Update on Citibank
I am providing you all a link to this New York Times article:U.S. Approves Plan to Help Citigroup Cope With Losses – NYTimes.com for two reasons.
First: it has an excellent embedded graphic showing the long list of bailout money that has so far been spent. Second: it has a terrific photograph of George Bush doing his best to look as if he’s relevant to the current situation. Relevant, that is, in a positive helpful way rather than as one of the people who caused the mess in the first place.
There is no doubt that bailing out Citibank is an essential policy move. The failure of Citi would produce an unimaginably large cascade of panic and secondary failures throughout our financial system. It has to survive. But I think this deal is heavily biased towards Citibank: the taxpayers are not being rewarded for stepping up.
The deal itself looks fairly onerous from Citi’s point of view, but on closer inspection they get away fairly lightly. They have given up a large chunk of preferred stock, and have issued warrants for a potential wad of common stock as well. In return they are getting a capital infusion and a guarantee for a vast swathe of their bad assets. The deal does not, obviously, prevent Citi having to write down assets. It will have to post big losses on its rotten assets for a few quarters. The goal is to calm the market and signal that the bank will weather this particular storm. Its current shareholders will suffer in the near term as their dividend is cut, which was part of the deal, but in the medium term their investment will be saved, at least in part. That sticks in my craw. This is my point: the deal lacks teeth to punish the laxity of the current management, Board, and shareholders. In a way it typifies the Paulson era of bailout. Saving the bank is a necessity, but that doesn’t mean saving the current set-up is also a necessity. At a minimum the taxpayers should be getting a better return on their immediate investment and the current management team should be shaken up. The Board too is culpable for not having exercised due diligence over the past few years as the problems piled up. So I think the deal lacks teeth.
Whether the deal is sufficient to stop speculators targeting other weak banks we have to wait and see. I would be surprised if there aren’t more of this kind of deal in the next few months as other banks suffer the same attack by short selling speculators that Citi weathered last week.
Going forward: I hope that the stupidity of the deregulation enacted during the Reagan era is unwound and that the banking industry returns to sanity. Part of Citi’s problem has been the extent of its non-balance sheet assets. It has approximately $2 trillion on its balance sheet, but almost $1.3 trillion of non-balance sheet assets. This massive amount hangs as a vague and under-reported millstone around the bank’s neck. Advocates of better and more stringently applied bank reporting have a perfect case to bash the bank regulators with. Investors need to know more clearly what they are investing in. Until banks are transparent about what they own they will suffer the consequences of market nervousness.
Finally: the current management of Citi is clearly inept. They have dithered in the face of a mounting crisis and have moved at a glacial pace. They should be replaced.
Addendum: Some of you have asked why bail out Citi and not GM. The answer is that the industrial sector, as typified by GM, is secondary in the overall economy. The financial sector is the grease that allows the wheels to turn smoothly. Without credit there is no business. So getting the credit markets settled down takes priority over everything else. Only when the financial sector is safe can we turn our attention to the industrial sector. Having said that I expect that Congress will eventually help the auto industry, but only after there has been sufficient evidence that the car companies are serious about changing their evidently bad business models. As I have said before: I don’t agree with helping GM because I think it is beyond help. I still feel that even with government money GM is a hopeless case: it just has no ability, apparently, to update itself. Obama has asked them to produce a plan against which the government can lend help. Let’s see what the car companies do in response. there must be some crazy overtime in Detroit right now. About time too.
