Time for the Government to Buy Citigroup

No real point to merging it into JPMorgan Chase or Bank of America. And it is definitely too big to fail.

Who wants to be Deputy Assistant Secretary of the Treasury for Citigroup?

Peter Eavis:

Share Slump Tests Citi Limits: Following steep drops all week, Citi's shares shed another 26% Thursday, even after Prince Alwaleed bin Talal, a large and longtime shareholder, said he plans to increase his stake in the bank.... The market appears to be in a game of chicken with the government over Citi.... The political risk of giving banks basically free money is huge. And even that mightn't do the trick.... The only way to get that [leverage] ratio down is to slash assets -- almost impossible right now -- or issue a large amount of common stock. And that is the dilemma for the government. Citigroup's market value is $26 billion. If the government wanted to inject another, say, $25 billion through common stock it would end up controlling the bank...

Yep. Time to do it. Swedish model. No more of this "preferred stock capital injection" business. Common stock. And with commitment comes control.

Comments

[Ken Houghton]

There are jobs I can imagine people being insane enough to take, despite (or, in some cases, because of) there being no chance of success, on the grounds of The Starfish Theory.

That isn't one of them.

Citigroup needs someone with LBO experience. What's Henry Kravis doing?

[christofay]

Henry Kravis, you have got to be kidding. Can you possibly find someone more morally compromised? Fees for me, losses for you.

[christofay]

And what was Rip van Rubin doing all those years to deserve his salary? And that guy is advising Obama President-elect.

[MattYoung]

Do the employees get federal benefits?

[Leila Abu-Saba]

Um, there aren't going to BE any Federal benefits, because we spent all our money on Iraq and the bank bailout (and Big 3, and ...)

Can you review for us again why Citibank is failing? I just don't get it. How can Citibank fail? I'm still not panicking, but ... I'm just staggered that they could have been this dumb.

[Leila Abu-Saba]

Answering my own question, sort of:

http://www.nytimes.com/2008/11/21/business/21finance.html

Seems that Citigroup is tanking because everybody is tanking? They lent too much money to people who can't pay? Is that it?

Sometimes I agree with those Republicans who say the whole thing is psychological. I mean, folks have been overextended for years. Why is everybody freaking out now? Why is the world's fifth largest economy (my state, California) tanking because some greedy bankers lent too much money to squeezed middle class folk who can't pay it back? Is wealth that evanescent? Where did all the money go?

My son's public school is closing - "budget cuts." Etc.

[MattYoung]

"Where did all the money go?"

The current estimate of capital value is different from the predicted estimate of capital value, hence the money is used to pay off the difference.

If we cannot cover the difference, the "margin call", then we have to reduce consumption to pay the bills.

A generalized margin call is a euphemism for liquidity to cover the differences in capital value expectations.

The question is why we do this adjustment all at once, the question we have been asking for the past year.

The most probable technology shock that caused the shift in expectations (of capital value) is likely the digital revolution continuing its work. It seems that there is a critical mass of technology which, when deployed, pushes us dramatically into another equilibrium point (another estimate of capital value).

We saw this in the great depression, IMHO, when the imperative of commercial radio just broke though the economic barrier. There was just a gain from using radio markets as a center of goods distribution and such a low cost of implementing a commercial radio station that we just abandoned the older forms of distribution.

We are in the same spot. The cost for us to actually measure the distribution of goods is now so low that we just abandoned the older estimates of measuring the flow of goods. Department stores, warehouses, forms of transportation are being whipsawed by the deployment of low cost digital information.

[scott]

Under no circumstances should taxpayer $$ be used to buy Citigroup. That will be throwing away good $$ after bad (see "Bailout").

The paper economy must die, and the sooner it is allowed to die, the better.

[Alex Tolley]

Looks like Citi is getting ready to shop itself rather than be de facto nationalized.

[Leila Abu-Saba]

Matt Young -really? The internet caused all this?

It wasn't stupid greed, overbuilding, overconsumption, bank deregulation and bubble thinking?

I thought that we're going into freefall because a lot of us quit buying cheap crap at Target/expensive crap at Nieman's.

Those of us who don't buy as much crap (cheap or expensive) as our neighbors are bemused. You mean our 401K lost 40% of its value because everybody else wants to live like we always have?

(1990 Toyota Camry & 1998 Honda, 10 years left on a 15 year fixed mortgage, house bought in 1999 in mediocre but convenient neighborhood, no credit card or student loan debt, we eat home cooked meals 6 out of 7 nights, public schools, etc.)

I'm not complaining that life isn't fair, 'cause life just isn't fair, but... I take no pleasure in "I told you so". OTOH I'm just not worried. I'm alive and that's what matters. Also, if we're poorer, so are most other people, and we know how to have a good time while broke. Will instruct the newbies for a small fee.

[Ken Houghton]

Citi is too big =not= to fail, but there are pieces of it that can succeed on their own right now.

The consumer banking business, for instance, is strong. The credit card operations are probably salvageable, and the credit card servicing area certainly is. Pieces of previously purchased investment banks weren't destroyed by the Prince/Pandit combination, and therefore could probably survive on their own in the right atmosphere, or if, say, Morgan Stanley--itself fresh from a round of layoffs yesterday--bought them.

Even the mortgage origination area is probably salvageable.

It needs to be sliced and diced, so the "Deputy Assistant Secretary of the Treasury for Citigroup" should be someone who first knows how to sell off The Good Stuff--and isn't going to sell to his friends just because they are his friends.

In that context, describing Kravis as "fees for me, losses [i.e., risk you are willing to pay for, but may well mismanage] for you" makes him A Good Idea.

After that, it needs to be run day-to-day by someone who believes in The Starfish Theory and isn't scared of red ink. But you need to slice and dice and make the remaining pieces small enough just to be some combination of "small enough to fail without contagion" and "too big to fail" before you can even think about solving the issue.

[Maynard Handley]

Brad, I ask this as a serious question, not as snark:

Is there discussion going on amongst the political classes regarding legislation to limit the size of companies?
What the hell sort of society are we running (or planning to run) when pretty much every economic sector consists of a primary entity that is too large to fail? Even apart from the current unpleasantness, what sort of incentives does this give rise to in the future, as this primary entity
(a) knows that gambling is a great idea because the losses are asymmetric with the gains and
(b) the key to maintaining this successful gambling strategy is to remain as large as possible, regardless of whether it makes economic sense.

The current situation appears to be insane by almost every metric, and, while sure it's important to resolve the current problem, what exactly do people have in mind for preventing a similar spiraling out of control in 2019 after the great biotech bubble of the mid 2010s?

[Barry]

"...what exactly do people have in mind for preventing a similar spiraling out of control in 2019 after the great biotech bubble of the mid 2010s?"

*Preventing*? The elites are undoubtedly figuring out how to protect themselves better, but prevention might not pay as much as sucking the hard and real profits from that bubble, while selling us the buble itself, and then making us pay for the bialout.

[Citi Stockholder]

I own both common and preferred shares of Citi. If Citi truly "can't be allowed to fail" how safe are my shares?

[Ken Houghton]

Very safe, unless you want money for them.

Just looked at the Citi stock price. Forget Henry Kravis; I could make money running the firm at that level. (It still needs to be broken up, but it appears that Paulson's pals are getting the profitable part.)

[kevin oleary]

Are you sure you don't mean "Swiss" model in regards to the Swiss bailout of UBS? You said Swedish...

[bob h]

If JP Morgan, et. al., do not need the $25 billion they were “forced” to take from Paulsen, why not have it returned so the Treasury so that it can be deployed on more urgent problems (Citibank, auto bailouts, auto and student loan financing,..)?
Particularly since the motivation behind the $25 billion infusions, to disguise the relative weakness of Citi, is now irrelevant.

[marketdude]

kevin oleary, Brad wrote about the Swedish nationalization of their banking system here:

http://delong.typepad.com/sdj/2008/09/time-not-for-a.html

[Blissex]

«legislation to limit the size of companies?» There used to be something like that. The antitrust stance of the USA used to be that large companies were anticompetitive as such. But there is a large correlation between executive compensation and company size, and some fortunate economists invented ridiculous doctrines, in particular two: * That market dominance only is objectionable not if it restricts competition, but if it can be proven that the lack of competition causes harm to consumers, something that is very difficult to prove. * That market dominance is anyhow not objectionable even if it restricts competition, if competition is potentially possible, even if not actually in place. The economists who used these doctrines as expert witnesses to defend large companies from antitrust considerations became very wealthy, and currently USA antitrust is rather weak. In part because large businesses have persuaded the USA government that they need to be immensely large to be "national champions" of the USA against foreign companies, and they should be allowed to fleece their USA consumers to create the funds to compete internationally. The problem with this argument is that it uses the global economy as the scale for "too large" (and Citigroup is pretty small compared to the global financial markets), but governments only have resources proportional to their national economies. So for example the Icelandic banks, national champions of Iceland, were pretty small compared to the global banking market, but way, way bigger than the Iceland government could afford to handle. Citigroup may be not too big internationally, but it may be too big to save on the USA government scale.

[Blissex]

it is most fascinating to look at the long term graph of the Citigroup stock price:

http://finance.yahoo.com/q/bc?t=my&l=off&z=l&q=l&s=C

In its the start of the "irrational exhuberance" bubble is very clear, in 1996; then the very rapid collapse in 2001-2002, halted by the Greenspan Put, which stabilized the price near its top.

Now the price is reverting (or worse) to the pre-bubble trend; indeed it is still way higher than in 1995-1996.

The graph above shows clearly that in 1995-2007 "something" happened that was completely extraordinary and artificial, and most likely the result of some government policy.

If deliberate, it was a truly gigantic pump-and-dump scheme to fleece middle aged and close to retirement baby boomers.

Compare with the graph above with that of a solid blue chip non financial business like Procter-Gamble:

http://finance.yahoo.com/q/bc?t=my&s=PG&l=off&z=l&q=l&c=C

Even PG stock has quadrupled between 1997 and 2007, for no obvious reason, and is now on a downtrend.

Be scared, very scared.

[Blissex]

«large businesses have persuaded the USA government that they need to be immensely large to be "national champions" of the USA against foreign companies, and they should be allowed to fleece their USA consumers to create the funds to compete internationally.»

The classic examples here are Microsoft and pharma.

[Blissex]

«a truly gigantic pump-and-dump scheme»

Probably where the Republican party was the boiler room operation running the scheme.

It looks like the republicans (and Clinton) created 1995-2007 was the biggest opportunity for old USA money to pump their assets, dump them and cash them in, and reinvest in countries with better long term economic prospects than the USA.

As Grover Norquist (one of the architects of the pump-and-dump scheme) argued:

http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=11699
«The 1930s rhetoric was bash business -- only a handful of bankers thought that meant them. Now if you say we're going to smash the big corporations, 60-plus percent of voters say "That's my retirement you're messing with. I don't appreciate that". And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher. And in 2002, voters said, "We're sorry about the seals and everything but we really got to get the stock market up.»

That's what being a winner is all about :-).