John Dizard: Geithner’s and Citi’s Days Numbered

Now I will admit my headline overstates John Dizard’s current column in the Financial Times a hair, but only a hair. Dizard has a somewhat baroque way of presenting his messages, and the color can take the edge off his communiques. Nevertheless, he has cultivated contacts among central bankers as well as at the major financial firms, so he typically has good intelligence.

The big messages are that Washington simply cannot make all the bank bondholders good, despite its pretenses it can. Citi is going to become a test case sooner than most realize. Dizard also says that the charade that the banks have a liquidity problem not a solvency problem, is wearing thin even on those who have good reason to play along (and as far as I can tell, there is absolutely no Plan B when the world wakes up and realizes what a crock Plan A was).

Dizard’s certainty that Geithner and Citi are goners comes through loud and clear even through his elaborate prose.

From the Financial Times:

That piece of shit up there, I never liked him. I never trusted him… But that’s history, I’m here, he ain’t.” Tony Montana (Al Pacino), watching a colleague hanged from a helicopter.

Scarface (1981)

It’s nearly time for some Washington careers to get the helicopter-noose treatment, particularly among the crowd of unvetted advisers and the tiny group of confirmed appointees at the Treasury Department. Politicos and policy hustlers have a style that differs slightly from Tony’s, but they’re about as sentimental. Secretary Timothy Geithner, not a bad or dishonest person, just a mediocrity who picked the wrong friends and trusted them for too long, can probably hear the rotor blades in the distance. Sadly, the prospective compensation packages for his next career are more modest than they would have been even a year ago…

For the rest of us, the question is who can be the next to take the lead on the national workout. That is probably Sheila Bair, chairman of the Federal Deposit Insurance Corp. But the FDIC needs serious reinforcement of its talent, and a different capital structure, for this to work.

You can pick out the likely geographical spot where the present bail-out wave will recede: 399 Park Avenue, the Citigroup HQ. Already, the Federal Deposit Insurance Corp’s resolution planners are circling the holding company’s shareholders, bondholders, and – at last! – top management.

Even other Tarp financed Wall Streeters are getting tired of the pretence that the Treasury and its advisers are brilliant or that their schemes make sense. Vishwanath Tirupattur, a Morgan Stanley credit strategist, said on a conference call last week that “The policymakers think lack of liquidity and leverage is the main problem…they think prices are depressed more for technical than underlying reasons. There are clearly several asset classes where current prices are better explained by collateral performance.”

“Collateral performance” means that the banking system’s real losses, not temporary mark to market losses, are overwhelming the capital injections finance-able by Federal bail-out appropriations. Congress won’t vote for any more, because they want to safely return home to their districts and maybe get re-elected.

So who’s left? The receivers at the FDIC. They’re sort of like the Internal Revenue Service, though without the Service’s easygoing institutional nature and its agents’ good sense of humour.

When there is a seizure, or “resolution”, of a bank, they take over as owner, guarantee deposits, and fight to take control of any assets. They are not customer-centric, relationship lenders. The FDIC is a corporation owned by the US government, but its costs are paid through levies on member banks.

Before Sheila Bair puts up government buildings colour swatches on the wall of Mr Geithner’s office, though, she will want to decide whether it might make more sense to stay in her current position. Senate confirmation would not be a challenge for her. Maybe, though, having some other punching bag at the Treasury would be better, especially since the FDIC faces staff shortages. Managing that, as well as a leadership transition and a raft of resolutions, would be difficult.

Also, while the Wall Streeters in Mr Geithner’s corner are demoralised enough to be brushed aside, and the big bank shareholders are either playing some derivative arb or totally out of it, the bondholders of the banks aren’t going to run away crying like little girls. Their basic implied threat is to withhold any further capital investment in big banks, which example would be followed by foreigners. That is less scary than it was before Hank Paulson’s crash.

Yves here. That is a standard threat, “Stiff the bondholders, and you’ll never raise cash again,” and it is utter rubbish. Bond investors LOVE investing in nice cleaned up companies exiting bankruptcy. Happens all the time. And note Dizard’s claim that Geithners’ Wall Street defenders are losing faith. Back to the article:

Chris Whalen of Institutional Risk Analytics, which, among other activities, profiles bank credit quality, says “The administration has said that all the senior debt of the banks is money good, but they don’t have the money to back that u.p,,,,Before the end of the second quarter, we have to come to a decision on Citibank. Government cannot write a cheque for $200bn, $300bn or $400bn to bail out the bondholders.”…

Citi might buy some time with writeups on assets formerly marked to market. And even with bank bondholders sliced up and turned into mere stockholders, and with the FDIC backed with a $500bn (£341bn, €377bn) (or bigger) line of credit with the Treasury, a systemic workout will eventually need new law.

Yves here. Geithner has given lip service before Congress to being able to put big banks in receivership, but I have seen nada in the way of concrete steps to make that happen. Back to the article:

The key problem is this: if the cash the FDIC uses for big bank resolutions really is a loan from the Treasury, then it will have to be repaid with a usurious assessment on the rest of the insured banks. That would not leave sufficient operating cash flow, or capital accumulation, for the banks to finance recovery. So the loan must turn into an equity capital contribution from the taxpayers.

However, since the FDIC is owned by the same taxpayers, and insures their deposits, that will be an easier sell than any more capital “investments” in the banks or dealers. Also, FDIC managers have modest houses in the suburbs, and drive minivans rather than limos. Better optics.

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  1. IF

    So much for the rumor mill. I agree that a bond holder would love to invest in a cleaned up Citibank. But certainly this would cause bondholders of all other banks to get scared. Well, I say “bring it on”. Maybe we can find a way to cut that baby in half.

  2. Anonymous

    I keep on seeing these “screw the bondholders” articles but see very little analysis behind them along with the fact that bondholders have been screwed as a result of what’s going on. For example, Lehman, Wamu, and IndyMac are situations where bondholders got back less than par. What about Citigroups exchange of preferreds and Trups? Bondholders got less than par in those cases.

  3. Anonymous

    There is no shortage of greedy, stupid people in the world. We’ve seen plenty of this in the MBS market already. Thus, even if the USG stiffs the Citi bond holders, I have no doubt a new crop of eternal optimists will still be ready to invest in bonds.

  4. Sergei

    The wind-down of citigroup will pose bigger systemic risks than the wind-down of Lehman, due to its larger asset base and global operations, and the problem with counterparty risks will arise again. I would think a lot more of the global banks have counterparty exposures to Citi than say, Lehman. If they had to write down such exposures, the writedowns could further impact their capital adequacy, which will restrict lending and slow down any recovery…

  5. Anonymous

    “I keep on seeing these “screw the bondholders” articles but see very little analysis behind them..”

    Failure to see the bond holders pulling the strings is very common, you just have to look a the vacuum, it will not be pretty, and polite talk is not of taking out bondholders.

    Because of the size of the bondholdings in question, they play like gangstaz’

    A 5% haircut on 400 billon of bonds (very low, think more like 20%)would amount to 20 billion dollars. They can spend up to that 20 billion in lobby and other nonsense to make sure it doesn’t happen, and still come out ahead.

    They also get paid while they are waiting. Every day before the end is a day where they are earning on those bonds. They do better pushing off the day of reckoning.

    This is even before leverage.

  6. Anonymous

    “Yves here. That is a standard threat, “Stiff the bondholders, and you’ll never raise cash again,” and it is utter rubbish. Bond investors LOVE investing in nice cleaned up companies exiting bankruptcy. Happens all the time.”

    IMO, you make a most important point that has been lost in the storm. There is a huge supply of capital looking for honest investment at a positive interest rate.

    We are experiencing the loss of transparency and trust in the financial system, swallowed up by years (decades) of corruption and fraud. Stabilizing the financial system does not equate with preserving the status quo. The government does a great disservice to the American people by continuing the bankrupt and dishonest policies of Reagan/Bush. The system needs cleansing.

  7. Russ

    Yes, the notion that these investors are going to go elsewhere is ridiculous. They have no where else to go.

    That’s how the FIRE sector bloats in the first place: too much surplus capital which can no longer be productively invested.

    (Of course, I’d like to simply do away with such surpluses in the first place. Then there would be no bubbles, and no need for them.)

  8. Anonymous

    This ongoing train wreck can not happen soon enough, IMO. The throttle is still on full speed ahead and that needs to change.

    There evidently must need to be more pain before the patient responds to the train wreck happening.

    It is the spasmodic flailing part that makes for the ugliest time. Trust me, I have been there.

    I had excellent emergency room doctors. Lets hope we do as well.


  9. gaius marius

    the difficulty i see resides in who, exactly, the demonized and nefarious “bank bondholders” are. they are us.

    bank debt, iirc, is largely held by three parties: other banks, insurers and pension funds. start wiping out bank debt, and you’ll have sparked a cascade that wipes out much of the insurance and annuity industry, cuts pensions to pieces and pulls a string of banks into the maw. such an event very likely runs well beyond any illusions of government control very quickly — it could easily give rise to the very inferno we’re trying to mitigate, and be vastly more damaging and expensive than guaranteeing bank debt and fostering zombie banks.

  10. Anonymous

    I agree with gaius marius, it’s a spiral in the toilet bowl, major bank failures then AIG needs another bailout and we know who now owns AIG.

    FDIC wasn’t given a Congressional blank check because financials have a rosy outlook.

    The DOW needs to check the 4000 area to make sure that’s the bottom.

  11. Cat

    “it could easily give rise to the very inferno we’re trying to mitigate, and be vastly more damaging and expensive than guaranteeing bank debt and fostering zombie banks”

    Nice try. And I bet you are still looking for those WMDs in Iraq. I think most people here are beyond worrying about some imagined inferno, and are rather more worried about the very real destruction of trust and transparency, and the ongoing looting of the US Treasury by the oligarchs.

    Burn the bond-holders, destroy their companies, and dump the entire smoldering turd in the trash. Then start over. Repeat as needed.

  12. Anonymous

    Citi shouildn’t be “cleaned up,” or even in existence for that matter. “Cleaning up” is bailout-speak for having the taxpayer in general responsible for Citi’s incompetence.

    Bondholders need to start realizing and accepting the fact that their investments in banks liek Citi may be worthless. After all, that’s what bankruptcy means — everyone unwise enough to have associated with the bankrupt firm loses, maybe all the way down to $0.

  13. Anonymous

    Pension funds and life insurance companies are already teetering. If they’re heavily represented among bank bondholders, you’re just shifting the problem instead of solving it.

    Maybe all the seemingly obvious “cut the Gordian knot” solutions proposed aren’t so workable after all…

  14. Anonymous

    As a potential bond holder, I am willing to sell some gold and sink some good dough in a reengineered financial institution called “Citi Community Bank” or “Citi Credit Union”. But since that will never happen, I plan on sitting here through this depression, obsessively polishing my bullion.

    Vinny GOLDberg

  15. Richard Kline

    Two conjectures following from Dizard’s remarks and Yves post, for another day.

    First, it does sound as though amongst the ibanks Wide Boys it has begun to sink in the Not All Shall Be Saved. The Guvmint simply cannot readily lay its hand on enough dough to pull this off, even looting the FDIC. So those best positioned are getting ready to kick another few of the hindmost out of the chopper. They ganged up on BSC last Spring, and Lehman’s was widely (and accurately) to be fatally exposed at that time; just took another six months. So now Citi is the designated main course at the Feast of the Zombies, with Wells right behind.

    Second, the first time any senior government policy maker is dismissed or demoted for failure in the Bank Stealout, the spell of their untouchability will be broken, and bodies will start to topple left and right, putting fear finally into politicos who can’t be fired but can be rendered political carrions. And that first time this happens . . . it will be the _first_ time of this crisis. Name me a senior governmental agent who has been forced aside thus far in this. Uh-huh. But once first blood spills, the political sharks will start thrashing. About time.

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