We are back to weekend melodrama, but this one is starting on Sunday night, not a Thursday or Friday. Not good.
Citigroup is apparently throwing itself on the mercy of the court, um, taxpayers, once again, but even the bankster favoring Geithner/Summers team know that the public at large is losing patience with financial firm bailouts in general, and favored treatment towards recidivists like Citigroup in particular. The pound of flesh is about to come due, and there is no Portia in the wings to argue why that would extract more than the contract terms.
The interesting thing is that Citi approached the powers that be (again) yet there does not seem to be any pressing need for a Federal (further) rescue, as in a depositor or counterparty run. Citi merely seems to be wanting to get out in front of the deterioration of its book (the party line is it won’t do well in the Treasury stress test, but given the collapse in its stock in the last ten days, one has to wonder).
And that means it must look REALLY ugly.
From the Wall Street Journal:
Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.
While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup’s common stock. Bank executives hope the stake will be closer to 25%,…
The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis…
Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock,…
The move wouldn’t cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted…
Bank of America Corp. said Sunday that it isn’t discussing a larger ownership stake for the government…
There’s no universal agreement on what constitutes nationalization of a bank. In the U.K., the government already owns 43% of Lloyds Banking Group PLC, and last week it moved to increase its ownership of Royal Bank of Scotland Group PLC to 70% from 58%. Those two banks have been classified as “public-sector entities,” and as much as £1.5 trillion ($2.136 trillion) of their liabilities have been moved over to the country’s balance sheet….
As part of the plan, Citigroup officials hope to persuade private investors that have bought preferred shares — such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority — to follow the government’s lead in converting some of those stakes into common stock, according to people familiar with the matter. That would further bolster an obscure but increasingly pivotal gauge of banks’ capital known as “tangible common equity,” or TCE.
The highly complex TCE measurement, one of several gauges of a bank’s financial strength, gives weight to common shares — thus the interest in converting perferred shares to common stock.
Details of the rescue remain in flux….
If the deal gets nailed down, it will be Washington’s third effort to aid Citigroup since last fall. In October,…
There are at least two catalysts for the recent talks with the government.
First, Citigroup’s shares have fallen to historic lows. That doesn’t pose a direct threat to the company’s stability. But if it spooks customers into pulling their business, that could push the bank toward a dangerous downward spiral.
Second, bank regulators this week will start performing their battery of stress tests at the nation’s largest banks as part of the Obama administration’s industry-bailout plan. As part of those tests, the Fed is expected to dwell on the TCE measurement as a gauge of bank health, according to people familiar with the matter.
The crisis is triggering a deep re-examination of the way bank health is measured in the U.S. financial system. This is a complex exercise, but it boils down to calculating various ratios of how much cushion a bank has to absorb losses on loans and other bad assets.
Until recently, TCE has been one of the less prominent ways of gauging a bank’s vigor. Bankers and regulators generally prefer to use what is known as “Tier 1” ratio as the measurement.
According to their Tier 1 measurements, most big banks, including Citigroup, appear healthy. By contrast, most banks’ TCE ratios indicate severe weakness. Citigroup’s TCE ratio, for example, stood at about 1.5% of assets at Dec. 31, well below the 3% level that investors regard as safe.
The regulators’ new focus on TCE represents an important shift. The government’s recent injections into hundreds of institutions were predicated on the idea that Tier 1 was key. Because the investments weren’t in the form of common stock, they didn’t affect the companies’ TCE ratios.
In Citigroup’s case, converting a significant portion of the government’s preferred stock into common shares would help lift the company’s TCE ratio, perhaps to as high as 4%, according to a person familiar with the company’s thinking.
Update 10:00 PM;
Reader Early Writedown pointed to an Obama Administration statement earlier today:
Some details will be made available this week, but parts of the plan will take weeks, months and even more than a year to play out as the Obama administration puts together a program that they hope will return banks to long-term health….
Officials stressed that there were no separate meetings going on surrounding Bank of America or Citigroup specifically and that the two banks would be treated under the broad plan now in the works.
Neither bank has asked for increased government assistance and one official said such assistance is not needed at this time.
Now this gets interesting. Team Obama tried to (basically) preemptively deny the Citi special pleading. The “neither bank asked for increased government assistance”: is misleading. Citi’s request for conversion of preferred to common IS a plea for help; it lowers the cash drain and puts the taxpayer pari passu with common shareholders, rather than in a slightly favored position.
And I would not be surprised that the WSJ (and now Financial Times) stores were deliberate Citi leaks, with plausible deniability, to pressure the government, as best they can.
US stock futures were up on this non-news; the indications are that Team Obama is not ready to blink. It looks like it will (as we surmised yesterday) take a depositor or counterparty run to get them to act. Wonder what the stock market will do when it figures that one out.
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Yves did you catch the statement from the Obama administrate at 1pm today?!
http://www.cnbc.com/id/29332236
“Officials stressed that there were no separate meetings going on surrounding Bank of America or Citigroup specifically and that the two banks would be treated under the broad plan now in the works.
Neither bank has asked for increased government assistance and one official said such assistance is not needed at this time.”
–
I’ve been suggesting in conversations with a hedge fund manager friend here in NYC that this administration is not just slow but is arrogantly underestimating the speed of events in the market place. They are either wildly disorganized, lying (again), or flat footed. Pick your demon.
Marijuana Legalization More Popular than Key Conservative Leaders
http://yglesias.thinkprogress.org/archives/2009/02/marijuana_legalization_more_popular_than_key_conservative_leaders.php
Early W,
No I didn’t, thanks for the heads up, but the FT also has a report, not citing the WSJ, so I think this is real. Things could have changed since 1 this PM.
But I agree in general. Team Obama wants to press forward with its not fully worked out Plan A, and they don’t appear predisposed to adapt.
we are tinkering with ratios? That is the answer to what question?
How the hell can the USG possibly justify to taxpayers the conversion of preferred to common when it could just move in and take out the remaining equity in a far better return for the taxpayer. At the moment it is USG throwing in bad money after good but refusing to take the controlling stake. At the moment it is the American taxpayer being sacrificed on the alter of neo-con ideology … private good, public bad.
Whatever! This is theft plain and simple. If the USG takes less than market terms in any further injection of capital, it represents a theft and fraud purported on the taxpayer.
Forgive me for citing Monty Python:
http://www.youtube.com/watch?v=grbSQ6O6kbs
YS:
I opposed the bailout from the outset. If we were going to have one I favored putting Uncle Sam’s money in as senior debt. If a bailout recipient went bankrupt, it would then be clear where Unc stood in the capital structure. Absent putting more money in, what difference does it make if Unc’s money is preferred or common stock? Only lawyers can worry about the difference. Kill Citigroup. Now.
RE: Early Withdrawal
If they aren't handling BoA & Citi separately, that sucks.
It seems more plausible that they are doing the smart thing by 'handling' the banks separately, but not advertising it, to avoid scaring off shareholders.
It may be that they're getting away with half-truth here — they may be planning on "handling the banks together" ultimately, i.e. nationalizing all the dubs in one fell swoop, when its a little clearer which ones are bunk (and a little more politically expedient to bring down the axe.)
From Bloomberg, more bad news for Citi:
By Tak Kumakura and Takahiko Hyuga
Feb. 23 (Bloomberg) — SFCG Co., a Tokyo-based lender whose
creditors include Citigroup Inc., collapsed in the biggest
bankruptcy by a publicly traded Japanese company in more than a
year, listing 338 billion yen ($3.6 billion) in liabilities.
SFCG, whose shareholders include Hikari Tsushin Inc. with
an 11.5 percent stake as of Feb. 4, owes Citigroup 71 billion
yen, according to a securities report filed by SFCG on Oct. 27.
Shinsei Bank Ltd., owed 54.1 billion yen by SFCG as of July 31,
led declines among Japanese lenders in Tokyo trading.
Remember, the AIG deal was reworked later in favor of AIG creditors (err, PIMCO perhaps?) so why would continuous reworkings of bank deals to the detriment of the Treasury not be expected?
PIMCO was taking the mother of all baths on its preferred holdings on Thursday and Friday last week and then out of “nowhere” came the White House “soothing” statement.
Check the William Gross call logs for the “help me, please” call(s).
To my mind, there just isn’t enough hard information to judge what the current situation regarding C (and BAC) actually is. What’s going on seems to me to be the rough equivalent of what’s known as a smoke filled room in politics. Like I said before: the only thing I’m sure about is that stock prices were driven down heavily, supposedly on rumors of nationalization.
P.S. – maybe not plausible… possible (hopefully so.)
What would be the incentive for USG as a common shareholder to wipe out the common shareholders? None! That is the Pandit's game plan. If this smart move on the part of Citi does not come to fruition, we can say bye bye to all the common holders, Dow, S&P, and all the world indices since this game plan spells of truly bad books.
Thread music, which seems to fit into the thoughts I’m having inside my head about this trash!
Rolling Stones – You Can’t Always Get What You Want
The government may end up holding as much as 40 percent of Citigroup’s common stock, the newspaper said, citing people familiar with the situation it didn’t identify.
http://www.bloomberg.com/apps/news?pid=20601087&sid=av08lzk8SlMg&refer=home
Asian stocks are rising on the news. What a joke.
I feel kinda dumb for saying this, but isn’t this just a rumor to goose markets?
THIS STORY STINKS
The pound of flesh is about to come due, and there is no Portia in the wings to argue why that would extract more than the contract terms.
Larry Summers doesn’t get this reference.
I didn’t get a chance to comment on the blog about Japan, but now is as good a times as any.
Yves posted this link about Citi stock sales in Asia (http://www.nakedcapitalism.com/2009/02/citi-stock-being-heavily-sold-by.html)
As far as I know, Citi has been considered a damaged bank by Asians for a long time. However, for many banking services they were the only game in town. Now I have heard that folks in Japan/Taiwan are moving funds out, this was during last week’s uncertainty, I don’t have any data for tonight.
I am concerned about any unwinding of Citibank (on the same level as AIG perhaps) because I feel they are more multinational and complex than BofA, Wells Fargo, etc., I think the fallout if Citi tanks this week will be pretty severe. Just my opinion.
The administration is going to have to make some hard decisions fast while being very understaffed. One would have thought that Geithner would have borrowed a good part of his staff and the Federal Reserve Bank of New York and one would have hoped that the FRBNY staff would have an intimate knowledge of CITI’S books, but apparently not.
I believe that what is hitting CITI now is its exposure to Europe and Eastern and Central Europe in particular as those economies implode. Another Minsky moment has arrived.
Yves:
Take a look at UK:
http://www.guardian.co.uk/uk/2009/feb/23/police-civil-unrest-recession
and this:
http://www.guardian.co.uk/business/2009/feb/23/deripaska-loan-ldv-vans-mandelson
Britain is about to become Iceland?
D
The regulators are worried about TCE — which is a little like choosing a color to paint the bedroom when the house is on fire.
Yeah, an anonymous story about a little accounting hocus-pocus will work. For a couple of hours.
At one point on Friday.. the original $25B TARP investment was the combined market value of B of A and C combined. Amazing.
@Steve,
contrary to my expectations, it does seem to be helping Asia:
HONG KONG (MarketWatch) — Japanese shares came off their early lows Monday as banking stocks were aided by news Citigroup was in talks federal officials for the U.S. government to expand ownership of the banking giant. The Nikkei 225 Average, which dropped more than 2% in early trading, was down 0.2% at 7,398.84 by the end of the morning session, while the broader Topix index also pared losses and was down 0.3% at 737.03.
http://www.marketwatch.com/news/story/Tokyo-stocks-pare-losses-banks/story.aspx?guid=%7B6D076B16%2D237E%2D40FC%2DBD14%2DCA10FDAFD377%7D&dist=hplatest
“so I think this is real.”
Oh yes Yves, what I found quite surprising is that the administration could have a statement at 1pm saying nothing to see here, and then by 8pm have citibank throwing themselves on the alter. I would think there would be slightly more regular talks and coordination going on among the white house and the leadership of the largest financial institutions in the world. Nobody is perfect, but these guys just seem all over the place.
futures love it. :)
“Yeah, an anonymous story about a little accounting hocus-pocus will work. For a couple of hours.”
Sure, like drinking one’s urine will keep one hydrated. For a while.
Team Obama needs to get it through its head that C, BAC, JPM, GS, MS, and WFC (I miss any body?) are deeply insolvent and need to deleverage by flipping a lot of their debt into equity. It’s accepted wisdom that the big 3 auto companies need to do this to survive. It’s the same thing with the big banks.
“It may be that they’re getting away with half-truth here”
yes, I see your point and have thought about this. I think this does require a little leap of faith however that they are trending toward a bond holder hair cut. time will tell maybe, but I’m not hopeful. Right now I personally feel odds are they are scrambling, but that’s just MHO – I can see your view.
the Obama team is quickly becoming lame duck material as they expand the war in Afghanistan,hang around in Iraq and offer no vision for the economic crisis… disappointing and grim.
What is the probability that one of the key reasons that the administration has resisted nationalization is that foreign governments–especially in oil rich middle eastern states–have effectively told them that they will not sit by and let their common shares be wiped out?
Which is to say, is the American banking response tempered by a fear of offending powerful foreign entities who invested in these banks and are now saying that the US government should insure their investment?
If I have this straight, Citi wants to issue common with a current market value <$2.5B to obtain $45B in new equity by converting the government's preferred stake. Ideas like this are why Citi employees are so highly compensated.
Anyway, whether the story is true or not, Tiny Tim had better have his ukulele tuned up by tomorrow morning.
Guido Sarduchi, aka the prince, I wonder if GE just pulled him out of the SNL closet for that one.
Not a real confidence builder in my mind.
This seems to be more about making sure that the Saudi Prince’s stake in CitiGroup is not wiped out by a nationalization. He would exchange his preferred shares for common, thus gaining exposure to risk, but he wouldn’t be wiped out.
Cheer up, Yves. This is the nationalization you have been asking for. Of course, the Treasury will want to see the results of the stress test before it agrees to this proposal. That will probably kill the deal.
“Cheer up, Yves. This is the nationalization you have been asking for. Of course, the Treasury will want to see the results of the stress test before it agrees to this proposal. That will probably kill the deal.”
This is exactly why Yves is crazy for asking for nationalization. We need receivership/conservatorship where taxpayers put up no money, and creditors claims against C are forcibly flipped into equity. Give Citi to the creditors, and let them worry about what it’s worth. If they want to dissolve Citi, fine. If they want to save it, fine. As long as it is their money at risk and not the taxpayer’s, I don’t care what they do with it as long as it isn’t illega, and BCCI reduce.
I'm having serious trouble making sense of the stock market reaction to the news that the government said one thing in the afternoon and Citi apparently leaked the opposite story in late afternoon?
I just don't see how even Indispensable Tim Geithner can get away with converting $45 billion of face amount preferred in Citi into some $2-$10 billion face amount of common and not be tarred and feathered on Broad & Wall by an angry mob . . . . . . is there?
uh, uh…I know, I know.
We shall call this “slow motion nationalization”.
yeah that’s the ticket.
i cannot figure out why the market is reacting bullishly to this story…
I’m in there shorting the e-mini’s as fast as I can go right now . . . . . . it’s not as easy as you’d think, for a futures contract up 8 points on the night.
It must require an astounding lack of self-awareness on the author’s part to churlishly dismiss Geithner and Summers as ‘bankster friendly’ when her own career prior to the latest stint was spent entirely on Wall Street. Then again, the entire taxonomy of ‘good’ and ‘bad’ economists and policymakers that has sprung up here and elsewhere is so patently ridiculous it could easily be mistaken as farce.
Joe Stiglitz, Clinton’s CEA Chair: Friend of the Working Man.
Larry Summers, Clinton’s Treasury Secretary: Puppet of the Moneylenders
Nouriel Roubini, former Treasury staffer: Truthteller, Soothsayer, Font of All Wisdom.
Timothy Geithner, Roubini’s former boss: Town Fool.
And why? Because in their fourth week in office, the offending duo didn’t want to single-handedly (that is, literally single-handedly – they don’t even have a staff yet) nationalize the entire U.S. banking industry. For this, they earn the stern reprimand of one Yves Smith, Chief Economist of Blogspot.com, who alone sees these men for who they truly are.
What a joke. History will look back and laugh at such drivel, if it even bothers to remember.
Oh please, Mr. Anonymous, could you deign to enlighten us with your masterful wisdom then?
None of the supposedly smart people at Treasury, the Fed, hedge fund masters of the universe or Wall Street titans have done much of anything smart over the past decade or two to prepare for a big credit crunch like the one we’re currently seeing and like the ones we’ve had every 15-20 years or so in the past.
It may be true that Geithner doesn’t have senior undersecretaries in place yet, and it may be that the FDIC is woefully understaffed relative to the demands of seizing Citi and BofA, but markets in my experience could give a flying F*CK about such “the dog ate my homework” excuses. As a matter of fact, markets in my experience love to take advantage of such situations and put the hammer down on the weak parties just for the hell of it to see how much damage can be wrought.
But please, enlighten us, you’re so much smarter than all of us here.
Anything to do with this ?
Feb. 23 (Bloomberg) — SFCG Co., a Japanese lender whose creditors include Citigroup Inc., filed for bankruptcy protection, triggering a slump in financial stocks on concern Japan’s recession will cause more corporate failures.
SFCG, which focuses on lending to small businesses, listed 338 billion yen ($3.6 billion) in liabilities, making it the biggest bankruptcy by a publicly traded Japanese company in almost seven years. The firm owed Citigroup 71 billion yen as of July 31, according to a filing by SFCG on Oct. 27.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aIIxHTRBuKvY&refer=home
Anon of 11:05 PM,
I find it amusing that you choose to lecture me, I presume accusing me of hypocrisy, because” her own career prior to the latest stint was spent entirely on Wall Street.”
You are dead wrong here, both in fact and implication. I have had my own firm for 20 years of a 30 year work life, hardly “a latest stint” as you imply, and of the three jobs I held before then, only one was for a Wall Street firm.
But you can’t be bothered to get facts right, no, you chose to operate on prejudice and issue salvos well wide of the mark.
And FDR, with far less illustrious financial credentials than Geithner and Summers, didn’t wait to have staff in place to start acting in a crisis. He outlined his program in his inauguration speech and implemented the bank holiday the next day. He spent his time between election and taking the reins developing a program. What excuse do you offer for this crowd, which was supposedly “experienced hands” that were already up to speed?
Your post is a long ad hominem attack. That is not welcome here, whether directed at other readers or at me, Future comments of that nature will be deleted.
Yves,
Ignore the troll, It’s obvious that guy is petty and a fool. Or delete him, No substance, just anger and jealousy.
Just a fast question. Let us say that Citi is both long and short the same CDS so that their exposure is effectively zero. Now suppose that Citi has some kind of credit event and has to post more collateral. Do they have to post on both sides of this effectively closed trade? If so they are beyond dead and that credit event will be avoided at all costs.
Yves,
One can read a slightly different conclusion into the FT article on Citi. The FT implies Citi is looking to convert the $75b in outstanding preferreds, and that the government may not convert its entire stake.
So assume conversion of $30b in privately-held preferreds and $30b in government-held. That leaves $10b of common in a $70b firm, or roughly 14%. The government’s stake would be $30b/$70b or roughly 40%.
Why would preferred shareholders agree to convert? Only because they may expect zero down the road, and with the government as a fellow common shareholder, they are much more likely to retain their “call option” on Citi’s future value.
Just speculating, but it seems like a possible interpretation.
1) In general, the major banks have very few collateral postings requirments upon any downgrade. That was an obvious pitfall they all avoided. In the CDS example above, the bank would have been posting mark-to-market collateral on the losing leg and receiving it on the winning leg, so no net funding. That will likely be the case even if the bank goes below investment grade. Although all counterparties would have asked to unwind before then.
2) I wonder how many of the commenters here who pronounce that all banks are insolvent, have actually read any of the banks financials? That seems to be a prerequisite to claiming insolvency.
Obama is doing fine so far, he hasn’t given them money. Keep it up!
The government would be happy to acquire common equity at the market price if that would help.
Or just do the Mankiw re-securitization: keep wiping out tranches, starting with equity, until you get a solvent equity, then the bottom remaining tranche is exchanged for that equity.
Regrettably after common equity comes preferred, which will be wiped out too. Oh well it’s time to end the charade that taxpayers will get anything from that “investment”. Just don’t throw good money after bad.
Anon @12:48:
If they’re not insolvent then they can continue in business like the proud anti-government-meddling capitalists they are!
@Yves:
Your Politico bio credits your with “more than 25 years in the financial services industry” and lists among your previous employers Goldman Sachs and Sumitomo Bank. Perhaps they got their facts wrong. If not, it hardly seems unfair to characterize your career as being “of Wall Street” – certainly it is far closer to the world of private finance than the academics and career civil servants who you so casually smear as harboring its sympathies.
As for FDR, your hero as much as mine: yes, he acted. And dramatically. But this was only after seeing a month-long nationwide depositor panic – the fourth in as many years – engulf thousands of banks, such that 1/3 of the entire system had already failed or suspended (see Wicker); only after several state governors had declared holidays of their own, creating a domino effect that all but forced his federal hand (see Temin); and only a year of Pecora’s congressional hearings had obliterated all claims of banks to legitimacy. Even then, the crisis at hand was one of confidence, not solvency, and so it was enough to simply declare a week off. The newly-created insurance system wasn’t even tested, as the system quickly righted itself.
And today? There is no nationwide banking panic (though, perversely, you seem eager for one to commence); in the meantime, we merely have a he-said he-said pitting Ken Lewis’s memorandums against Nouriel Roubini’s Rolling Davos Review. Bloggers like yourself, after 3 to 4 minutes of quiet, scholarly reflection, have unanimously cast their lot with Roubini. And you may be right (if I had to wager, I’d guess you are). But that’s all it is right now. A guess. A prediction. At best, an online consensus. And whatever that is, it isn’t 1933, and it hardly merits FDR’s mentioning, much less imitation.
So, the behind closed doors during the week ends and by stealth operations continue under Obama.
Thus, lets not have consistency, predictability and transparency to generate public confidence for the whole operation. Im not a specialist of markets, but I would assume that the levels of uncertainty will just continue
Once the officials return to work on Monday, completely exhausted after another week end of fire-fighting, the next urgency will appear that require their “full” attention.
I am not a conspiracy theorist. It does not necessarily have to be that DC is helping friends on wall street in a nicle, non-transparent kind of way. To me, this just smells of incompetence and failure to see the impact on the system of their ad hoc improvisations.
At least the public would get a bit of ownership. Unless it is also decided at the same time that the whole senior management will be replaced soon, this is just business as usual for them.
Anon of 1:05 AM,
Roubini is not the only one forecasting very large losses for the banking industry. Kenneth Rogoff is at Roubini level losses, as is BridgeWater Associates (they have a private research product, central banks are among their clients). Even the IMF, which tends to be a lagging indicator, has also increased its estimates (but not to the same levels).
Meredith Whitney, the most accurate banking analyst as far as calling bank performance in the crisis is concerned, LAST WEEEK said her best ideas were to short Citi and BofA! This at already highly distressed price levels.
Roubini is melodramatic, but he is not alone in his views. Lewis is an interested party, He is going to say the bank will make it even it it looks like a goner. Look at how Jimmy Cayne and Dick Fuld were in complete denial up to the very end. Michael Lewis is of the view that the CEOs of these firms really do not understand them (it takes too much in the way of quanty skills) and he may well be right.
Lewis does not have the experience to assess what is really afoot at Merrill; the investment banking business they had was small and didn’t have big credit trading operations.
As for my background, Sumitomo Bank is not Wall Street. That is third world in their eyes. My firm does serve the financial services industry, but it isn’t “Wall Street” either. There is a lot in financial services besides Wall Street.
I don’t wish to discourage, but trying to interpret the meaning of these press releases and articles strikes me as a bit of Kremlinology/tea leaf reading.
From the FT:
“According to its proponents, the injection of common stock would bolster Citi’s capital base while at the same time allaying market fears of a nationalisation. Under the plan, first revealed by the Financial Times last week, Citi could also try to raise fresh equity with a public share offering. The aim would be to keep the government stake to no more than 40 per cent or at least below 50 per cent, said people familiar with the plan.”
“However, the US Treasury has so far not expressed an opinion on the idea and it is unclear whether the government would agree to convert its preferred shares into Citi’s common shares without demanding a controlling stake.”
“Top government officials – who are trying to establish a more strategic and less ad hoc response to the crisis – are anxious to avoid the type of Sunday night crisis announcement that became a staple of Hank Paulson crisis management at the Treasury last year.
They apparently believe that the market response to White House and Treasury statements on Friday reaffirming the administration’s commitment to private ownership of financial institutions buys them some time to come up with a way forward.”
If this is the true nature of matters, it suggests to me that the Government’s response is quite schizophrenic mixed with a bit of naive. Lets see if this makes more sense when the details get clearer.
Why short C? Short the Fed.
http://astrolos.blogspot.com/2009/01/timing-american-economic-apocalypse.html
@Yves.
I take your point. As I said before, if given a choice between Roubini’s (et al) forecasts and Lewis’s, I’d bet on Roubini’s. My point was simply to illustrate the difference between FDR’s actions in March 1933, which you held up as a model for bold and courageous action, and Obama’s actions now, which you find lacking. The difference being that FDR was facing an actual banking crisis (albeit a liquidity crisis, not a solvency crisis), whereas the Obama team – as of now – confronts merely a forecast of crisis, however prescient it may yet prove to be. Moreover, in a recent interviews, even Roubini himself acknowledges the remaining small chance that the economy will recover more easily and thus spare the banks.
Now, one can certainly argue that Team Obama should prepare for the worst and act preemptively . But this is well beyond what FDR’s example might or might not recommend; and credulity and skepticism of the haste is hardly evidence of “bankster-favoritism” (your phrase, and my original objection). My guess is that FDR’s team would share the same concerns.
Anon of 2:27 AM,
We have had a bank run, on the shadow banking system.
Only 15% of non-farm, non-financial credit goes through banks. The rest shifted to securitization. That has broken down. The powers that be have cobbled together some quick fixes, which I as I detailed in 2008 posts, typically produced adverse consequences elsewhere nearly as bad (sometimes worse) that the problem they were trying to fix.
There is NO serious effort at bank reform afoot, none, no vision as to what the financial system ought to look like going forward, Obama knew as of October this was the number one issue. He could easily have gotten a couple of groups (or had them put together) to prepare big think papers on a largely pro bono basis describing issues and options. That would not have tied the hands of any incoming Treasury/economics team, but would have helped get everyone on the same page and set priorities.
Instead, too much is reactive, too much focus on short term patchwork. I’ve done crisis related work with clients and this team is not managing well.
Yves,
The EU is in the process of reviewing every banking rule in the book, plus mark to market, etc. Tomorrow, Tuesday, a committee report with proposals will be presented (I will be analysing for clients). We do not know where this review will take us, but my guess at this stage will be the most profound reform since the early 90s when the Internal Market program was first introduced.
It will be interesting to see how the Obama Administration will respond to such a development on this side of the pond.
The G20 in April will be interesting to watch…….
“He could easily have gotten a couple of groups to prepare big think papers on a largely pro bono basis describing issues and options.”
We are supporting Bono now? I thought his music was sub-par but hey, anybody is better than Geithner.
(Alright, I kid, I kid)
It is a fully political point. Why should not cancel the shareholders? They proved to be unable to define a viable and strong strategy. They proved a total lack of management supervision. They proved they cannot conceive and, least of all!, implement a sustainable selection process for the top management. In the end a bank need to book something above zero when you subtract liabilities from assets: if the bank is already existing it is not such a difficult task, isn’t it? Either looks such a titanic task to keep your customers alive and kicking. Who fais both tests does not deserve any pity: just drive their values to zero, just fire every single manager who cannot prove his disagreement – i.e. some memo warning about the unbalanced risk -. Next time they will pay more attention to the fact that a bank (any firm and individual, really) must be alive and stay alive in the future before booking “profit growth in the double digits” every single fy… Doesen’t seem rocket science but everybody pretended to forget the point: let’s make the reminder.
Sometimes I like to test my own thinking by suggesting a contrarian view point and this is an attempt to do that. When we talk about nationalisation of banks we see this as a solution to the banks not lending. Lending volumes in the US are believed to be down by about 55 percent during 2008 according to the Reuters Loan Pricing Corp (RLPC). This is in comparison to a WSJ report which indicated Bank Lending Activity Declines 1.4% In Q4. Leading the way was citigroup which was down 3.1% although some investigation shows that citigroup foreign lending was significantly down whereas US lending was more robust. Obviously there is some discrepancy in the reports until you think about Yves statement that only 15% of non-farm, non-financial credit goes through banks.
If we looked at the lending volumes of say GE Money we might see something very different in terms of lending volumes. Now GE Money had a significant portion of the sub prime end of the market in Australia, India and the UK and has now closed or sold those business units. This is why lending is down in those countries while bank lending is up.
Lets look at a few more facts. The Treasury Department said the banks reduced their mortgage and business loans by a median of 1 percent each, while credit card lending rose by a median of 2 percent. Banks reduced new commercial real estate loans by 19 percent, while increasing loan renewals by 55 percent. Loans purchased by institutional investors slid to $69.6 billion, down 84 percent from 2007’s $425.8 billion. Loans backing leveraged buyouts, a key source of loan growth for the past several years, were down by 80 percent to just $41.3 billion from $209.9 billion.
Quite clearly those facts would suggest the banks problem is not with lending to the consumer but to highly leveraged companies particularly real estate developers. Let us be clear about the banks whether they hold illiquid assets, are zombie insolvents or not the only thing we need them to do is to keep lending. The evidence against them in this respect is not really there, although they have been a bit squeamish in picking up the slack of those non bank entities who have withdrawn.
Banks and bank lending may have become a convenient excuse, as despite all that I have said the economy is still in a downward spiral. The number one factor in my book for the economic downturn was the demise of equity withdrawal which according to the bank of England was running close to 8% of US consumer disposable income. Quite how they work out that equity withdrawal in the UK was 5 percent of disposable income with 12billion a quarter and the US was 8% on 700billion a quarter when the US population is only 8 times that of the UK is a mystery. This could not be solved without house prices reversing course significantly. The second big factor was securitisation and the miss pricing of risk. Here you can make a very good argument for nationalisation, along the lines of the government making up the funding for miss pricing of risk so that credit can remain cheap. The consequence of this is social unrest as in effect there is a perception that the imprudent are bailed out by the prudent. That perception is what the treasury will be avoiding and why they may be in a sort of catch22 situation.
Counter cyclical capital requirement rules will most likely save Citigroup with the UK already having led the way this seems like a simple short term remedy. A wild card solution might be the nationalisation of the monoliners although there is something very discomforting about risk being subsidized by government in this way, sort of a be risky or else message.The question will be whether some sort of run forces the feds hand.
Citi is a zombie and needs to be put to sleep.
Those 2 banks have already failed. So seize them and clean it up. If Obama give any more handouts to shareholders of them, i.e., if he does anything other than seizing those 2 banks, it would mark the beginning of his presidency’s downward spiral, because by then we would have known his true character.
And it doesn’t even matter that it’s not a certainty that they have lost hundreds of billions. If the consensus is that a bank has failed, it has already failed.
May I suggest that all the anonymous posters on this blog choose a name. This is just too confusing.
Maybe in honor of the (really stupid, uninspired, very smart – pick one) bad back-good bank option we should have “good anonymous” and “bad anonymous” commenters?
Anonymous of 10:42
“Yves is crazy for asking for nationalization. We need receivership/conservatorship where taxpayers put up no money, and creditors claims against C are forcibly flipped into equity.”
Anonymous of 11:05
“…the offending duo didn’t want to single-handedly (that is, literally single-handedly – they don’t even have a staff yet) nationalize the entire U.S. banking industry. For this, they earn the stern reprimand of one Yves Smith, Chief Economist of Blogspot.com, who alone sees these men for who they truly are.
What a joke. History will look back and laugh at such drivel, if it even bothers to remember.”
Yves’ nationalization proposal *is* a conservatorship scheme and *doesn’t* involve the entire US banking system.
Yves posted this *on Saturday*.
http://www.nakedcapitalism.com/2009/02/more-on-that-dirty-word-nationalization.html
I don’t know when the expected verdict of history will be in. Me, I have some drivel to laugh at already.
February 23, 2009 7:29 AM
Citigroup and BofA, no more government help for these losers, let zombie banks die.
The market tells us these banks are worthless. Let them go to zero stock price. take them over and pay the shareholders, creditors nothing. Pay off the Depositors with FDIC insurance which will borrow from the federal reserve, because it doesn’t have a trillion Dollars to fill the hole.
Next raise the Marginal tax rate to 90% to cover the interst on the public debt, like we did from the 40′ to th 70’s.
this is the only true solution.
respond to smartest guy in the house
No economic or financial background here – just watching and learning.
Obama et al. do seem wholly unprepared in one respect: to be able to level with the public. Playing politics and smoothing the “optics” at a time like this surely is counterproductive. They should just admit that whole swaths of the system are broken or insolvent, that some form of “nationalization” (call it what it is) of various industry segments is necessary, and that our standard of living is going to take heavy blow. We’re pretty good at dusting ourselves off and getting back up on our own feet.
No economic or financial background here – just watching and learning.
Obama et al. do seem wholly unprepared in one respect: to be able to level with the public. Playing politics and smoothing the “optics” at a time like this surely is counterproductive. They should just admit that whole swaths of the system are broken or insolvent, that some form of “nationalization” (call it what it is) of various industry segments is necessary, and that our standard of living is going to take heavy blow. We’re pretty good at dusting ourselves off and getting back up on our own feet.
I have a friend at Citi. She said asset book is a REAL mess; after talking to her for an hour my hair started to curl. There will be MANY bailouts for this bank alone. It’s like the plane has crashed and the management is projecting a hologram in the sky to make everyone think it’s still flying.
No more. Not now. Not tomorrow. No. More. Period. Not for Citi, not for B of A, not for AIG. Basta.