one, the period for making such CRA loans in a disaster area.
In a speech in New Orleans, Comptroller of the Currency John Dugan said Thursday that a longer extension might still be granted.
Also see and hear:Death Star
I think I figured out a way for us to sue the Fed and Treasury to challenge the legality of their alphabet soup of lending facilities.
Governmental agencies are required by law to give the public a notice and comment period BEFORE issuing regulatory rules. This is required under the Administrative Procedure Act, Section 553.
If you review Treasury’s and the Fed’s creation of their alphabet soup of lending facilities to help the big 6 banks and GS and MS, the Fed and Treasury mostly have been creating the programs through announcements. They have not been issuing a notice in the federal register (the official publication of regulations) with notice period for interested parties to submit comments and then participate in a hearing.
This may mean that the various programs are ILLEGAL due to violating the APA.
I am not an expert so I don’t know if private citizens can sue to void agency actions that violate the APA. However, most certainly community banks and credit unions that have been screwed over by the Fed and Treasury’s assistance to their competitors would have standing to sue the Fed and Treasury to overturn their assistance to the major banks.
Spread the word to the credit unions and community banks and civil rights groups like the american civil liberties union. Hopefully, Bernanke/Paulson/Geithner slipped up and violated the APA, and we can get the courts to overturn their programs as ILLEGAL actions.
Also, if the Fed and Treasury does start having notice and comment periods, we should start showing up at the hearings to protest. The Fed’s and Treasury’s actions as promoting systematic risk by encouraging corruption, incompetence, and reckless speculation.
Martin, too right.
What a dismal display of shirking by both sides. They are simply dwarfed by the scale of the shambles. Mind you, I think this lot would be dwarfed by quite a small shambles.
I can’t see either side being forced to take any initiative to resolve the situation, until the slush fund of taxpayer money is exhausted. At which point it will suddenly become really really urgent again, and there still won’t be a proper plan.
Further horrible speculation – Citi may be considering how they will fund their off balance sheet vehicles. Last time I looked, there was ~$1Trn OBS, of which a good half was RMBS of unknown pedigree – does anyone think it is good stuff? If much of it is funded wholesale, on a rolling basis, which is quite likely, then there maybe a double whammy down the road for C – first a full blown funding crisis in the off balance sheet stuff, then, as a consequence, the revelation of further humungous ABS losses (more multiple hundreds of billions). I wonder if this is what’s making Pandit all sweaty. Perhaps he’s propping up the OBS stuff already, on the quiet.
Or perhaps he has finally got bored with thumb-twiddling – that’s been his main occupation for the last year. That, and needling Jamie Dimon, and writing daft emails to his staff.
Better bank oversight has to be good news but what has really been uncovered here is poor management from both the bank and regulators side. I have not used the word incompetent as I don’t really know the full ins and outs of this, but even the auto makers came up with a plan (a rose tinted spectacles one).
If I were a bank executive then I would not be asking regulators what to do or what I am allowed to do, I would be attempting to present detailed plans for how the banks can be turned round. It just sounds to me like Citibank executives have sort of given up running the bank and need to check here there and everywhere before acting. When they get 10 different instructions from the different authorities they then seem to be frozen in the glare of the headlights.
Frankly the management structure in Citibank does not appear to be working with my suspicion that middle layers of management are tending to drag their feet. Shareholders ought to think carefully about their obligations in light of what appears to be going on.
In the mean time the various agencies and authorities over seeing Citibank need to consult with each other so that they have a consistent and complete view instead of giving comflicting instructions.
Anon@3:55AM. I am not a lawyer, but I would be willing to bet that individual shareholders and bondholders would have standing. The problem is that Citi and the others large institutions requested assistance, and congress authorized the assistance. Congress has the authority to regulate commerce, and these institutions are up to their collective eyeballs in commerce.
The problem is: the assets aren’t worth shit! They are just trying to buy time, and it seems that time is for sale in loads, both in Washington and Wall Street, but they do not want the general population to know what the truth is. It is just another case of asymetrical information, protecting the crooks!
The excerpted quote is precious: “One person close to the company compared the government’s role to the sword of Damocles, an ever-present evil hanging over their heads.” Apparently Citi has no clue what a private hostile take-over might involve for a solvent institution, much less what a bankruptcy judge might do with an insolvent one.
The denial is actually so severe it’s humorous. The media enablement of it—and the WSJ seems to be proudly leading the way in its news pages of all places—is pathetic.
You are talking your book and losing your credibility. Enough already with the bias. Try to think for yourself and be honest and insightful. You are getting tiresome and will lose readers.
Some very recent and relevant developments on this side of the pond:
Bank nationalisation gets EU green light[fr][de]
Published: Wednesday 25 February 2009
As support grows in the US for outright nationalisation of weak banks and insurance firms, the European Commission will today (25 February) suggest that governments should be able to take control of banks as a last resort to prevent the collapse of key financial institutions, provided that rescued banks fully clarify their exposure to toxic and impaired assets.
@ Swedish Lex: In itself a quick nationalisation is preferable to the present situation: writing blank checks and letting banks cash them in monthly or quarterly installments. To US readers: I think that when all the Level 3-assets have been looked at really thoroughly, I think that quite a number of European banks will be found to be just as insolvent as US banks.
Sounds like neither side knows what to do and can’t manage the beast that is Citi. Break up the company where the pieces are far more manageable. Unlike BofA and Chase, Citi has never consolidated its operations and merged systems. This means most of the pain of a break up would be non-existent. The longer we continue to believe that Citi can stay in its current form the worse it will be. First Weil and Prince would not do it, than The Board and Pandit said they would not do it, now the government wants to be on the Big Bank train. If it hasn’t worked in 10 years why do we continue to believe that running this operation as one big hairball will help customers, shareholders, and the government now?
One element to add to Yves’ excellent, unbiased and insightful post: Citi culture. Citi is and has been famous for literally decades as having an extraordinarily decentralized culture. Instead of, say, GE like command, think of a global archipelago of fiefdoms and islands. Successfully imposing ‘directives’ in a culture like this is a herculean task — whether for Pandit, for any third party private investor/owner or for the US government.
I read the WSJ piece and thought it was garbage. Did Citigroup’s PR department write it and the WSJ print it? Poor Citigroup. Poor Pandit. Kill this monster. The article says, “the US … by converting its 7.8% stake of preferred shares to as much as 40% of Citigroup’s common stock … would give the wobbling bank a desperately needed boost to its capital”. Think about that. The way to boost capital is to make a new investment. This is incompetent reporting. Why should Uncle Sam move down the preference chain in bankruptcy by converting? Crazy.
Citi culture …
Is it possible that the public sunshine goody face persona of government is clashing with the more devious dark side ugly face persona?
Excerpt from; The Crimes of Citibank… More CIA Connections CITIBANK’S SENIOR MANAGER FOR GOVERNMENT RELATIONS, NORA SLATKIN PLAYED KEY ROLE IN JOHN DEUTCH INVESTIGATION – FORMER NUMBER 3 AT CIA [From the May 31, 2001 issue of “From The Wilderness”]
Special to NarcoNews – As the remaining unbiased press of the Western Hemisphere, and especially of Latin America, rises in outrage at the announced May 17 purchase of Mexico’s giant Banacci Group (Banamex) by Citigroup, more skeletons come stampeding out of the Citigroup closet. Both banks have been firmly connected to drug money laundering and Banamex owner Roberto Hernandez owns land near Cancun, Mexico that is commonly referred to as “the cocaine peninsula.” President Bill Clinton vacationed on the Hernandez property in the summer of 2000.
Taken collectively these skeletons reveal a well-defined financial and intelligence infrastructure that appears tailor-made for the global management of the drug trade’s billions of dollars in illegal revenue along with the additional billions of dollars generated annually by the illegal looting of national economies by government officials.
One of these skeletons is Nora Slatkin. Having risen to a post as Assistant Secretary of the Navy for Acquisition in 1995 she resigned and was immediately appointed as the Executive Director of the Central Intelligence Agency. The Executive Director is the number three position at Langley and is responsible for all Agency operations. Her boss was then Director of Central Intelligence (DCI) and current Citigroup Board Member John Deutch. The timeline – as compiled from stories in The New York Times, The Washington Post and AP and the CIA’s web site – around her tenure at CIA and of her transition to Citigroup is most revealing.”
Here’s the link;
Could there be any connection here to the imminent collapse of the Mexican government that seems to be getting traction in the news lately?
Deception is the strongest political force on the planet.
i on the ball patriot
Well, it just shows you don’t need 51% ownership (as the stupid comments of Greg Ip from the Economist Magazine imply) for there to be effective Nationalization. That is in fact what we do have so do it and do it in full measure.
Re. Yves exemplar of Lee Iaccoca and his taking a $1 salary. Uh huh. And not long afterwards, he cashed in $200 million in stock options from Chrysler. That kind of back-door payout based on short term performance (Chrysler pulling out of the abyss for a few short years) is the fundamental problem of incentives in American business leadership. No?
.”Overseers” is a weak word, suggesting Uncle Sam really doesn’t have legitimate authority to take the actions it is demanding.
Nor will they carry whips :-/
Yves talking her book? That doesn’t make any sense. The article is pointing out some piss poor reporting and where the bias shows up.
LOL! But that would make the government slavedrivers.
“Yves talking her book? That doesn’t make any sense. The article is pointing out some piss poor reporting and where the bias shows up.”
Bill Gross / Summers considers Yves to talk her book if she advocates the interests of taxpayers over bondholders.
“Bill Gross / Summers considers Yves to talk her book if she advocates the interests of taxpayers over bondholders.”
Summers called rich people “selfish” for fighting against higher estate taxes. It seems that Summers/Geithner think it is “selfish” for the middle class not to want to bail out bondholders and CDS speculators.
Martin, you are looking at this situation backwards. In fact, I would surmise to say that the vast majority of commenters don't understand the underlying motivations of the central governments, and therefore also continually repeat false analogies.
What you described was how the financial regulatory scheme existed before it became official gov't policy to relax certain risk standards in order to achieve what is/was deemed a politically virtuous objective: the "ownership society".
To use your dike analogy, assume that a certain segment of the population was not able to enjoy 'water sports'. As a solution, the water authorities decided to allow periodic flooding in order to achieve this societal objective.
However, as the dikes became progressively weaker from back-filled water, there came to be a period of crisis where the entire system was endangered to the point of collapse.
Now, a common sense approach would be to be to reverse prior public policy directives and focus on pure engineering solutions. That's what we see expressed by Yves, et al: why don't they do the right thing?
But what you're missing is the political motivation for continuing the access to 'water sports' even though it threatens the entire dike system.
Until you understand that FIRE forms the entire economic basis of the modern welfare state, including employment & 'clients' ie recipients, you'll continually miss why the .gov is using every resource at its disposal to "shore up" (yes, pun intended) the banking system in an effort to restore the credit driven consumer economy.
Doing the "right thing" isn't an option; it does nothing to re-ignite FIRE. The objective is FIRE->welfare state. Once you understand that, every action coming out of DC/WS makes absolute perfect sense.
centiare, to a very substantial degree, I believe you are right.
It’s our job here to make sure those actions are exposed for what they are. After one gets good at it, it’s actually fun to deconstruct the various strategies employed by “them”. Interesting times.
Believe me, some of us do indeed get it. I happen to be an inhabitant of a small Anglophone island where the split of employment is roughly 50% state, 20% financial services, and 30% miscellaneous manufacturing, hairdressing, soothsaying, etc.
The coming reallocation of resources is not going to be pretty.
Doesn’t stop me wanting a plan though, and some honesty.
Doing the "right thing" isn't an option; it does nothing to re-ignite FIRE. The objective is FIRE->welfare state. Once you understand that, every action coming out of DC/WS makes absolute perfect sense.
Take for example the current effort to mandate log retention at wifi points in the US (http://tinyurl.com/d7ph3b). The cover story about child predators is the justification invented to explain the real objective of increased surveillance, and they'll surely cook up something else if it doesn't fly. As the Downing Street memo puts it, "the intelligence and facts were being fixed around the policy."
That said let me stress that I highly value Yves forthright and honest appraisal of the face-value motives. As helpful and relevant as it is to point out sub rosa agendas, the current propaganda being put out by US gov/banks/mainstream media is so patently ludicrous that a ruthlessly logical direct attack like Yves can be highly successful – perhaps even more so.
If Federal Reserve Chairman Ben Bernanke were captain of the RMS Titanic on that fateful April night he would have made the following announcement to the 2,200 frightened passengers and crew, “I contacted vice chairman Tim Geithner who checked with his steering committee, comprised of Schumer/Dodd/Frank, and the best way to handle this crisis is to save the Wall Street bank passengers, first. In addition, all credit cards on file from other passengers have been debited $1,000 dollars because the bankers have catastrophic CDS gambling debts and have run up a huge CDO tab at the bar. In addition, payments for the naming rights to the Mets baseball stadium, a blowout convention in Las Vegas and a professional golf tournament in Florida, sponsored by bankers, require payment. Also, credit card money goes toward banker employment bonuses so that they can give out loans, only if they wish, when they are safely rescued.” Dr. L. Summers Pangloss, although an academic, boarded a lifeboat early by banker invitation, was asked to comment upon leaving and uttered, “All is for the best in the best of all possible worlds.” Captain Bernanke further declared that he expected the Titanic to turn up in the second half of the year and amazingly, the 1,500 doomed passengers and crew agreed.
More bailouts on their way:
BTW, the “adverse” scenario of the stress test is a complete joke.
Missing in all of these debates and bailouts is this:
What is it that the experts see as being so terrible and so awful that these banks need to be bailed out in ever increasing amounts?
“What is it that the experts see as being so terrible and so awful that these banks need to be bailed out in ever increasing amounts?”
The bankers will keep asking for money until the people put the fear of god into politicians.
The administration announced that that the banks can draw needed funds at will from the Treasury, in the form of convertible preferred stock. Bernanke said that we do not want to zero out stockholders. The executive branch is beyond our control.
We have to put the fear of God into our legislators, to make sure no additional Treasury funds are appropriated for this purpose.
Congress is angry at greedy bankers. Congress needs to reform itself (from the WSJ):
By MARY ANASTASIA O’GRADY
Chris Dodd’s house habits have already caused him big trouble with Connecticut voters. His presence as a beneficiary on subprime lender Countrywide Finance’s Friends of Angelo list was a key factor earlier this month when he earned his worst job rating in 15 years of polling by Quinnipiac University.
His case won’t be helped by new revelations in Sunday’s Hartford Courant. Columnist Kevin Rennie revealed the dubious circumstances under which the long-serving senator became sole owner of yet another property, a private house in Ireland, in 2002.
A grand estate on ten acres in Country Galway, the house was purchased for $160,000 in 1994, with Kansas City businessman William Kessinger contributing two-thirds of the purchase price. Eight years later, Mr. Dodd bought out his partner’s interest for about $122,000. Considering that home values in Ireland had quadrupled between 1994 and 2003, Mr. Rennie reckons Mr. Kessinger’s share should have been worth at least $330,000.
Also curious was the witness to the original deed — one Edward Downe Jr., who had pleaded guilty a year earlier to running an insider-trading ring and paid an $11 million fine to the SEC. In 2001, Mr. Dodd successfully lobbied for a pardon for Mr. Downe from President Clinton.
One question is whether Mr. Downe had any continuing connection to the house or role in its financing beyond his witnessing of the sale. Mr. Rennie, a former Republican state legislator and regular columnist for the Courant, notes that the “Irish land registry isn’t open to the public in the manner of the American system. It probably appeared unlikely that anyone would discover the curious appearance of Downe’s nearly illegible signature as the witness to Kessinger’s signing the official transfer document.”
He also reports that Mr. Downe and his wife “in the past few years have been sponsors of local events” in the Irish neighborhood of Mr. Dodd’s home, though Mr. Dodd reportedly tells the paper “the Downes have never stayed at or rented his house in Inishnee, nor had any financial role in it.”
Connecticut GOP Chairman Chris Healy has his own view of the revelations. Mr. Dodd “won the Irish sweepstakes and Ed Downe bought him all the tickets,” Mr. Healy tells me. “He sold his soul to people who need things and in Ed Downe’s case, it was the pardon.”
Though the Rennie column was among the most viewed items on the Courant Web site Sunday, the story hasn’t been picked up by the wider media. Mr. Dodd may be less lucky in his choice of opponent next year. Reported to be considering a challenge is Peter Schiff, who runs a Connecticut brokerage and gained fame as a forecaster of the subprime blowout and critic of Washington corruption.
It’s obvious what is going on here: Citi is just positioning itself for future failure. When they need another $40, $50 billion, they can complain that they would’ve performed better, if the government wasn’t meddling in their business.
Anon 4:59 you may be right, this is a long game.
At the end of all this “stress test”, all we will have is a result. We won’t really know how big a CDS hole they have in the middle of their business. We’re not to know that, it’s just our job to pay for it.
The hole will still be there next year and they can cry for more money then.
God I wish we could just shut them down.
“God I wish we could just shut them down.”
If 3 people buy debt of each big bank, they can file involuntary bankruptcy petitions against the companies. If we’re prepared to finance litigation to fight them, or get lawyers to do it pro bono, we can fight over the banks solvency in public. And expose for all the world to see just how insolvent these banks are due to their CDS trades. And govvie promises aren’t assets on the books to prevent them from being insolvent.
That is a very interesting idea. Very very interesting. Thank you.
I have absolutely no idea what Centiaire and a couple of Anonymouses are talking about with FIRE (maybe finance, insurance and real estate?), the welfare state (huh?) and “sub rosa agendas”(???). There is obviously a conspiracy theory here that I’m missing out on.
But I would have no trouble at all in believing any suggestion that concentrating attention on “the crisis” helps Govt. avoid difficult things like health care reform, industrial policy, trade policy, immigration policy, labour policy, environmental policy, etc, etc.
The Crisis is almost as good as a war; it eats up all other issues.
“If 3 people buy debt of each big bank, they can file involuntary bankruptcy petitions against the companies. If we’re prepared to finance litigation to fight them, or get lawyers to do it pro bono, we can fight over the banks solvency in public. And expose for all the world to see just how insolvent these banks are due to their CDS trades. And govvie promises aren’t assets on the books to prevent them from being insolvent.”
No, you’d have to show the banks generally aren’t paying their debts.
However, if someone buys bonds in the banks, they could sue them to attack any transactions they do as fraudulent conveyances if they aren’t arms legnth, like bonuses, or like selling assets at below market prices to the CFO’s wife. This would allow public litigation over whether the banks are solvent.
gordon: yes you correctly decoded the FIRE acronym.
How about a conspiracy to transfer taxpayer money to banks, or to certain connected banks?
There’s nothing wrong with discussing the other important issues you mention. This may not be the right blog for some of it, that would be Yves’ call.
In an interview with PBS television’s “NewsHour” program, Geithner said he was “deeply offended by the quality of judgments we’ve seen in the leadership of our nation’s financial institutions.”
Now if I could only ask the follow-up question:
Why continue to lend money to persons with a demonstrated deficiency in the quality of their judgements
I did have some hopes for Geithner. But now I am ready to walk around and cuss like Gabby Hayes did
“n an interview with PBS television’s “NewsHour” program, Geithner said he was “deeply offended by the quality of judgments we’ve seen in the leadership of our nation’s financial institutions.”
I won’t believe Geithner beleives ANY actions by bankers are offensive until he starts firing bankers who previously engaged in “offensive” action, and advocates a 500k pay total pay cap for all employees, independent contractrors, and consultants at banks.
What else could Geithner say, that those actions don’t even offend him?
He’s making nice noises to us and maximizing the gifts to the banks.
It’s really unprecedented for the gov’t to take a first-loss position behind creditors and preferred stockholders.
I would speculate that the govt’s approach to Citi has everything to do with its off-shore operations and nothing to do with faith in management or with political ideology. Full nationalization would trigger legal issues for some foreign subs. 64% of Citi’s deposits are in foreign subs. U.S. law prohibits payment of deposit insurance on off-shore deposits, and many of Citi’s foreign domiciles do not have deposit insurance. Perhaps Geithner et al are afraid to discuss these issues both for domestic political reasons and to not scare away foreign depositors. And I think it’s plausible that the international reach of a few mega-banks has shaped policy for all of them.
“It’s really unprecedented for the gov’t to take a first-loss position behind creditors and preferred stockholders.”
I think we need to find a way to sue the Fed/Treasury. If they overpay to help the big 6 banks, we can try to have small banks sue, maybe under the administrative procedure act for abuse of discretion in favoring the big bank, and maybe for putting these programs in place without a notice and comment period so they can object, and maybe under the small business act for the Fed/Treasury not doing analysis of the impact their programs have on small businesses.
If Treasury/Fed let banks pay bonuses, we can have bondholders sue for fraudulent conveyance.
We can also organize protests if there are any regulatory hearings about how the Fed/Treasury are shafting taxpayers to help rich bondholders and CDS counterparties.