Citi Rescue: One Of The Worst Mistakes In History & May Collapse Financial System

Discussion in 'Economics' started by ByLoSellHi, Nov 25, 2008.

  1. The U.S. government’s emergency rescue of Citigroup Inc. offers a new model for bank bailouts: explicitly insuring against losses on toxic assets, with taxpayers footing the bill.

    The U.S. Government has officially and ultimately betrayed U.S. taxpayers in the most direct, transparent and blatant manner imaginable.

    Citigroup Bailout Charts New Course for U.S. Government Rescues

    By Craig Torres and Robert Schmidt

    Nov. 25 (Bloomberg) --
    The U.S. government’s emergency rescue of Citigroup Inc. offers a new model for bank bailouts: explicitly insuring against losses on toxic assets, with taxpayers footing the bill.

    The Citigroup plan extends the federal commitment beyond the previous framework of capital injections from the Treasury and credit from the Federal Reserve. Now, the U.S. is a partner in the performance of $306 billion in real-estate loans and securities, sharing losses beyond $29 billion on what are likely to be some of Citigroup’s worst holdings.

    “Everybody and his brother has got to have their hand out now,” said Eric Hovde, chief investment officer at Hovde Capital Advisors, which manages $1 billion in financial-services stocks. “The whole problem is so much bigger and deeper than the Fed and Treasury ever understood.”

    Taxpayers are likely to be at greater risk from the new template, which may be used to help more companies as debt writedowns continue to climb, analysts said.

    “Every situation will need to be evaluated on a case by case basis, but obviously we are able to draw from our experiences as we work through these issues in the financial system,” Treasury spokeswoman Brookly McLaughlin said.

    Citigroup’s crisis escalated as it was forced to take on its balance sheet a number of special units created to invest in riskier securities. The New York-based bank’s shares lost 60 percent last week, and then recouped some of those losses yesterday after the government’s rescue. Other lenders remain vulnerable.

    Weakened Banks

    Wells Fargo & Co. is absorbing Wachovia Corp., the bank that regulators pushed in September to merge amid mounting losses from $120 billion in a portfolio of home loans. Bank of America Corp. has taken on both Countrywide Financial Corp., once the biggest independent mortgage lender, and Merrill Lynch & Co., the securities dealer hobbled by $24 billion of losses. Morgan Stanley slumped almost one third in the past three months.

    Other banks “are going to show up” and ask for the Citigroup deal, predicted Joseph Mason, a professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.

    The loss-sharing plan is another twist in the saga of Treasury Secretary Henry Paulson’s management of the $700 billion Troubled Asset Relief Program. Since the rescue fund was approved by Congress and enacted last month, Paulson has been criticized by lawmakers and others for not having a clear design for using the money. President-elect Barack Obama joined the chorus yesterday.

    ‘Confusion’ on Strategy

    There has been “confusion on what the overall direction might be” of the Bush administration’s plans, Obama said in a press conference in Chicago. At the same time, he pledged to “honor the commitments” of the outgoing team.

    “The model is that there is no model,” said V. Gerard Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. “It is an improvisation battle plan.”

    Under the terms of the agreement, Citigroup will cover the first $29 billion of pretax losses from the $306 billion asset pool, in addition to reserves it already set aside.

    Citigroup will accept 10 percent of losses above that amount, with the government responsible for 90 percent. The Treasury is second in line, taking $5 billion in losses, and the Federal Deposit Insurance Corp. is third, absorbing up to $10 billion. If the portfolio plummets through those triggers, the Fed steps in with a loan for the remaining assets.

    Initial $25 Billion

    U.S. authorities acted after the second-biggest U.S. bank by assets touched $3.05, the lowest level since 1992, threatening confidence among its depositors and counterparties. Citigroup had already received a $25 billion infusion under Paulson’s $250 billion capital-injection program.

    “The Treasury and the Fed are doing what they can do to hold the pieces together, and it hasn’t been easy,” said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which lobbies on behalf of 3 million businesses. “If we don’t keep the financial system going that is going to impose costs on the American public that will be real and palpable.”

    The Fed’s exposure in the deal also represents a tack in the way the central bank has approached the crisis.

    Since what was an effective purchase of $29 billion Bear Stearns Cos. assets in March, Fed officials have shown a preference for providing short-term credits for firms facing a cash squeeze.

    Assets Swell

    The central bank’s balance sheet expanded $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.

    Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds.

    Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to $52.5 billion in loans to help American International Group Inc. wind down its portfolio.

    “It is clear that regulators still lack a comprehensive plan to address problems in our financial markets,” Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo. “It is unclear whether they have carefully considered the implications of their continued ad-hoc approach.”
  2. Clearly the FED is in trouble. If one of these big banks go down, the FED will go down with it.

    I suspected, beginning in the first quarter of this year, the FED was going to put itself in a bind by assuming positions in troubled assets. It was a risky, and dumb move.

    The only was out of this is via the bailout/nationalization/hyper-inflate model. Maybe in that particular order.

    get your tradin shoes on folks
  3. Today, it might just cost us an arm. Tomorrow, it will be the leg. The next day...damn, what a sorry sight.

    Well, give Bush, Bernanke, and Paulson a round of applause for job well done! I hope the Obama administration will soon issue new stamps in their honor so that we won't feel so bad about spitting on their faces.
  4. Ah yes, the ol' Moral Hazard argument.

    Guess its time to dust off that petrified rock and examine what relevance - if any - it has for us today.

    After all, in this "New Economy" - full of "New Ideas" and "New Commerce" - we surely have no need for such quaint, outdated notions of enabling untenable risk.

    It's obvious. We've learned our lesson.

    We promise to be better next time.

    And if it doesn't work out? Not to fear.

    The Government will run everything. So its okay. We'll all be taken care of. From Cradle to Crave.
  5. You gotta love the Media on all this.

    They always love warning about the risks well after the fact.

    In their best smarmy, shit-eating grin:

    "Will the 700 Billion Dollar bailout passed last month encourage Wallstreet to take even bigger risks, next time around? We asked a panel of economists and they warned......yes...."

    Media is a complete Whore for Wallstreet and Big Government.

    Yellow-Journalism at its finest.
  6. In 1983 Reagan offered a sweet deal - increase payroll taxes in exchange for a Social Security "trust fund" to hold the excess revenues. That "trust fund" is nothing more than a stack of Treasury bills, notes and bonds. In short, it was a Ponzi scheme that enabled massive federal deficits, and Americans loved it, and loved him for the "economic growth" it provided.

    This Citi bailout - and the equally mind boggling announcement coming on Tuesday - is a straight line descendant from that first move.

    We've gotten exactly what we demanded from our political leaders.

    'night all.

    PS The Medicare/Medicaid trust funds roll over this fiscal year - meaning they will no longer be able to help sop up the flood of Treasuries. Social Security hits that wall in 2 years. Tick tock tick tock...
  7. What all of this points out to me is how irrelevant this makes congress and the power structure we have in American government look!

    The US govt just put $325B+ of support into Citi in one day, even though they only put $20B (or whatever the # is... I don't have the report in front of me) of cash in today.

    So does every bank get $300B? That puts us at almost $3T for 9 banks.

    When the government implicitly covers all losses, they have just nationalized, insured, and virtually injected the total cash sum of the total they are committed to.

    Putting the socialism argument aside, why did treasury even bother to get the congress to approve TARP when they are doing these measures without issue ? If anything, this administration (and the fed) have shown a reckless disregard for the need of legislation and just seem to do what they want.

    The mandate of the fed being private and able to do whatever they please at their discretion reiterates this. Considering the policy action they've taken up to now, I don't see why we need to wait for fiscal stimulus from Congress. Let the fed print today and create a new 'banking rule' to distribute it where they please.

    The action of the fed and treasury here point to relative total discretion, undermining the power structure the rest of government set forth..

    Boy I'm sounding like Ron Paul on this...

    Isn't it kind of amazing that our entire financial system (and thus total diplomatic future/etc) is held together by the fed/treasury with no need to pass/change law? They could arbitrarily decide to print 10T, pay off the national debt, and send us reeling into hyperinflation all without the consent of the rest of our government.
  8. mind


    let us face it: NOBODY knows what will happen to a complex
    system of the magnitude as we see it in today's economy,
    when certain pillars fall. it could well be that the proclaimers
    of extremely free markets are right, and letting everybody
    default would finally be the right solution.

    but it could well be that a failing citibank would trigger
    MASS unemployment of near 20%, MASS deflation
    followed by hyperinflation at 20% and so forth. and the
    political situation could follow very easily. just consider
    - as an easy example - what happens to israel, if the
    US support dries out. and what consequently happens
    to all of us.

    the matter of fact is that this is entire new territory. the
    comparison with the great depression does not take
    into account that the world today is more integrated
    and complex. so even this example fails. i am quite
    suspicious of everybody who KNOWS perfectly well
    what must be done. i doubt ANYBODY does ...
  9. mind


    my point is: yes, all government action will be paid by
    the people. but we do not know if the price is not worth
    it. if i want a parachute i do not care too much about its

    two guys falling in free air:

    "i tell you, you really overpaid for that piece. you got
    fooled all day long. there are better and easier to get
    ones all over the place. DO YOU STILL HERE ME, UP

    ... bumm.
  10. mind


    can't help it. the US are no free market and have never
    been. they protect big companies. against foreign competition
    by global political influence. they put subsidies in place
    on a regular basis in form of interest rate cuts when
    markets tank.

    in this respect the US is a "CEO socialism" and has always
    been. with all the side effects, like corruption, oh sorry,
    that is called lobbyism nowadays ... BTW did you know
    that the term "public relations" was only invented, because
    "propaganda" already had a bad odeur?
    #10     Nov 25, 2008