To Answer Alex’s Question….
Alex wants to know why we are bailing out Citigroup. Simple: the executives and large stake shareholders in Citigroup have the personal phone numbers of most politicians in their roll-a-dex. They are probably on a first name basis with Senator Harry Reid, Speaker of the House Nancy Pelosi, Secretary Henry Paulson, and Senator Mitch McConnell.
Voters on the other hand do not have these numbers. Voters are a large and diverse group. Voters are hard to organize and can be a fractious group at best. So when it comes to supporting large scale donors, possible future employers, over screwing the voter it is a no-brainer. Any attempt to look for additional logic/reasons in this is futile. We have here an extremely blatant case of rent-seeking.
As unbiased as this sounds, I’m bettin’ there’s at least one or two more explanations.
Grrr. The reason that Citi was bailed out is that a failure of that magnitude is the last thing that the global economy can absorb right now. Some back of the envelope numbers suggest that it would be roughly equivalent to 300 or so local banks failing.
Do you remember when Lehman failed? Have you been paying attention to the fact that almost everyone has been saying that it was the worst decision made by Paulson & Bernanke? That more or less knocked the Dow Jones from 1200 to 800. We we’re talking about losing 1/3 of the market capitalization of the U.S.
Now you realize that Citi is much, much bigger, and much, much more integrated into national and global finance that even Lehman was, right?
So just take a wild guess at the consequences of Citi failing, would you please.
All that said, the terms of the Citi bailout are miserable for U.S. taxpayers. Miserable. Start with Mark Thoma:
That’s pretty much the point I made in Alex’s thread. I’m amazed that I’m not being denounced in saying there’s political motvation, here.
We also have to make sure that the new Mets stadium keeps its corporate sponsorship.
Cat’s sleeping with dogs?
What the f*ck. You and your side are the ones defending bailouts like this and you can’t describe the horror scenario? You need me to do it?
“Me and my side.”
I’m not taking sides, apart from pointing out that the terms of the Citi bailout were overly generous, to the point of being a very bad deal for the taxpayers. I am asking for a more detailed analysis that “rolodexes numbers” however.
Way to rise above, Steve.
The simple fact is that bailout responses are not breaking down neatly along any kind of lines. Everybody seems to be in turns philosophical and pragmatic … turning at times to panic.
It will take a few days at least to shake out how philosophical, pragmatic, or panicked this was.
When one is presenting a case for billions in bailout money excuse me for wanting to actually make the damned case. You know there is this thing called, when you make a claim you back it up. We get nothing here just scary sounding vagaries.
And you hit the nail on the head, although I doubt you realize it. People are panicking just not the same people as nearly 80 years ago. The CEOs are panicking. The large stake shareholders are panicking. The guy on the street? He’s not panicking. So lets conjure up the boogeyman of bankruns and by Georege we’ll get a bailout.
Note that I agree with you on the merits, Steve. In my update below I was presenting the presumed rationale rather than defending it.
Steve — As bad as the terms of this bailout are, are you suggesting that Chapter 11 bankruptcy and FDIC conservatorship is preferable?
It is difficult indeed to make the case for catastrophic consequences of not bailing out Citibank.
Apparently, it is easy to make the case that only negligible consequences would follow from NOT bailing it out.
Could you make that case for us?
You are clearly pro-bailout, so you are clearly on that side. If there is something really scary that would result from failing to bailout can you please explain it?
Lets stop and think here for a few seconds instead of hyperventilating and imagining Lovecraftian horrors swooping out of the skies and rising from the Oceans.
You follow Scott’s links and Mark Thoma links to another who describes Citi as a “fucked” bank. No really. In other words Citi is so messed up the only word to describe it is fucked.
So we are going to bail out this fucked bank, and the people who fucked it up. We are going to do this by…taxing people? No. Printing more money (inflation tax)? No. Borrowing. Yes!
We’ll borrow money from the banks…so that we can give it to the banks so that they…can…lend it…out……uhhhmmm….errr….PROFIT!!!!!!!!!!111!!!ONE!!!
And all that money we are borrowing and lending is to be…lent back out to companies so that they can smooth out their cash flow. So we are doubling down on our interest payments, but this is good for the economy. Only problem is, according to the Doom-n-Gloomers that Scott references…these banks they take the money and don’t lend.
But we are to worry that letting Citi fail will ruin the global economy. The stars with finally align and R’leyh will rise from the depths and Cthulhu will walk the world again. Or something equally as scary, I’m sure.
Frankly Citi needs to die. I wouldn’t mind if the Federal Reserve and the FDIC stepped forward and stated that all deposits would be guaranteed to prevent a run. But to continue to prop up a fucked bank, a term you linked to indirectly Scott, is stupid.
No. I am NOT saying that letting Citi die will be a good thing. I am not saying it will be a minor thing. It will be a bad thing.
Think of it this way. If you keep supporting a drug addict will they get better or will they just keep sucking money out of you till either you are broke or they die anyways? That is how I see this.
The problem is that your theory, that all it takes is political connections to get a bailout, makes certain predictions which have not panned out.
So, going back to my suggestion from a month or so ago, why aren’t we borrowing money from failing banks?
Actually we probably are. What isn’t being told is that right now Citi is probably making all sorts of loans this very second.
It’s curious that of the 4 names you mention only one had any significant relationship to the Citi bailout.
There fixed it for you.
It’s the Golden Rule: “The man with the gold, makes the rules!”
I started by finding this bailout “strange and arbitrary.” I said I was “waiting for the news cycle to digest it, and hopefully find some sense (or necessity).”
… but you know, the more Steve chews the carpet, the less ready I am to believe any snap judgments.
Citigroup has something like $60 billion in CDOs. If it fails right now then the mark to market pricing on those goes through the basement. Now every other bank has to write down its assets accordingly. With fewer assets, these banks are by definition more highly leveraged. So they have to deleverage themselves accordingly, which means a corresponding 10-1 or 20-1 decrease in worldwide credit.
That’s the easy part. The implication on credit default swaps is above my pay grade, but I’m going to guess that they’re substantially worse than the blow that Lehman’s failure dealt.
I left off the fact that Citi is the guarantor on $1.6 trillion in credit default swaps. Chapter 11 effectively renders those unbacked. Now we have $1.6 trillion in “uninsured” global assets that were previously “insured”. (Annoying quoty marks indicate that it’s not really insurance). That leaves us with a likely ratings drop on $1.6 trillion in global assets.
Many large investments, such as pension funds, only invest in assets at or above a certain rating. So when ratings drop there is a large selloff, which further drives down prices. These lower prices then leave banks with lower capitalization, and hence higher leverage, leading to less credit.
Now if Citi can fail and leave its CDS unguaranteed, then who else may also? How does this effect the value of those CDS and the value of the assets that they back? I’m in no position to answer those harder questions.
Sorry don’t buy it. I think this is overly pessimistic. I’m just not buying a near doomsday scenario.
However, I see this very much like government instituting a price floor. In this case supply and demand want to set a price below the floor but the government doesn’t let the price go that low. However, instead of setting a price, they merely keep paying out the money to all people who would work at the floor wage.
See with a price floor you have excess supply. So the government isn’t merely paying those workers that are actually working (using a wage/labor model) but also all the workers that would like to work at that wage.
We are attempting to delay the pain hoping for, basically a miracle. That somehow the economy will start growing again and the government can stop supporting these financial institutions that behaved highly irresponsibly. Well…until the next time, and the time after that, and the time after that,….
OK Steve, I suppose it’s plausible that Reid, Pelosi, et all have been feverously twisting Paulson’s arm demanding a Citigroup bailout.
Of course it seems that if such meetings took place we would have heard of them.
However, given recent evidence that, despite the bailout legislation passed by congress, Paulson seems to have total freedom to direct it as he sees fit I just found it odd to mention congressmen while leaving out Bernacke, and of course, the President.
Wait a minute … didn’t Reid and Pelosi go to Paulson and ask him for $700B? Am I remembering that wrong?
I might have missed the humor tag on this one…
They don’t have phones in their offices? It has to be face-to-face?
Still the point is that these people have the ability to get in touch with powerful people and get favors. The people in Washington have incentives to comply.
Of course, they’ll put the best face on it. Saying it was for the good of the global economy. Heck they might even believe it. But given that the crisis has racked up over $7.7 trillion so far with no end in sight, I can’t help but wonder….how much worse could things have been without these bailouts like Citi got?
I know, I know the sky would have fallen. And don’t be such a nitpick.
So what’s your point Steve… It is all the fault of the “Washington People”? You know they come and go. It does not matter which party is in power, to us lowly folk or to those at the top. For us serfs, we are at their whim. For those at the top… Well, anybody can be bought.
What is your solution, Steve?
All it takes?
No. But clearly, it doesn’t hurt.
The unspoken implication was that we would do that, and not give away $700B.
Clearly it doesn’t help either, so maybe it’s time for a new theory.
Yes, it does in fact help.
Note, please, who was involved with the negotiation.
Do you really consider that absent an oncoming Democrat administration, Citibank wold have been handled that way?
Given the current administration’s own words on the need for a Citi bailout, yes, I think it would have gone exactly the same way.
So, Robert Rubin had nothing to do with this?
Bithead — Given how unyielding the Bush administration has been on every single point of policy, I cannot imagine that they are now basing their decisions on Bob Rubin’s opinions.
Steve Verdon, argument from analogy is false argument, particularly when comparing the financial system to a drug addict.
So, absent Robert Rubin Citi would not get a bailout?
For a theory to work, Bit, it has to not only predict when things will happen, but also when things won’t happen.