Posts Tagged ‘citi’

It’s Impossible to Remove Toxic Assets

March 21, 2009

Information came out yesterday and today that the Obama administration is about to unveil their plan to buy up toxic assets from banks.  They plan to use up to a trillion dollars from the previous bailouts, help from the Federal Reserve and a form of a public/private partnership to accomplish this.  After the uproar over the AIG bailout and bonuses, the administration does not want to go to Congress for more money.

However, it does not matter what kind of plan the Obama team comes up with for one key reason:  Banks will not sell any of their toxic assets.  They will not sell because the second they do, they will have to revalue their assets to the market value, and that will lead to failures across the board.

They would rather sit with billions of dollars of toxic assets on their books, not try to get rid of them, and collect billions from the government.  The only way banks will sell their assets is if the government suspends the mark-to-market accounting rule.

Mark-to-market means that banks have to value assets for their market value.  This is similar to how things operate in the real world for you and I.  Previously, they could use “mark-to-model” accounting, which meant they could value their assets using a computer model to determine their value.

For example, if we bought a home for $500,000, and we want to refinance or pull out equity, the bank will look at the value of our home if we sold it, or the market value.  If it’s value has dropped to $450,000, we have to adjust our plans for the new value.

You will hear some “economists” argue that banks should not have to use mark-to-market because there is no market right now and prices are artificially depressed.  There is a market right now, it’s just that no one will price assets that low because it will trigger all the other banks having to write down their assets.

If the value of these assets was artificially depressed, people should be buying them because their true value is really higher.  Just because it involves millions of dollars and the banking industry does not mean that the rules should be different.

If we suspend mark-to-market it will only lead to inflated prices for worthless assets.  Then the government will buy them and lose all their money and the losses will be stuck on the American taxpayer.  Sounds like a great idea to me.

There is a very simple alternative to all the bailouts and failed schemes – let the banks fail and let the bad debt be liquidated.  Only one politician has been a proponent of this, Ron Paul, and only a small handful of economists have called for this alternative.  It is amazing how the debate is limited to how many billions we should give away and how mad we should get for less than 1% of those billions being handed out in bonuses.

If you talk about bank failures, you are bound hear about Lehman Brothers and how disasterous that was.  I would argue though, that the Lehman failure has nothing to do with the crisis we are in.  Sure, lots of people lost money, but it was pretty orderly, proving the bankruptcy system worked.   Shareholders got wiped out, bondholders settled for 20 cents on the dollar, and the derivatives settled for about $6 billion.

Are we still talking about Lehman?  No.  Are we still talking about another firm that failed but had a government negotiated failure, Bear Sterns?  No.  The government got involved and arranged for a way to settle the debts and found a buyer.

Are will still talking about firms the government has tried to rescue through all the bailouts?  AIG?  Fannie and Freddie?  Bank of America?  Citi?  I know this is anectdotal evidence, but it seems that firms we let fail have gone by the wayside, and those that we’ve saved have just kept causing more trouble.

The point is that spending more taxpayer money and coming up with more schemes to help the banks are futile attempts to put humpty back together again.  The banks will not cooperate and liquidate their debt when they have the promise of government overpaying for worthless assets.  However, we will keep these insolvent institutions alive by giving them money to offset the writedowns on their bad debts.  It is an endless cycle with no light at the end of the tunnel.

The only way to move through this is to let the insolvent banks fail, liquidate their debts, and let the healthy or new institutions fill the void.  Until we do this, the current crisis will continue and eventually lead to the failure of the dollar and our economy as a whole.

Step One in Screwing the Taxpayers

February 26, 2009

When President Bush was pushing for his massive bank bailout plan, the concept was for the government to take a stake in the failing banks and eventually make money for taxpayers.  I was not in favor of the bailout  because I knew that in the end, the taxpayers would get nothing.

The new scheme for Citi to get more government funding is step one in this process of screwing over the taxpayers.

When the government gave Citi $45 billion of taxpayer dollars in the TARP package, it got warrants for preferred shares.  These could be converted to common stock, which could then be sold by the government, hopefully at a profit.

Now, Citi is in need of more money, and their plan is to have the government to convert their preferred shares of common stock, at or close to the current share price of $2.50.  This will give Citi about $45 billion in cash and the government would become the shareholder of 40% of the company.

When the TARP was enacted, Citi’s share price was just below $20, so in order for the taxpayers to make money, we would have to convert the shares above that price.  By converting them at $2.50, we are taking a 88% loss! 

Serving the best interest of Citi is NOT the protection taxpayers were supposed to receive in the TARP program!

Also, the bigger side effect of the government becoming a 40% shareholder in Citi is that we will not be able to let it fail or nationalize it.  If either of those occur, shareholders (taxpayers) are wiped out.  We will have to keep pumping more money into the failed bank, keeping it on life support.

The bank bailout was a horrible program and idea from the start.  We were sold the fact that the taxpayers would be protected by taking a stake in the failing banks, and then selling the stake for a profit down the road.  This new plan by Citi is a direct contradiction of these protections, and is the first step of screwing over the taxpayers.  This turns the plan into a huge transfer of wealth and a direct giveaway to banks.  We will never see a penny of returns on the $700 billion we “invested” in the failing banking industry.

More Government Equals More Recession

February 22, 2009

The latest headlines have the government taking a larger stake in Citi, upping it’s share to 40%.  This is just going to stretch out the recession we’re in even longer.  If they are going to take a stake in the failing bank, the Feds need to stop taking baby steps and flat out nationalize already.

Of course, letting the banks fail and letting the free markets work is out of the question now.  The reason is that government intervention has eliminated failure as an option.  It’s a tangled mess that all went back to the original TARP plan, that in hindsight, looks like what we needed.

The entire problem with the system right now is that there is too much bad debt and malinvestment.  The original goal of the TARP was to eliminate this debt.  Instead, though, the Feds realized that if they actually determined the market value for these securities, a lot of banks would fail.  They then modified the TARP to give money directly to the banks, so they could offset their bad assets.  This failed because the assets were basically worthless and no amount of money could offset the malinvestment.

So, here we are, with the banks still in the same predicament, and the taxpayers on the hook for $300-$700 billion.  We don’t the exact number because the government lost count somewhere along the way.  Remember, as protection for the taxpayers, we got shares in the banks.  So if they fail or get nationalized, we lose all our money.  Everyone else gets away for free while the taxpayers are left holding the bag.

Everyone talks about how bad the failures of Bear Stearns, Lehman Brothers, and Washington Mutual were.  Honestly, though, they weren’t that bad compared to the Great Depression II Obama is trying to create.  Shareholders lost everything, the bond holders got 20 cents on the dollar and a lot of people got screwed, but the failure was pretty orderly.  The bankruptcy system and the method of failure works.  Sure, it’s painful, but at least we know what we’re getting and we can move on.

We’re in a situation now where no one wants to let the banks fail, and we will bankrupt the nation and the taxpayers in order to make it work.  We’ve already been screwed over enough, and a couple more months of pain from the failure of a few more banks isn’t going to kill us.  Just get it over with so we can move on.  Don’t keep stringing this charade out.

The more the government gets involved, the bigger the conflict of interest and the bigger the problem gets.  We need the liquidate the bad debt.  Plain and simple.  We need failure and we need the free markets to work.  Why are we going to prop up these banks that made the terrible decisions that got us here?  It’s absolute nonsense.

More Reasons the Bailout was a Bad Idea

January 27, 2009

As if we didn’t have enough reasons to show us the TARP bailout has been an utter distaster, a few more popped up this morning that aren’t as obvious.

The first is that the headlines all read this morning that Citigroup was buying a $50 million plane with taxpayer money.  It turns out that it really ordered the plane in 2005 and that using it would cut costs for the company.  They also were financing it by selling other planes.  Now, they’ll still have to spend millions of taxpayer dollars cancelling the order.

This is exactly the kind of double standard that is set up by the bailouts.  You can’t spend any money to improve your business because if you do, you are wasting money.  I’m not sure how much efficiency this plane would gain Citi, but $50 million is only .014% of the $350 billion they can’t find.

So now, in the eyes of the public, the reason we can’t find the bailout money is because of wasteful companies buying private jets.  This is the scapegoat the new administration needs so they can place the blame on the companies,  not the failed policies the new Treasury Secretary promoted.

This leads us to another example of the failure of the bailout.  This morning, Tim Geithner, the new Treasury Secretary mentioned above, placed new rules against lobbying for TARP funds.

Wasn’t it just a few months ago that the Treasury basically forced the largest banks in the nation to take the TARP funds?  If they did not want them, why would they lobby for them?  Maybe Geithner’s new rules prevent the banks from lobbying against getting government money.  You will have to take it, no questions asked.

Again, a great example of the new administration showing how they’re cracking down on lobbying and adding transparency (that was said with sarcasm, by the way).  This is just political grandstanding and fooling the public into thinking real “change” is happening.

These lobbying rules will also have no effect on the lobbying efforts that are going on for the new stimulus package though.  That one has politicians and lobbyists lined up, trying to get money for any projects within their districts.

Also, these rules have the unintended consequence of encouraging closed door, secret meetings like the one Bank of America had with the Treasury.  By outlawing lobbying, the banks will go to more secretive and shadier tactics.  

The whole idea of bailouts and the TARP were horrible from the start.  The House had it right the first time, when they voted against it.  Now we are living in a world where we, the people, have to just live with this garbage day after day.  

A President who really promotes change would have assessed the situation with unbiased eyes, realized how the TARP is not working, and had an action plan ready to go day one.  Instead, Obama’s team is saying it will take months to get up and running and just adding more crap on top of the stinking TARP.  We need real fixes, not patch jobs on what was a horrible idea from the start.