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Citigroup Nationalization: Good Bank, Bad Bank
Tweet Share on Facebook November 23, 2008 CommentSeveral sources are now reporting that Citigroup is nearing a deal with the government to create a seperate "bad bank" to house $50 billion worth of toxic mortgage and other assets, as well perhaps a $1 trillion or more in off-balance-sheet entitites. The WSJ's version of the story also says the following: "Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said." CNBC adds this: The Government will absorb much of the losses for citi if there are losses and Citi would issue preferred stock to the government."
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Citigroup Nationalization: Coming Fast?
Tweet Share on Facebook November 23, 2008 Comment (1)Sooner rather than later. Much sooner, according to DC insider and analyst Pete Davis:
"What's ahead? My Washington banking sources expect a backdoor nationalization of Citigroup, possibly before 6 p.m. today, when Asian financial markets are poised to hammer Citi stock from $4 to far less 90 minutes from now. That after Citi fell from a 52-week high of $35 in early December, 2007, to its Friday close of $4.
Nationalization of Citi would probably include the injection of billions of dollars more from the Troubled Asset Relief Program (TARP), on top of the $25 b. Citi has already received. Citi is too big to fail. Over half of its deposit come from foreign investors. Thursday, Saudi Prince Alwaleed bin Talal upped his stake in Citi from 4% to 5% in an effort to stave off a bank run. Monday, Citi announced more layoffs, bringing the total to 75,000 out of a total workforce of 375,000. Unfortunately, this probably won't be enough."
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Citigroup Nationalization: How It Might Go Down
Tweet Share on Facebook November 23, 2008 Comment (16)The Bronte Capital blog lays out what I think is a fairly reasonable scenario for the nationalization of Citigroup -- and probably other big banks, too. It would go like this:
1) The FDIC (led by Sheila Bair) seizes Citigroup after declaring it unsound. Sorry stockholders and debtholders. "Indeed this is precisely what Bair did at Washington Mutual. What she did once she might do again."
2) Uncle Sam (a.k.a. taxpayers) recapitalize Citigroup.
3) The FDIC could "IPO the new Citigroup once this market mess had died down (and remit most the proceeds to former bond holders)."
But here is the big ramification:"If Sheila Bair was to confiscate a really big bank and cancel all the parent company liabilities then no other bank in America would be able to raise parent company debt. Indeed I think that has been the case ever since Sheila Bair did the reckless and irresponsible takeover of Washington Mutual… but it would certainly be the case if the parent company liabilities of Citigroup were cancelled. And that would be a huge decision indeed because then every bank with parent company liabilities (meaning almost every bank in North America) would fail.
Many – but not all – could be taken over in the same fashion at little cost to the government. But almost all of them would wind up property of the US Government. Full nationalisation, Swedish or Norwegian style, is an effective end to a financial crisis – and Sheila Bair has the power and has proved that she is willing to use it. But it is a decision way above her pay grade. (Where is President Obama’s new Treasury Secretary?) ...
Actually I think the die was cast for Citigroup when Sheila Bair confiscated WaMu. The lesson was learnt that bank debt could be treated very unfairly by regulators and hence banks were never going to be able to get finance again. The worst decision of this cycle was to let Lehman fail so badly - creditors got very scared. The second worst was the reckless way in which creditors of WaMu were treated - it made them even more scared."
Me: The core truth here: The problem is confidence, confidence, confidence.
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The Obama Economic Team
Tweet Share on Facebook November 22, 2008 Comment (8)Team Obamanomics, courtesy of the WSJ:
"The team is expected to include New York Federal Reserve Bank President Timothy Geithner, who will be nominated as the next Treasury secretary, Mr. [Lawrence] Summers, and incoming budget director Peter Orszag. Jacob Lew, a former White House budget director, is expected to be Mr. Obama's National Economic Council chairman. Jason Furman, who coordinated economic policy for the Obama campaign, is likely to be Mr. Lew's deputy. And Austan Goolsbee, a University of Chicago economist, is expected to be the chairman of Mr. Obama's Council of Economic Advisers.
Me: These guys are not Marxists, protectionists, or believers in a return to 90 percent marginal tax rates. They are believers in free trade bolstered by an expanded government safey net for workers, increased government spending on infrastructure (green and transportation) and education to increase growth and reduce income inequality,and higher taxes (though certainly less than a 70 percent top income tax rate) to help fund it all. But will they support a) the nationalization of our banking system or b) a pricey homeowners bailout? My guess is that they will recommend doing, to use the words of Obama, "whatever it takes" to keep us out of a depression. Other than cut taxes on capital or business of higher incomes.
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Treasury Secretary Geithner: Further Thoughts
Tweet Share on Facebook November 21, 2008 Comment (3)1) Comfort. Like Obama, Geithner is 47 (Obama is 14 days older), a fast riser and a technocrat.
2) Multipolar. If Larry Summers takes a White House post, you will have two bright academics (Summers, Bernanke) along with a bureaucrat running U.S. economic policy. It would be nice to have someone with business experience in the mix, yes?
3) Condi II. I wonder if Geithner will end up a mediator of sorts between competing economic centers of power such as Summers and Bernanke. Geithner strikes me as an executor of policy not a creator. And fiscal policy would seem to reside in the White House.
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Timothy Geithner: Obama Treasury Secretary
Tweet Share on Facebook November 21, 2008 Comment (4)It looks like New York Federal Reserve Bank President Timothy Geithner is our next Treasury secretary. A few quick thoughts:
1) He has the edge of being from Wall Street and understanding that world without being of Wall Street and having his hands "dirty" from the subprime crisis.
2) CNBC's Jim Cramer won't be happy, having called for a Senate investigation of Geithner because he supposedly was the prime factor behind the decision to let Lehman die. ("I think Geithner is one of the key architects of what went wrong here," Cramer said.) I am sure the Senate Republicans will be happy to make that dream come true with some very tough questioning.
3) Assuming Geithner is confirmed, his main job would presumably credit be as Credit Crisis Czar, leaving other key aspects of economic policy up to the White House.
4) He is not an economist.
More to come ...
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Should Uncle Sam Buy Citigroup?
Tweet Share on Facebook November 21, 2008 Comment (3)Brad DeLong thinks so. Current Citigroup market capitalization: $22 billion.
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Obama as President of the Recession
Tweet Share on Facebook November 21, 2008 Comment (7)Note to President-elect Barack Obama: Terrible economies make for topsy-turvy politics. A sky-high "misery index" of runaway inflation and elevated unemployment helped Ronald Reagan defeat incumbent Jimmy Carter by a landslide in 1980. But the horrendous 1982 recession took a huge chunk out of the Gipper's popularity. Recall that Reagan had just a 35 percent job approval rating at the start of 1983. (The dissipation of political capital even pushed him to raise taxes.)
Reagan might have been a one termer, but then the economy took off like Carl Lewis at the Los Angeles Summer Olympics. The economy surged 4.5 percent in 1983 and a mind-blowing 7.2 percent in 1984 as unemployment dropped from a high of 10.8 percent in December 1982 to 7.2 percent in November 1984. Reagan won by an even bigger landslide in 1984 than in 1980, and a 25-year "long boom" was underway. Surely Obama, another presidential victor who won by a hefty margin and inherits a lousy economy, hopes the overall pattern will repeat itself. Recall an ominous passage in his otherwise joyous election-night speech: "The road ahead will be long. Our climb will be steep. We may not get there in one year or even in one term." That was a call for patience until prosperity returns.
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The Biggest News of the Week!
Tweet Share on Facebook November 21, 2008 Comment (1)This may seem like an archane, wonky point to some, but yesterday the S&P 500's dividend yield nudged above the yield on the Treasury 10-year note. That has not happened since 1958, the year when the dividend yield first slipped below bond yields. Back then, it was a sign of greater comfort with holding stocks, that some of the nervousness from the Great Depression had finally faded.
Today, the oppposite action could mean a tipping point in people's attitudes toward holding stocks. Not that I could really blame them given the horrible return from stocks over the past decade or so. But to abandon the stock market as a way of building net worth would be a shame with market down so much. Terrible timing, especially since the stock market is our only escape from the meager retirement returns being promised by Social Security.
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How Tom Daschle Might Kill Conservatism
Tweet Share on Facebook November 21, 2008 Comment (213)The GOP strategist had been joking about the upcoming presidential election and giving his humorous assessments of the candidates. Then he suddenly cut out the schtick and got scary serious. "Let me tell you something, if Democrats take the White House and pass a big-government healthcare plan, that's it. Game over. Government will dominate the economy like it does in Europe. Conservatives will spend the rest of their lives trying to turn things around and they will fail."
And it turns out that the fearsome harbinger of free-market doom is the mild-mannered ex-U.S. senator with the little, red glasses, Tom Daschle. He'll be the guy shepherding President Barack Obama's healthcare plan through Congress via his probable role as secretary of health and human services. At the core of Daschle's thinking on the subject is the creation of a "Federal Health Board that would resemble our current Federal Reserve Board" and ensure "harmonization across public programs of health-care protocols, benefits, and transparency." (Forget secretary of state, Hillary Clinton should shoot for chairman of Fed Health and run one seventh of the U.S. economy.) And the subject of that "harmonization" would be a $100 billion to $150 billion a year plan that would let individuals (and small businesses) buy insurance from private companies or from a government plan.
