This is a brief update to my previous posts about the government’s TARP program.
- Slowly more voices are raised about the pending theft of taxpayer money, 21 September 2008
- The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
Now we have the Citgroup bailout. The secret is out, so the mainstream media and blogs cover the story adequately.
Update: an excellent table which every US citizen should study: “Tracking the Bailout“, New York Times, 26 November 2008.
- Committments: $7.8T
- Used so far: $1.4T (most of which are investments or loans, not expenditures or losses)
The following all appear on Mark Thoma’s article at Economist’s View. Yes, now is an excellent time to get angry.
“U.S. Approves Plan to Help Citigroup Cope With Losses“, 23 November 2008 — Opening:
Federal regulators approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank, the government announced late Sunday night.
“Citigroup“, Paul Krugman, op-ed at the New York Times, 24 November 2008 — Excerpt:
A bailout was necessary – but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.
Amazing how much damage the lame ducks can do in the time remaining.
“Citigroup Bailout: Weak, Arbitrary, Incomprehensible“, James Kwak, posted at The Baseline Scenario, 24 November 2008 — Excerpt:
The arithmetic on this deal doesn’t seem to work for me (feel free to help me out). Citi has over $2 trillion in assets and several hundred billions of dollars in off-balance sheet liabilities. $20 billion is a drop in the bucket. Friedman Billings Ramsey last week estimated that Citi needed $160 billion in new capital. (I’m not sure I agree with the exact number, but that’s the ballpark.) Yes, there is a guarantee on $306 billion in assets (which will not get triggered until that $20 billion is wiped out), but that leaves another $2 trillion in other assets, many of which are not looking particularly healthy. If I’m an investor, I’m thinking that Citi is going to have to come back again for more money.
In addition, the plan is arbitrary and cannot possibly set an expectation for future deals. In particular, by saying that the government will back some of Citi’s assets but not others, it doesn’t even establish a principle that can be followed in future bailouts. In effect, the message to the market was and has been: “We will protect some (unnamed) large banks from failing, but we won’t tell you how and we’ll decide at the last minute.)” As long as that’s the message, investors will continue to worry about all U.S. banks.
The third goal should have been getting a good deal for the U.S. taxpayer, but instead Citi got the same generous terms as the original recapitalization…
“Citigroup Scores“, Robert Reich, posted at his blog, 23 November 2008 — Excerpt:
If you had any doubt at all about the primacy of Wall Street over Main Street; the utter lack of transparency behind the biggest government giveaway in history to financial executives, and their shareholders, directors, and creditors; and the intimate connections the lie between Administrations — both Republican and Democratic — and the heavyweights on Wall Street, your doubts should be laid to rest. Today it was decided the government will guarantee more than $300 billion of troubled mortgages and other assets of Citigroup under a federal plan to stabilize the lender after its stock fell 60 percent last week. The company will also will get a $20 billion cash infusion from the Treasury Department, adding to the $25 billion the bank received last month under the Troubled Asset Relief Program.
This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.
Meanwhile, more than a million workers in the automobile industry, along with six million mortgagees, and a millions of Americans who depend on small businesses and retailers for paychecks, are getting nothing at all.
Afterword
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Situation reports on the financial crisis:
- The US economy at Defcon 2, 11 March 2008 — Where are we in the downcycle? What might the world look like when it ends?
- The most important story in this week’s newspapers, 22 May 2008 — How solvent is the US government?
- Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
- High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
- A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
- A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
- Status report on the financial crisis: we’re at a critical point in time, 10 October 2008
The sad thing is, Obama is staffing his administration with exactly the same people allowed and profited from the current mess — the Goldman Sachs alumni and students of Robert Rubin. This is no-one’s fault, in particular, it simply reflects the dominant place the financial sector has achieved in our economy, and hence in our politics.
I get the feeling that no one is taking the current situation seriously.
This is what I feared from the start. The corruption of our leadership by money may be leading us to Hades. Everyone wants to belly up to the money bar. Democrats want more money to buy votes with, large corprorations want more money to make their bonuses with, etc. Makes one wonder if it was caused and not by accident.
Maybe we could stop asking who broke it. Maybe we could ask, “who knows how to fix it?”
@Mikyo, “Maybe we could stop asking who broke it. Maybe we could ask, “who knows how to fix it?”
Maybe there is no “fix” – at least one that can be afforded. Maybe the “fix” is an end to fiat money (actually a requirement of the U.S. Constitution in section 10, miracled away by the Supreme Court), high-multiple fractional reserve lending against opaque assets.
There are lots of ways to organize a society to create a safe, organized community and provide a mechanism to reward effort and divvy up scarce resources. This crony finance capitalism era in the U.S. is certainly not the only way.
Check out Moon of Alabama today for a description of the distortion of our economy by the prominence of financial institutions. It didn’t use to be this way. Banks once simply took in savings and lent them out to what they thought were viable social enterprises. Banks were a necessary part of the economy, but not the dominant part they are now. I dated the daughter of a banker in college; he was about as stuffy, conservative and uninspiring as they come. That’s the way they’re supposed to be.
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Fabius Maximus replies: here is the link: “Finance Has Lost Sight of Its Role“, Naked Capitalism, 24 November 2008. It is correct, but what makes an analysis like this valuable is not a description of what happened, or when, or where, or by who. “Why” it happened is the key.
Looking at the just financial sector misses the key drivers of this evolution.
My guess is that this was our response to pressure on our incomes (both business and personal) from increased foreign competition. We shifted the economy to focus on non-tradable activities, shielded from foreign competition. Instead of engineers we became a nation of lawyers, doctors, social workers, and financial-types.
This unfortunately resulted in a large current account deficit, as these activities are “overhead” on the economy (however valuable from an abstract sense). Not a pretty picture. Returning the national focus to actually earning money (not just moving it around) will be difficult and long.
We need to know who’s at fault for the simple reason of correcting what is wrong.
Part of being a free people is being responsable for our actions and holding others accountable for theirs! So far we have let the politicians slide, Republican and Democrat alike! So besides piling on debt and letting the politicians do whatever they wanted, we now get to enjoy the consequence for our lack of attention.
This problem is so multi-dimensional it’s outright scary.
I’ve got a bailout plan: How about you stop borrowing to give away my hard-earned cash – a surrogate to my value created from working – to people – over-leveraged bankers, over-leveraged home “owners” – who have already proved themselves irresponsible?
I pay my debts, you pay yours – what a concept.
What is the point of doing drugs when all you have to do is to read the business pages of the newspaper?
FM “We shifted the economy to focus on non-tradable activities, shielded from foreign competition. Instead of engineers we became a nation of lawyers, doctors, social workers, and financial-types.”
Who is the “we” in this formulation? Children of factory workers who decided it would be nice to be a lawyer instead? Is that why factories closed or went overseas — because of a shortage of workers here?
Our golden age (post WWII) came to an end when our allies and enemies destroyed by war rebuilt themselves and caught up with us. Toyota took the market from GM by being leaner, quicker and more aggressive (I remember when Japanese automakers introduced new styles almost every year, while GM chugged along with the same boxy design for all of its lines for almost a decade.)
I think the blame lies with the limited vision of our capital class, not the moral shortcomings of the rest of the population.
Update: valuable analysis by the NY Times
Here is an excellent table which every US citizen should study: “Tracking the Bailout“, New York Times, 26 November 2008.
Committments: $7.8T
Used so far: $1.4T (most of which are investments or loans, not expenditures or losses)
Too many fat cat bankers, and bank investors. Treasury should be preparing a pre-packaged Chapter 11 bankruptcy plan for banks that:
1) hugely reduces counterparty risk,
2) guarantees deposit assets;
3) wipes out equity investors,
4) reduces bond holder claims on assets (to 20%?),
5) eliminates all top executives, and the board of directors, and replaces them with gov’t employees whose job is to shut the company down in a low cost way.
End of bonuses, gov’t civil service type salaries for those who stay. Sale of the assets.
Save the good banks, let the bad banks fail. If they need gov’t cash, those are the bad ones that need to fail. Minimize the social third-party consequences of the failures.
The ultimate irony is that when Japan was dealing with a similar problem in the 90’s, our top economists, including Paul Krugman went over there and lectured them as though they were children on how they were caught in a liquidity trap, and they needed to write down bank held assets as quickly and viciously as possible, no matter how painfull, to reach bottom, and then let the markets sort it out. Otherwise, they were warned, it would only prolong the inevitable pain and suffering. Apparently it’s easier to give advice than to follow it.
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Fabius Maximus replies: One of the many rich ironies in this cycle. What comes around…
On a more constructive note, I have seen few explanations of the detailed way WWII got us out of the Great Depression. I believe one way this happened is the Federal Govt. became a good, reliable, and long term customer for technically innovative products. For example, they said,”Engineer a system to shoot enemy planes down, and we’ll buy it, and we’ll pay to engineer and build it.” Out of this came radar, linear control theory (a little known “Whopper”), servo motors, and analog computers (Op-amps, another whopper). This kind of “industrial policy” is the tech geek analogue of building roads and bridges and has a demonstrably higher pay-back if done right. If we are going to “fiscal spend” our way out of this, I recommend this form of spending over back breaking labor. The key is clear, persistent, simply stated technical objectives with minimal presupposition as to what technical approach should be taken.
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Fabius Maximus replies: There is no mystery to it. WWII, both the early orders from Europe and then the wartime mobilization, provided a massive Keynesian stimulus. The FDR “new deal” spending, while large by the standards of the time, was both far too small and too short in duration to restart the economy.
From Wikipedia about “1941: First (vacuum tube) op-amp”
I think it’s important to appreciate the human element, and the triumph of the human spirit, in all of this. Even venal human foibles cannot derail such sweeping tides. (How’s that for a mixed metaphor). It’s a good thing, because venal human foibles can do a lot of damage.
http://www.eetimes.com/anniversary/designclassics/opamp.html