Feds Bailout Citi

By Big Tent Democrat, Section Other Politics
Posted on Mon Nov 24, 2008 at 07:35:12 AM EST
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Is it a good deal?:

The plan has two key features:First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets. Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October. In return for the latest intervention, the government will receive an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares. In addition, the government will get warrants, or the right to purchase $2.7 billion worth Citigroup shares in the future.

The government will impose restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share for the next three years and will face limits on executive compensation. Plus, Citigroup will be expected to adjust mortgages for troubled borrowers, using procedures similar to those the FDIC implemented at IndyMac, which it took over last summer.

(Emphasis supplied.) Krugman is quite negative.

By Big Tent Democrat, speaking for me only

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Feds Bailout Citi | 40 comments (40 topical)

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Back in September (5.00 / 2) (#1)
by joanneleon on Mon Nov 24, 2008 at 08:03:56 AM EST

I was jotting some notes (that I saved) during the CNBC morning shows:

CNBC "SquawkBox" Steve Liesman says the message today is that there are clearly financial firms who are "in the club" and those who are not "in the club".
These five will be protected by the US balance sheet and the Fed balance sheet. Right now, these five companies are "in the club".
JP Morgan
Bank of America
Citigroup
Morgan Stanley
Goldman Sachs

This was during a time when some commentators on CNBC were pretty much in shock about everything going on and speaking off the cuff. Some were even showing signs, IMHO, of anger and suspicion.

I know I don't like the idea of a "club" of banks who won't be allowed to fail for reasons that are not transparent to the public even though it's taxpayer money being used to "rescue" them. I still haven't heard any really logical reason put forward for the selection process. I'm also surprised that it took this long for Citigroup to publicly show its weaknesses. A lot of people have known for a long time that they were in big trouble. Why did it take until now for them to be bailed out?

Of course, we still don't know which banks got money from the "TARP" despite Paulson's early (and now broken) promises of prompt disclosure, and Bernanke refused to reveal who got the bazillions in special loans from the Fed in last week's Congressional hearing, even when he was directly asked by a member of the Committee.

Citi was always a pile of dung IMO (5.00 / 2) (#3)
by Fabian on Mon Nov 24, 2008 at 08:07:22 AM EST

I'm not at all surprised that they got hit so hard and I certainly wish they weren't being helped out of the cesspool that they helped to make.


: Helped out (5.00 / 1) (#7)
by joanneleon on Mon Nov 24, 2008 at 08:25:49 AM EST

is a bit of an understatement, even by the best British standard.

So tell me... (5.00 / 2) (#2)
by Fabian on Mon Nov 24, 2008 at 08:04:38 AM EST

Why isn't Krugman part of the Obama administration?

(Probably because he doesn't play politics is my guess. Hmmm...thesis there - compare/contrast the politics of academia with the politics of governing.)

My view (5.00 / 1) (#4)
by Big Tent Democrat on Mon Nov 24, 2008 at 08:14:05 AM EST

Krugman at the Times is more valuable than Krugman in the government.


If the government (5.00 / 5) (#6)
by Fabian on Mon Nov 24, 2008 at 08:24:58 AM EST

would actually listen to Krugman, he'd be even more valuable.


Heresy (5.00 / 1) (#19)
by gyrfalcon on Mon Nov 24, 2008 at 10:20:41 AM EST

Look, I realize this is heresy and I'm probably going to get flamed for it, but Krugman patently didn't understand the key part of the original TARP package he railed against so wildly, so in my view, his judgment on this stuff is questionable.

The key idea of the now discarded TARP plan was for the government to buy up a chunk of the so-called "toxic waste" of mortgage securitizations being held by financial institututions in order to, A, get them off the books, but more importantly, B, to help establish a de facto market value for them. The utter lack of ability to figure out what they're worth is what paralyzed the credit market and the financial world back in September and beyond.

Despite the fact that at least some of us were discussing this strategy on the blogs and emailing each other back and forth about it and a number of the business reporters were writing/talking about it, Krugman announced he'd "figured it out" with a great "Who knew?" post almost a week afterward.

He was, in other words, agitating very loudly for almost a week against something the key part of which he somehow managed to miss having figured out. How seriously can I take his fulminations on these questions when I, an economic and financial doofus, knew what the plan was from the beginning and he didn't figure it out until many days later?

Krugman is a left-leaning economist, and as such, I take his thoughts on broader economic matters he's studied seriously. After the debacle of his TARP "analysis," I can't take his opinions seriously on these fast-moving and innovative measures aimed at the financial markets.

Maybe the Citi bail-out is a bad idea, maybe it's badly constructed, I have no idea. But I'm sure as heck going to wait for somebody who's been more sober and more reliable on these things, like Stephen Pearlstein over at the WashPost, before I join in the hysteria.

I'm not talking just now (5.00 / 1) (#22)
by Fabian on Mon Nov 24, 2008 at 10:41:35 AM EST

Krugman saw the overall weakness in the economy a long time ago. It's more than just a credit crisis.

That's what I mean when I say I wish the government would listen to Krugman. Long before the credit crisis hit the "fundamentals of the economy" were in trouble.


What hogwash, he was having a fit (5.00 / 1) (#31)
by Militarytracy on Mon Nov 24, 2008 at 12:08:38 PM EST

over the initial TARP proposition which is very far from the final agreed to TARP that we ended up with. Without his initial fit though you may have very well ended up with Paulson's original astroglide required proposal given our current Dem leadership. Can we please make sure that we get our Krugman facts straight please.


Sorry I'm a tad ticked (5.00 / 1) (#32)
by Militarytracy on Mon Nov 24, 2008 at 12:14:27 PM EST

Just am, most people were not paying attention to the day by day hour by hour actual plays it took to reach agreement on TARP. I WAS. Krugman complained when he needed to and the country desperately needed someone b*tch*ng and reluctantly agreed when he needed to and those are the facts of that legislative fight.


Sorry, MT, but you're just wrong on this (none / 0) (#37)
by gyrfalcon on Mon Nov 24, 2008 at 02:24:52 PM EST

The price valuation issue was a key part of the original TARP plan, indeed pretty much the raison d'etre for it. Krugman totally didn't get that, and certainly helped torpedo it in the Congress by mobilizing who knows how many "progressives" who should have known better to call up their congresscritters and scream about it.

By the time we got to the modified TARP that eventually passed, the financial system had gotten so tightly locked up in the sheer panic that resulted from failing to pass a bill that the original TARP wasn't going to work anyway.

Was the original TARP something that would have worked? I have no clue, but it sure was an innovative approach to the credit crisis. (And it was a crisis, btw. Go find a chart of the Ted spread for September and you'll see very vividly what happened in just a matter of a few days.)


: Just because a private valuation issue (none / 0) (#38)
by Militarytracy on Mon Nov 24, 2008 at 03:18:00 PM EST

was a key part of the original proposition doesn't mean that proposition should have just floated through as it was. The "panic" you speak of had nothing to do with credit locking up.......all of the fanancial institutions being chock full of now fully revealed to the public BS assets is what locked up credit. Can't afford to lend the money when you need it to CYA your own institution unless you didn't need to CYA your own institution, but then what institution who needs it can secure the loan at this point? Shock doctorine responses to real crisis will save nobody in the end.

Very good point (none / 0) (#25)
by joanneleon on Mon Nov 24, 2008 at 11:13:15 AM EST

I had nearly forgotten that Krugman effectively rubber stamped the bailout, saying it wasn't the best plan but that something needed to be done and blah blah blah. It was a weak rubber stamp, but nonetheless, I'd expect a lot more from him.

BTW, Obama is saying at this very minute that the "best minds" are needed for his economic team. Again, regardless of Krugman's early opinions on the bailout, why is he not seeking the assistance from the most recent Nobel prize winner in economics? In fact, considering his choice for Sec. of Treasury, who is working on said bailout and must have agreed with its passing, this is more of a reason to bring Krugman on board.


You might want to read this article: (none / 0) (#26)
by inclusiveheart on Mon Nov 24, 2008 at 11:17:50 AM EST

The End of Wall Street's Boom

From Portfolio.com

If nothing else it chronicles how few people - even those doing these deals - actually understood what was happening with and how these mortgage backed securities were created in what seems to have been an exercize in alchemy.

It wasn't just that they couldn't price these securities - these securities may no have existed in the first place. That not being able to price them was a challenge created not by issues with valuation, but a challenge created by the fact that some portion of them didn't actually exist as mortgages in the first place. It never occured to be that there weren't really that many bad loans - I don't fault Krugman for not thinking of that possibility.

In any case, his objections to the bailout IIRC were structural more than they were substantive. I got the impression that he felt that something should be done, but disagreed with how they were proposing doing it.


Still it's a good question (5.00 / 1) (#8)
by joanneleon on Mon Nov 24, 2008 at 08:30:41 AM EST

I've been hearing all kinds of accolades on the news channels for the admin. appointments, claiming that the cream of the crop has been culled. Why not the Nobel prize winning economist in the most challenging economic times since the Great Depression?


I wish they could clone him. (none / 0) (#9)
by Dr Molly on Mon Nov 24, 2008 at 08:35:01 AM EST

BTW, I love your awesome rants about the bailouts! Without some regulation and oversight to go along with the staggering giveaways, they are just enabling the same old problem to continue. What a selljob.


Where is the change (none / 0) (#10)
by joanneleon on Mon Nov 24, 2008 at 08:38:21 AM EST

we can believe in?


I just wish some 'change' (none / 0) (#11)
by Dr Molly on Mon Nov 24, 2008 at 08:44:07 AM EST

would be required of these corporate greedheads along with the free cashola.

(Obama's got some good change going on in other areas though.)


True (5.00 / 2) (#15)
by joanneleon on Mon Nov 24, 2008 at 09:08:48 AM EST

and I don't mean to dismiss the positive signs of change coming in other arenas.

I want the man to succeed.

But how much change will be possible if the Treasury is thoroughly raided before he takes office?

I wish he would at least speak out about this bailout and I wish Congress would put a hold on the money, as they seemed to be ready to do last week. I'm not even sure if the oversight board for the bailout has been formed yet! Last I heard, it hadn't. I'm finding it hard to believe that Paulson is going to leave $350B on the table -- and I want to know what they are doing with the trillions in Fed loans, and if they are really loans.

However, as I said some weeks back, I believe Obama won't bad mouth the bailout because he was instrumental in helping to sell it. I loathe that kind of politics. Really, how about some criticism of this Citigroup deal or some mention of leaving at the helm execs who sank their bank?

Bottom line is, I'm having a hard time understanding why there isn't more being said by Obama and his economic team and I'm afraid that so much damage will be done in the lame duck period that no team in the universe would be able to succeed.


That's easy to answer (5.00 / 1) (#17)
by gyrfalcon on Mon Nov 24, 2008 at 10:00:05 AM EST

Because Paulson and his team have been in pretty much continuous contact with Obama and his team since mid-September. There are almost certainly Obama people already at Treasury, even if not being paid or officially installed.

Paulson is, to swipe Bill Clinton's phrase from long ago, focused like a laser beam on the transition.

Obama and his team almost certainly gave the green light on the Citi bail-out.


: Espoecially since... (none / 0) (#33)
by santarita on Mon Nov 24, 2008 at 12:15:53 PM EST

The new Treasury Secretary is currently the Pres. of the NY Fed.
This move looks like a limited return to the notion of using TARP to buy up bad assets. I haven't read any economic blog that likes the terms of this.

Wow, Krugman seems angry (5.00 / 3) (#5)
by joanneleon on Mon Nov 24, 2008 at 08:23:24 AM EST

even downright pissed.

From the article he cited, which quotes some informed sources:

To be clear, this is not a "bad bank" model. Assets are not, apparently, being taken off the Citi balance sheet and put into another entity walled off from the Citi biological host. Instead, they are being left on the Citi balance sheet, but tagged and bagged for eventual disposal via taxpayers. ...
[Paul Kedrovsky]
...Federal government will guarantee $300 billion of Citi assets, a much bigger number than had been leaked earlier, with a rather convoluted loss-sharing arrangement, but the bottom line is that Citi is at risk for at most $40 billion. Citi also gets a $20 billion equity injection, on slightly more onerous terms than the initial TARP investments...
[Yves Smith]
Economist's View Blog

Ouch. That's quite a blog post. I'm cheering them on. Speak out, economists, please. Shout from the rooftops. This bailout is a swindle -- something we all should have known from the start.

One economist notes that the GM bailout should be inevitable based on this Citigroup deal, and a number of them note that no management changes will be required which, to me, is one of the most telling details.

Honestly, have any big execs lost their jobs or any bonus money yet? It's unbelievable. No, it's much worse than that. Help me out -- I can't even come up with an appropriate superlative.

So far, everyone seems to be getting tons of money except the people who need it most. Why are we not out on the streets protesting this? Why?

It boggles the mind.... (5.00 / 2) (#12)
by kdog on Mon Nov 24, 2008 at 08:49:09 AM EST

to be sure.

But I don't see a point in protesting, Uncle Sam is gonna do what he wants to do...in this case grease his cronies with obscene amounts of money. Protesting will just get your arse locked up, then you're on the hook for bail and your share of the bailouts.

To quote the Big Lebowski..."Your revolution is over Mr. Lebowski, the bums lost."


That's a great scene (none / 0) (#14)
by Big Tent Democrat on Mon Nov 24, 2008 at 09:07:06 AM EST

: We may need to revise the next bit.... (5.00 / 1) (#16)
by kdog on Mon Nov 24, 2008 at 09:12:01 AM EST

"I suggest you do what you're parents did, get a taxpayer funded bailout sir!"

Maybe the silver lining (none / 0) (#18)
by KeysDan on Mon Nov 24, 2008 at 10:14:45 AM EST

is that we will not have another war, such as an attack on Iran, to enable profiteering in the final days of Bush--a bloody mess, but, at least, figuratively.


: The nation being broke.... (none / 0) (#20)
by kdog on Mon Nov 24, 2008 at 10:22:09 AM EST

never stopped 'em from going to war in Iraq, and subsequently occupying Iraq. I wouldn't count on the economic situation giving Bush and the gang pause if they wanted to start some more sh*t.

What should be done (none / 0) (#24)
by joanneleon on Mon Nov 24, 2008 at 11:00:52 AM EST

if protesting is not the right thing to do?


: Well, on the weekend before (none / 0) (#28)
by inclusiveheart on Mon Nov 24, 2008 at 11:32:49 AM EST

Thanksgiving - yesterday - I went to a nearby mall to pick up a few things for the holiday. This mall's parking lot this time last year was so full that I drove around for about 45 minutes before I could find a parking space. Yesterday, it was empty. Ghost town. It was like going there at night after the stores are closed.
People are protesting whether they intend to or not.
These companies and our government in recent years insisted that workers aka consumers needed no protections - that companies should be free and unregulated - that injuries to consumers were to be accepted for the good of the booming economy. Now the party is over. There's nothing left. We're sucked dry and that's ultimately going to hurt them more than anything they've done to themselves thus far. Now we'll see if our esteemed members of Congress will figure that part of the equation out. Because if they don't they'll keep funneling money into the hands of these hucksters and the only trickle down effect will be that we are all that much worse off.

: It most definitely is... (none / 0) (#30)
by kdog on Mon Nov 24, 2008 at 12:05:00 PM EST

the right thing to do...just don't think it would get us anywhere except a cell...especially without massive numbers.
The best thing to do would be to tax revolt, imo...but we'd run in to the same problems. Ya can't beat city hall, and ya can't beat Uncle Sam when he's got his heart set on redistributing our wealth to his cronies.

Two (Ok, three) things to remember: (5.00 / 1) (#13)
by scribe on Mon Nov 24, 2008 at 09:03:05 AM EST

(1) Various of the Saudis, Kuwaitis, and Gulf "Sovereign Wealth" (i.e., governments) own a substantial stake in Citi. Over 10 percent with at least one individual owner over 5 percent, IIRC, but someone with access to the exact numbers could give a better picture.

(2) Nobody gets hurt.

(3) You're nobody. (h/t Homer)

Double standard for Big Finance (5.00 / 2) (#21)
by DFLer on Mon Nov 24, 2008 at 10:26:37 AM EST

We've heard nothing but negatives about Detroit and UAW workers and jet-setting management...they've failed and deserve to go under. What about the MASSIVE greed and failures of Citi group? Where are the stats about salaries, including stock packages, retirements and health care? etc etc.

Yesterday's Times had this article about Citi, which detailed their fall. In part:

But many Citigroup insiders say the bank's risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings -- and executives' multimillion-dollar bonuses -- failed to rein them in, these insiders say.
SNIP
And as the credit crisis appears to be entering another treacherous phase despite a $700 billion federal bailout, Citigroup's woes are emblematic of the haphazard management and rush to riches that enveloped all of Wall Street. All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted.

While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.
The bank's downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.
Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank's current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

It's a total cr*p bailout (5.00 / 2) (#29)
by Militarytracy on Mon Nov 24, 2008 at 12:02:13 PM EST

It is not my job to buy worthless unsecured loans to save any company who made those loans knowing full well that what they were doing was defying all preexisting economic common sense. It is a complete ripoff! Bend over everyone and lube up.

MT, would Vera approve of (none / 0) (#34)
by oculus on Mon Nov 24, 2008 at 12:33:53 PM EST

your colorful language?


Can't speak for Vera.... (5.00 / 1) (#36)
by kdog on Mon Nov 24, 2008 at 12:49:34 PM EST

but I approve..colorful times calls for colorful language:)


I think so too (none / 0) (#39)
by Militarytracy on Mon Nov 24, 2008 at 04:18:01 PM EST

It is part of my embracing of my feminism that I reserve the right to talk like a sailor when circumstances call for it :) My grandmother always disagreed with me on that though. Out of respect for her (a person who fed me, washed me, and protected me before I could even walk) I was seldom very colorful in her presence.


: Oh Well (5.00 / 2) (#40)
by squeaky on Mon Nov 24, 2008 at 04:38:40 PM EST

She missed out. Didn't do such a bad job as far as I can tell either.

No :( (none / 0) (#35)
by Militarytracy on Mon Nov 24, 2008 at 12:44:00 PM EST

She had more finesse. I try, but at times it is obvious my single parent was her construction working son.


Let's see, (none / 0) (#23)
by ChiTownDenny on Mon Nov 24, 2008 at 10:49:23 AM EST

This government bailout of an instituion that is "too big to fail" provided terms of financial assistance similar to the terms it offered Citi should it would acquire Wakovia, after it decided to bless Wells Fargo's bid, after Wells Fargo decided it didn't want Wachovia, but Citi did, and then Citi's stock never recovered, and, oh, I give up!

: Don't forget Paulson's "Section 382" (none / 0) (#27)
by DFLer on Mon Nov 24, 2008 at 11:30:32 AM EST

move, allowing billions of dollars in tax savings to acquiring banks. The impact on states' revenues etc. discussed here in the Mpls. Star Tribune
Strib

Thriving banks buying teetering banks, like the Wells Fargo-Wachovia merger, may cost Minnesota state government tens of millions of dollars in income taxes this year and tens of millions more for several years to come.
snip
By some estimates, the ruling will allow Wells Fargo to pay much of the $12.4 billion acquisition price for Wachovia through tax savings this year and for years to come.
snip
Behind the scenes, the potential impact left some analysts wide-eyed.
snip
The Washington law firm Jones Day said the IRS ruling on Section 382 will spare banks acquiring troubled financial institutions as much as $140 billion in income taxes. Most of that revenue would be lost from federal tax collections, but not all.
The state of California calculated a loss of $2 billion in tax revenue as a result of mergers like the Wells Fargo-Wachovia deal.