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Slouching Towards A "Temporary Takeover" Of Citibank

By Big Tent Democrat, Section Economy
Posted on Fri Feb 27, 2009 at 08:43:57 AM EST
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It appears that Treasury Secretary Tim Geithner simply will not bite the bullet. NYTimes:

[T]he Treasury Department announced on Friday that it would vastly increase its ownership of the struggling company. After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake to 36 percent from 8 percent.

Under the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock, giving taxpayers more risk, but more potential for profit if the company recovers. The Treasury will convert its stake to the extent that Citigroup can persuade private investors, including several foreign government investment funds, to go along. . . . The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup . . . Taxpayers, after pumping more than $45 billion into the bank, have become Citigroup’s single largest shareholder. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.

This is simply ludicrous. Bite the bullet now Geithner. "Temporary takeover" of Citi is inescapable. Start fixing the problems now.

Speaking for me only

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    Slouching Towards A "Temporary Takeover" Of Citibank | 92 comments (92 topical)

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    Exactly right, BTD (5.00 / 4) (#1)
    by allimom99 on Fri Feb 27, 2009 at 08:56:48 AM EST
    The longer we wait to do this, the more we risk a japan-style "recovery" - I prefer to hope we will foolow the example of Sweden instead, where they did the temporary takeovers quickly, fixed the deficiencies, and got the banks back into the private sector ASAP.

    Sure, the Rs will scream socialism, but they're doing that anyway. This would be the place to spend some of that political capital Obama has at the moment. As you have said, the longer he waits, the less valuable this will be. Bold strokes are needed here, not nibbling around the edges of the dilemma. Doing the right thing is often not the easy way, but it sure looks good on the other side of the crisis, IMO.

    I HATE the Geithner pick (5.00 / 3) (#3)
    by ai002h on Fri Feb 27, 2009 at 09:07:02 AM EST
    I was listening to his interview the other day and he really needs to go. He doesn't realize he works for the government, he STILL thinks he works for Wall St. Seriously, you can tell in the language he uses, he sees government as a different entity entirely and that what he's doing is seperate from that. People have no idea how entangled a lot of these Fed guys are with Wall St, their neoliberal ideology is wired in such a way that makes them the servants of Wall St.

    Think of it, every step of the way, Geithner has been on Wall St's side. He lobbied the adminsitration to cutback on their compensation restrictions, he fought off Axelrod and co. who wanted to nationalize the banks, he went to capitol hill and begged Barney Frank and Chris Dodd for hours to loosen the compensation ammendment added to to the stimulus bill.

    It's not a surprise that the most disappointing approach of the Obama administration has been their handling of the bank crises. The stimulus bill wasn't big enough, but it was entirely a democratic bill with the exception of the AMT. The budget is the most progressive budget since WWII, with guys like Krugman and Reich saying, if passed, it will undo the past 40 years of killing the middle class. But the banking crisis has been nothing but peacemeal, unsure measures, and it all comes from Geithner. Of all of Obama's appointments, he's the one I would take back, even more than Gates.

    Geithner understands the banking system and (5.00 / 1) (#7)
    by Green26 on Fri Feb 27, 2009 at 09:38:17 AM EST
    how Wall St. works, in my view. It will take more time to make a good assessment of how he's done. I like what's he's done so far.

    As for Citibank, my view is that a government takeover of Citibank is a last resort, and would essentially ruin Citibank and reduce it's ability to lend. Citibank is so much larger than any bank that the US has taken over in the past, that I doubt the US has the resources to accomplish an overnight takeover and reopening, as it often has done with other smaller banks.

    Keeping Citibank going preserves its franchise and going-concern values, keeps a takeover from causing yet another huge disruption in the financial and stock markets, and preserves some value for bondholders and stockholders.

    This conversion of a portion of the US's existing preferred stock into new senior preferred stock, appears to improve the position of the US and significantly increase its ownership position. The US offer is conditioned on other preferred holders converting their stock. I believe all of this will result in Citi having a stronger capital position--for purposes of the stress test and otherwise. No new US money is being put up at this time.

    It looks to me that this is a win-win situation for Citi and the US, as Citi's capital position is improved and the US's position is improved. Citi common stockholders are significantly diluted, as presumably they should be. Other changes are being made in Citi's business and governance, i.e. all dividends will cease and board composition will change significantly.

    If Citi survives, and I believe it will, its stock price and value will increase significantly, and the US will recoup a huge amount of its investment--and probably make money.

    Credit Default Swaps (5.00 / 1) (#13)
    by gyrfalcon on Fri Feb 27, 2009 at 10:53:30 AM EST
    Somebody in a comment to one of Krugman's recent blog posts said this:

    "It is possible that after looking into the abyss of what happens when too big to fail-fails- the government rationally concluded the costs are unacceptable.  If we nationalize, then credit default swaps are triggered.

    The whole system collapses. Think Lehman times 10. After all we are talking Citigroup."

    I don't know enough about the process to know whether this is right.  Does anybody?  If this commenter is correct and nationalization would cause the CDSes to be triggered, it could quite literally bring the entire financial system down in days.

    We have to remember this is not our fathers' financial system, it's become an entirely new animal in the last 10 years, thanks to the myriad of mortgage and other credit securitizations, and the credit default swaps that guarantee them.

    Parent

    When the government took over Fannie and Freddie (none / 0) (#14)
    by steviez314 on Fri Feb 27, 2009 at 11:00:10 AM EST
    that did indeed trigger their CDSs as a credit event.

    Now, triggering is determined by the credit default swaps primary dealers by some voting mechanism.

    These things have to centrally cleared, traded on exchanges and offset, ASAP.

    Parent

    This is where some international... (none / 0) (#18)
    by santarita on Fri Feb 27, 2009 at 11:09:58 AM EST
    agreement could be reached to change the events of default or the remedies on the events of default or maybe just some international agreement on forbearance.  

    Parent
    Thanks to both of you! (none / 0) (#21)
    by gyrfalcon on Fri Feb 27, 2009 at 11:25:22 AM EST
    Two questions.

    Do you think this is, in fact, likely the reason they're shying away from nationalization?

    And secondly, do either of you see any movement on the remedies you suggested-- voting (voting?  They vote on this stuff?) or an international agreement on forbearance?  Might the latter be on the agenda for the upcoming G-20?

    Oh, and another question.  How come the all-knowing Krugman et al never mention this in their ongoing push for Nationalization Now?

    Parent

    A Good Discussion... (5.00 / 2) (#33)
    by santarita on Fri Feb 27, 2009 at 12:35:58 PM EST
    of pros and cons of nationalization can be found at www.voxeu.oorg in an article yesterday by Matthew Richardson.

    Parent
    Superb (none / 0) (#52)
    by gyrfalcon on Fri Feb 27, 2009 at 01:04:51 PM EST
    This is precisely the kind of stuff I've been looking for and failing to find.  Thanks very, very much.  That looks like a terrific site and I'm going to go right back and browse in it a bit.

    Richardson pretty much convinces me, I have to say.

    Two things he emphasizes, though, that seem to me very relevant to the apparent stall we have right now in government action.

    One is the absolute need for the government to have a complete, detailed picture of each bank's financial situation.

    The other, which is dependent on the info, is that   if a couple of institutions are nationalized, the government needs to simultaneously publish its conclusion, and the detailed reasons for it, that the others are solvent and capable of standing, even if with some degree of government guarantees, in order to prevent the panicked runs we saw in the wake of Lehman.

    Let's hope this is what Geithner has in mind.  If so, the delay in acting is both explained and totally necessary.

    Many thanks.  Great site, fascinating article.


    Parent

    One will NEVER (5.00 / 1) (#64)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:32:10 PM EST
    happen until there is nationalization.

    Parent
    My Only Quibble With That Article... (5.00 / 1) (#78)
    by santarita on Fri Feb 27, 2009 at 03:19:28 PM EST
    is that it doesn't really explore the range of actions that the USG can take that, if taken, would amount to taking over the bank.  Bernanke said it very clearly at the hearing on Tuesday.  The USG has a lot of tools that it can use to force a bank to do what the feds want.  The fed doesn't need to nationalize in order to obtain effective control.  


    Parent
    I've posted here quite a bit that I think (none / 0) (#24)
    by steviez314 on Fri Feb 27, 2009 at 11:52:02 AM EST
    nationalization is just a silly word.  People (at least here) seem to mean it just in the sense of the government gets to control things, fire people, eliminate golf outings.  But guess what, if the gov't took over Citi, that wouldn't change the asset pricing one bit.

    The real question is, how big a gap is there between what the assets are worth (not just on a mark-to-market basis, but on an actual cash flow generating, performing basis) and what they are carried as on the books.  Who will have to take a haircut, common stock holders (I'd say Citi trading $1 is a big haircut), preferred holders (who are losing their dividends and in some cases being made to convert to common), and/or debt holders.

    I think the government is very reluctant to arbitrarily wipe out debt holders, when the banks are not currently insolvent--that is, they are cash flow positive.  That would have ramifications beyond the banking industry.

    If by nationalization, people mean take over the banks assets, zero out all the liabilities, a more accurate term for that is "expropriation".  If that's what we mean, let's at least be honest about it.

    I appreciate Krugman and Roubini having been right, but in 25 years of trading/investing, I have seen many people be right, and then not be right.

    I have yet to see one proponent of nationalization tell me what their business plan is the day after they do it.

    Parent

    Most People Think ... (none / 0) (#27)
    by santarita on Fri Feb 27, 2009 at 12:03:15 PM EST
    that nationalization means that the FDIC conservatorship where the  FDIC takes over assets and liabilities on a Friday afternoon and then sells the assets to another bank that opens operations again on Monday.

    If it were that easy with Citi, then it would have been done already.

    The more instructive example for Citi is probably AIG, where the Feds for all intents and purposes control AIG.  When the feds took it over, they did remove the CEO.  But I think senior management is still in place and operations continue (probably with the intent of winding up and dissolving).  The feds seem to be inching towards that model with Citi.

    Parent

    FDIC Conservatorship (none / 0) (#39)
    by BackFromOhio on Fri Feb 27, 2009 at 12:54:41 PM EST
    does not mean new owner by Monday; often FDIC remains conservator/receiver while it sorts things out; can continue for very long period. But while FDIC in, no "default" actions against the bank can go forward.

    Parent
    Correction (none / 0) (#40)
    by BackFromOhio on Fri Feb 27, 2009 at 12:55:42 PM EST
    does not always mean new owner by Monday, except that one can say that conservator/receiver is "new owner."

    Parent
    Do You Mean That No One Can... (none / 0) (#80)
    by santarita on Fri Feb 27, 2009 at 04:09:14 PM EST
     enforce  a contractual provision provides that supervisory actions up to an including conservatorship are  events of default?  Or do you mean that creditors of the bank cannot go to court to enforce an action against the bank?  Like an automatic stay in bankruptcy?

    Parent
    Like (none / 0) (#83)
    by BackFromOhio on Fri Feb 27, 2009 at 04:44:02 PM EST
    an automatic stay.
    And, FDIC has authority to repudiate contracts -- I'm not sure the extent of this authority or conditions for its exercise.
    But BTD says FDIC will not be involved....

    Parent
    I do think that... (5.00 / 1) (#85)
    by santarita on Fri Feb 27, 2009 at 05:48:13 PM EST
    repudiating contracts on a massive scale may cause a financial system meltdown all on its own.

    Parent
    Repudiation of contracts (none / 0) (#90)
    by BackFromOhio on Sat Feb 28, 2009 at 09:10:16 AM EST
    is determined one-by-one I believe.  The 'automatic stay' gives regulators breathing room to get a handle on what contracts are there, underlying financial facts, etc.

    Parent
    Can You Cite The Statute or Regulation... (none / 0) (#91)
    by santarita on Sat Feb 28, 2009 at 10:18:43 AM EST
    that provides for this automatic stay.

    I read the notice on the most recent bank liquidations.  Both were banks regulated by state banking agencies.  They were closed and FDIC was appointed as the receiver.  The FDIC reported that it will incur losses in one of  $59 million.  That suggests to me that the FDIC as receiver doesn't cancel contracts of the failed bank but rather pays them off.

    Parent

    I'll try to find you cites (none / 0) (#92)
    by BackFromOhio on Sat Feb 28, 2009 at 06:05:15 PM EST
    but I understand that each bank's charter determines which agency has the right to appoint the FDIC as conservator or receiver. There is an article summarizing some of the FDIC's powers at

    There is another detailed summary of FDIC powers keyed to FDI Act, FDI Regs & other enumerated sources in a Sept 2008 document prepared by Gibson Dunn; a summary of the document with update for recent events can be found at:

    This doc says FDIC's power to stay litigation is broader than in bankruptcy; it also says there are limitations on powers to repudiate contracts.
    The above secondary sources have statutory references.  I think the Gibson materials are better, but you may disagree.
    Another document put out by FDIC & giving history of legislation affecting the FDIC through 1994 is at:

    A glossary of FDIC term's can also be found at the FDIC website at:

    Note: Yesterday I found a reference & I cannot recall where, to the effect that the FDIC's jurisdiction is based on an institution's having federally insured deposits.
    I hope the above links are helpful.

    Parent
    Don't know why the link button not working (none / 0) (#93)
    by BackFromOhio on Sat Feb 28, 2009 at 06:11:31 PM EST
    for me - so here goes:

    www.law.com/jsp/articlejsp/article.jsp?id=1202425662023

    www.gibsondunn.com/publications/Pages/FinancialMarketsCrisis-FDICAuthority-BankFailures.aspx

    www.fdic.gov/bank/historical/managing/history3-A.pdf

    Parent

    You keep saying that (none / 0) (#50)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:04:34 PM EST
    And you are always wrong.

    Citi will not be a FDIC operation and it is obvious that it wil not be.

    Indeed, that is precisely why it needs to be dealt with now.

    Citi should be nationalized because it is insolvent.

    Unless it is nationalized it will certainly fail.

    Of course it is a drastic measure but Citi is finished as a going concern for anyone who is willing to look at this clearly.

    Parent

    Citibank is not involvent. (none / 0) (#71)
    by Green26 on Fri Feb 27, 2009 at 02:11:02 PM EST
    Look at its balance sheet. Look at what the head of the FDIC said a few days ago, and was quoted on in the NY Times. If a bank is well-capitalized, by definition, it is not insolvent. Of course, things may change in the future. That's why the stress tests are being done.

    "Sheila C. Bair, the head of the Federal Insurance Deposit Corporation, said on Tuesday that the nation's banking industry was safe. "All these large banks exceed regulatory standards for being well capitalized, so for right now, they're fine," Ms. Bair said on CBS television's "The Early Show."

    Parent

    I suggest (none / 0) (#74)
    by Big Tent Democrat on Fri Feb 27, 2009 at 02:19:15 PM EST
    that you misunderstand the definition of "insolvent."

    If I have a billion dollars in "assets" - but those assets are really worth 100 million, but I owe 500 million dollars, I am insolvent (assuming no revenue and income streams.)

    This is of course the point about Citi, iuts assets on its books are woth a fraction of what they say they are worth.

    Parent

    Might as well just go ahead and define the word. (5.00 / 1) (#75)
    by sarcastic unnamed one on Fri Feb 27, 2009 at 02:38:04 PM EST
    Insolvency means the inability to pay one's debts as they fall due.

    This is defined in two different ways:

    Cash flow insolvency -

    Unable to pay debts as they fall due [because cash flow is inadequate.]

    Balance sheet insolvency -

    Having negative net assets: liabilities exceed assets; or net liabilities.

    A business may be cash flow insolvent but balance sheet solvent if it holds illiquid assets, particularly against short term debt.

    Conversely, a business can have negative net assets showing on their balance sheet but still be cash flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default - for instance, if it holds long term debt.

    Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency.



    Parent
    What's your basis for saying (none / 0) (#76)
    by Green26 on Fri Feb 27, 2009 at 02:52:11 PM EST
    Citi's assets are worth a "fraction of what they say they are worth"?

    By the way, many people believe some of the lower-valued assets on the books of financial instituions will be worth much more than what they have been written down to, when the current financial crisis and economic downturn is weathered. That is one of the underpinnings of the bailout.

    With the US backing banks like Citi, it is likely that most, if not all, of these banks will weather the storm, in my view.

    Parent

    Let "some people" buy them then (none / 0) (#77)
    by Big Tent Democrat on Fri Feb 27, 2009 at 03:16:31 PM EST


    Parent
    If It Is "Nationalized"... (none / 0) (#81)
    by santarita on Fri Feb 27, 2009 at 04:10:56 PM EST
    hasn't it already failed?  Nationalization is the result of failure.

    Parent
    BTD, I don't (none / 0) (#84)
    by BackFromOhio on Fri Feb 27, 2009 at 04:46:40 PM EST
    know if you are referring to me, but either way, I'm curious as to why do you say Citi will not be an FDIC operation.  Thx

    Parent
    It's too big (none / 0) (#87)
    by Big Tent Democrat on Fri Feb 27, 2009 at 06:30:39 PM EST


    Parent
    You have posted a lot (none / 0) (#48)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:02:50 PM EST
    and most of it silly.

    you live in a world where Citi is not already insolvent.

    It is a dream world that basically makes most of your comment absurd imo.

    Parent

    I won't lecture you about the law of torts, (none / 0) (#51)
    by steviez314 on Fri Feb 27, 2009 at 01:04:44 PM EST
    please don't tell me what I know or don't know about bank balance sheets.

    Parent
    Who can lecture you about it? (none / 0) (#56)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:09:29 PM EST
    Are you really sitting here telling me that people in the financial business are not saying what I am saying?

    Who the hell do yout hink you are kidding?

    You are entitled to your opinion but please do not pretend your opinion is shared by anyone sane in the financial business.

    It is not so stop pretending you are stating some accepted truths here. you are very much stating things that almost no one in the financial business believes.

    Parent

    The International Implications ... (none / 0) (#25)
    by santarita on Fri Feb 27, 2009 at 11:53:55 AM EST
    were hinted at when Saudi Arabia (or a sovreign fund)  also agreed to convert its preferred shares in Citi.  I think the CDOs and credit default swaps are the next big shoes to fall and that the countries with banks having the biggest counterparty risks have to work together.  I do expect some international understandings to come out of the G-20 meeting.

    I have such respect for Krugman and the other economic and financial pundits who are calling for nationalization to wonder about the disparity between what they are saying and what Treasury and the Fed are doing.  Assuming that Geithner et al are not morons or hopelessly enmeshed in conflicts of interest, then there are a number of possible explanations for the divergence, like not knowing all of the facts, looking at the situation from a more limited perspective (i.e. not taking into consideration national or international global political consequences) or simply having a difference of opinion.   I am reminded of a quote from Thucydides: "Action is the fruit of ignorance, while hesitation, of reflection."  Sometimes action is the best way to go even if undertaken in ignorance.

    Parent

    Disparities (none / 0) (#34)
    by gyrfalcon on Fri Feb 27, 2009 at 12:40:12 PM EST
    I agree, and I'm puzzled, too, which is why I'm looking for possible explanations.  I don't, however, share you respect for Krugman as an analyst of the financial system.  The larger economy, yes, but not the nuts and bolts of the financial mess.

    I'm also not sure it's fair to say Geithner et al are hesistating.  They're not doing what "everybody" is calling for them to do, but that doesn't mean they're hesitating.

    You're surely right, though, about ignorance-- or to put it a little less judgmentally, lack of information.  Seems to me digging out info is exactly what he's doing.

    And we do need to remind ourselves that these guys have only been in office a month.  They're still way understaffed, and IMHO Obama has dropped too many different things on Geithner.

    Paulson pulled the plug on Lehman without sufficient information, and we saw the result. I can't in my wildest dreams imagine Geithner et al aren't haunted by those unintended and unanticipated consequences.

    But geez, it's all just so maddening sitting around and wondering and waiting.


    Parent

    Bankruptcy is a triggering event too (none / 0) (#47)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:01:38 PM EST


    Parent
    I don't get why (none / 0) (#36)
    by BackFromOhio on Fri Feb 27, 2009 at 12:50:20 PM EST
    the credit default swaps are triggered, if the "takeover" is done under FIRREA, where FDIC appointed as conservator &/or receiver, and the statute provides, like the Bankruptcy Code, that the statute stops all actions.  Perhaps, for some reason, FIRREA does not apply to Citibank, I don't know.

    Parent
    FIRREA Applies Primarily to ... (5.00 / 1) (#82)
    by santarita on Fri Feb 27, 2009 at 04:43:09 PM EST
    savings and loans.  I think that you need to talk about FDICIA.

    Parent
    I think it's about time we recognized that (5.00 / 2) (#20)
    by sarcastic unnamed one on Fri Feb 27, 2009 at 11:21:43 AM EST
    this dog don't hunt.
    If Citi survives, and I believe it will, its stock price and value will increase significantly, and the US will recoup a huge amount of its investment--and probably make money.
    It's a pipe dream.

    Parent
    Absolutely (5.00 / 1) (#46)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:00:52 PM EST


    Parent
    You Are Certainly... (none / 0) (#15)
    by santarita on Fri Feb 27, 2009 at 11:01:38 AM EST
    optimistic.  

    It's obvious at this point that the USG has decided to back the big banks no matter how much money it takes.  I'm not necessarily against that because it preserves the financial system as we know it and I'm not sure that the world is ready for a total restructuring.

    I do wish that the USG would start interfering a little more in the some of the decisions at Citi.  Can you imagine what would happen if the government told Citi - you will reduce credit card rates and mortgage rates across the board to say 4%.  Other banks would have to follow suit to keep competitive.  Wishful thinking,

    Parent

    The ambassador from Wall Street (5.00 / 2) (#8)
    by koshembos on Fri Feb 27, 2009 at 09:48:37 AM EST
    Geithner represents Wall Street in the cabinet. It seems that this is exactly the reason he is in there. Obama treats Wall Street as a sacred cow for reasons that I don't understand.

    Before the election there were (5.00 / 1) (#9)
    by oculus on Fri Feb 27, 2009 at 09:52:49 AM EST
    articles in NYT and LAT including information about the donations to the Obama campaign from CEOs and employees of Wall St. companies.  Significant percentage of his campaign fund.

    Parent
    Wasn't he (none / 0) (#65)
    by cal1942 on Fri Feb 27, 2009 at 01:45:48 PM EST
    the biggest or at least second biggest recipient of contributions from that category?

    Parent
    re bank bailout, tonight on Moyers Journal (5.00 / 2) (#11)
    by DFLer on Fri Feb 27, 2009 at 10:04:09 AM EST
    I'm not familiar with Mr. Johnson, but Bill always has good interviews.

    Behind the bank bailout. Bill Moyers talks with economist Robert Johnson, who decodes this week's news on the bank bailout including a hard look at the international ramifications of the plan and a discussion of why nationalization has become a flash point. Johnson is former chief economist of the Senate Banking Committee, former managing director at Soros Fund Management, and currently serves on a U.N. Committee on International Financial and Monetary Reform.

    check your local listings

    I've read some of Johnson's stuff and (5.00 / 1) (#12)
    by Green26 on Fri Feb 27, 2009 at 10:35:56 AM EST
    seen an interview of him. He's over on the left side. Personally, I don't agree with much of what he says, nor do I think he knows what he's talking about. In a transcript of one of his interviews, I saw a number of mistaken things he'd said.  He will likely say that Citi should be taken over by the US. Many of you would agree with him.

    Here's one of the odd thinks he said in any interview. I don't get his last sentence.

    "AMY GOODMAN: Rob Johnson, hasn't the FDIC been nationalizing banks at like, what, the rate of two a week recently--

    ROBERT JOHNSON: Yes.

    AMY GOODMAN: --as they take over banks, restructure them and then sell them back to private industry?

    ROBERT JOHNSON: They do. And auto companies and airlines and venture capital firms are restructured all the time."


    Parent

    Hmm (5.00 / 1) (#16)
    by Big Tent Democrat on Fri Feb 27, 2009 at 11:03:15 AM EST
    Are you saying telling the truth is "odd think"?

    Parent
    Slight Exaggeration... (5.00 / 1) (#19)
    by santarita on Fri Feb 27, 2009 at 11:16:02 AM EST
    Johnson is right that banks, airlines and auto companies have been restructured in the past.  But these events are not ordinary course of business events, as he suggests.  They've been more like 4.5 magnitude earthquakes - scary, with things falling off shelves but in the light of day no lasting damage has been done.  Taking over the  large money center banks would be more like a 7.0 earthquake.

    Parent
    thanks for the info Green (none / 0) (#17)
    by DFLer on Fri Feb 27, 2009 at 11:06:17 AM EST


    Parent
    Go nationalized (5.00 / 1) (#22)
    by Jlvngstn on Fri Feb 27, 2009 at 11:29:04 AM EST
    and you will have an AIG that is worth nothing and the assets will sell to other financial institutions at nothing.  You cannot invest in them and nationalize, if you do you will certainly get nothing for your investment.  

    AIG will be gone in 6 months as will our investment.

    False (5.00 / 2) (#45)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:00:15 PM EST
    AIG will be worth something once the government REALLY takes it over.

    One of the problems is the government has not taken AIG over.

    This is the fiddling I am talking about.

    Parent

    Let's wait and see in 6 months (none / 0) (#49)
    by Jlvngstn on Fri Feb 27, 2009 at 01:04:23 PM EST
    what is left of AIG.  I will tag this and eat crow or dish some out.  

    AIG is losing talent at a rapid pace, their business units are getting nothing in the way of offers and have problems deeper seeded than liquidity with the gov't intervention.

    If i am wrong I will gladly make a 100 donation to the site.  If you are wrong I want you to make me poster of the week.

    Parent

    that is not the bet (none / 0) (#63)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:31:13 PM EST
    Give me 3 years AFTER true nationalization of AIG and then we can talk.

    Parent
    Oy (5.00 / 1) (#23)
    by squeaky on Fri Feb 27, 2009 at 11:35:15 AM EST
    I don't know much about economics but from what I understand this seems like a gift to citi, or pouring money down the drain.

    Oops - follow - bad fingers! (none / 0) (#2)
    by allimom99 on Fri Feb 27, 2009 at 08:57:36 AM EST


    Citi was going to fight U.S. (none / 0) (#4)
    by Saul on Fri Feb 27, 2009 at 09:21:32 AM EST
    against getting full control is what I heard.  Could it be that the U.S did not want to get into a court battle for full control.

    Control of what? (none / 0) (#6)
    by kdog on Fri Feb 27, 2009 at 09:33:25 AM EST
    Without government money there is no Citibank....nothing to control.

    Seems to me if we insist on propping up this failed bank, we should have control...otherwise let 'em file bankruptcy.

    Though the rub is "we the people" will never ever have control over a bank we technically own a big chunk of, our "representatives" will...and I fear the represent Citibank more than they represent us.  Come to think of it, what is Citibank worried about...has Uncle Sam ever let them down even once?

    Parent

    It would do one good thing.... (5.00 / 1) (#26)
    by kdog on Fri Feb 27, 2009 at 11:57:07 AM EST
    remind the financial sector and investors that stocks are a gamble, and to be prepared to lose once in awhile if you're gonna gamble in the market.  The shareholders we are so averse to offend look a lot like spoiled babies who refuse to accept responsibility for betting on a loser.  Capitalism demands shareholders take the hit here...otherwise why have a stock market?  Just turn Wall St. into a charity ward where everybody wins..except the taxpayer who doesn't gamble in the stock market of course.

    I realize this may be a case of cutting off our nose to spite our face...but having the government reimburse gamblers who lose doesn't seem to appealing either.

    Parent

    What Do You Think Might ... (none / 0) (#28)
    by santarita on Fri Feb 27, 2009 at 12:07:11 PM EST
    happen to pension funds and annuities that had Citi as a component of their funding?  Look at where Citi was last year and look at where it is this year.

    Parent
    They will get crushed... (5.00 / 1) (#31)
    by kdog on Fri Feb 27, 2009 at 12:17:53 PM EST
    regrettable, but that is why they call it gambling, no?

    I agree a pension should be secure...pension funds should not be gambled on the stock market if you want a guarantee of seeing it when you retire.  But they were, and the money is gone.

    I know...the little people were sold a bill of goods..."Invest in the market and you could be rich just like Gordon Geico", "Wall St. will make your pension fund grow"...the people been had, what can I tell ya?  The solution isn't to crook a new batch of people to pay off the last batch that got crooked...the solution is to stop crookin'.

    Parent

    This is what I've been thinking. (none / 0) (#88)
    by allimom99 on Fri Feb 27, 2009 at 07:14:11 PM EST
    Poor stockholders. they would do well to remember "past results are not a guarantee of future performance." The bigger the risk, the bigger the gain (or loss, as the case may be). I don't have much sympathy for the stockholders, to be honest - it's never a good idea to invest in things you don't understand. Plus, I don't remember any of them complaining as these banks made ridiculous (for a BANK) profits.

    When something seems too good to be true, it usually is.

    Parent

    Many People Have Indirectly Invested... (5.00 / 1) (#89)
    by santarita on Fri Feb 27, 2009 at 07:25:08 PM EST
    401ks, IRAs, pension plans, annuities...

    You are right - investing is a risk but what is happening now is beyond ordinary risk.  That is why the government is taking extraordinary measures.

    Parent

    Which is why (none / 0) (#53)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:05:20 PM EST
    it needs to be nationalized.

    Parent
    We began preparing (none / 0) (#5)
    by SOS on Fri Feb 27, 2009 at 09:25:29 AM EST
    when Bush Jr got in (USSC versus America) because we realized this country was going off into the abyss if another Bush was in office.

    CitiGroup is not a Bank (none / 0) (#29)
    by Radix on Fri Feb 27, 2009 at 12:10:16 PM EST
    Citigroup owns a bank that is not the same thing as being a bank. Read that on Firedoglake, that's why the government can't take it over.

    Link to article (none / 0) (#30)
    by Radix on Fri Feb 27, 2009 at 12:15:17 PM EST
    Citigroup

    Parent
    this is ignorant in the extreme (none / 0) (#44)
    by Big Tent Democrat on Fri Feb 27, 2009 at 12:59:10 PM EST
    "If Citigroup is to be nationalized, it will be by consent. That could happen, because management knows that Citigroup is in great danger of failure."

    Indeed, if the government were to simply take over Citibank, it would cost the government much less as the FMV of Citi is maybe $20B at best.

    Parent

    That is absurd (none / 0) (#42)
    by Big Tent Democrat on Fri Feb 27, 2009 at 12:57:38 PM EST
    the government can take over anything.

    Parent
    True, the government can do (none / 0) (#57)
    by Radix on Fri Feb 27, 2009 at 01:16:05 PM EST
    anything it pleases, it has a well maintained army after all. I was pointing out what I saw in the article linked to. Care to comment on the writers assertion about how Citi's organization makes things more difficult for the Fed to nationalize Citi?

    Parent
    I disagree (none / 0) (#58)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:17:29 PM EST
    The government could purchase shares on the market right now or make a tender offer and buy the entire thing, for a fraction of the cost of bailing them out by the way.

    Parent
    To be consistent, you should want the (none / 0) (#59)
    by steviez314 on Fri Feb 27, 2009 at 01:22:47 PM EST
    government to be buying up the debt not the common.  If they are insolvent, the last thing you want to be is a common stockholder.

    I agree with you at least, that going down the capital structure, by converting preferred to common, is the wrong thing to do.


    Parent

    Buying the company (5.00 / 1) (#60)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:24:28 PM EST
    entails buying the debt.

    I want the company bought, not just the bad debt.

    Parent

    I don't agree that the government (none / 0) (#70)
    by Green26 on Fri Feb 27, 2009 at 02:03:58 PM EST
    can take over anything. There isn't existing legislation for the government to take over many things. This even includes banks that are solvent.

    To take over companies or industries, Congress would have to pass new legislation. Congress isn't going to pass legislation to take over many things.

    Parent

    you would be suyrorised what existing (none / 0) (#73)
    by Big Tent Democrat on Fri Feb 27, 2009 at 02:16:40 PM EST
    legislation allows on that score.

    Suffice it to say that, imo, not one piece of legislation would need to be passed to allow a takeover of Citi.

    Parent

    Goverment can become conservator-receiver (none / 0) (#79)
    by BackFromOhio on Fri Feb 27, 2009 at 03:49:03 PM EST
    of a "failed" bank -- any bank
    that is insolvent OR critically undercapitalized OR unable to meet deposit outflows.

    Parent
    This may have been asked... (none / 0) (#32)
    by Polkan on Fri Feb 27, 2009 at 12:35:48 PM EST
    ... if so, my apologies. I'm getting really confused now with this whole nationalization business, so I have 3 questions:

    1. Can somebody please explain to me how a mere fact of nationalization will "fix things now"?

    2. How exactly does nationalization make Citi solvent and increase its market capitalization?

    3. What does nationalization do that cannot be done with the level of ownership we have now?


    Answers: (none / 0) (#35)
    by steviez314 on Fri Feb 27, 2009 at 12:43:20 PM EST
    1.  It doesn't.

    2.  It doesn't and it doesn't.

    3.  Pretty much nothing.


    Parent
    Answers to your answers (5.00 / 1) (#41)
    by Big Tent Democrat on Fri Feb 27, 2009 at 12:57:11 PM EST
    1. Wrong.

    2. Wrong.

    3. Wrong.


    Parent
    OK, I've posted why I don't think so (none / 0) (#54)
    by steviez314 on Fri Feb 27, 2009 at 01:07:46 PM EST
    Now please tell me how nationalization will "fix things".  

    What things?  Tell me exactly what you want the government to do after a nationalization.  Separate it into a good bank/bad bank?  See the assets at any price and to whom?  Zero out all bank liabilities?

    Or do you just want a new CEO, new Board of Directors and no more golf outings?  Is that a fix?

    Parent

    It is the first step to fixing things (5.00 / 2) (#62)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:29:28 PM EST
    Why? because we will no longer have a bunch of people vested in lying to us about the state of Citi - current management.

    We will find out where we really stand. We will have access to capital to ride out the storm, if a storm it is.

    We can make rational decisions not tied to the vested interests of those who destroyed Citi.

    it is so obvious a solution that the only people who can rationally oppose it, imo, are those who can handle the truth about Citi now.

    Parent

    So you disagree with my answer to #2... (none / 0) (#55)
    by steviez314 on Fri Feb 27, 2009 at 01:09:23 PM EST
    Nationalization will make Citibank solvent?  Tell me the percentage haircut you want to give to debt holders then?  100%?  Then just be honest and call it expropriation.

    Parent
    Of course nationalization (5.00 / 2) (#61)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:27:26 PM EST
    makes it solvent.

    The United States is solvent, very solvent.

    The full backing of the Us will make Citi solvent.

    This is too obvious to need explanation.

    in other words, do you know what the Us pays in interest on its debt? Basically ZERO. Why do you think that is?

    Parent

    Of course, the US is solvent. (none / 0) (#67)
    by Green26 on Fri Feb 27, 2009 at 01:49:49 PM EST
    And of course, the US can make a bank solvent. However, taking over a bank by the US doesn't make the bank solvent, without taking various actions, some of which some posters have listed above.

    Parent
    the Us backing a bank (none / 0) (#68)
    by Big Tent Democrat on Fri Feb 27, 2009 at 01:52:56 PM EST
    makes it solvent.

    It would hardly make sense to take over Citi and not back it.

    Parent

    I believe the question some are asking is (5.00 / 1) (#69)
    by Green26 on Fri Feb 27, 2009 at 02:00:49 PM EST
    what, specifically, would or should the government do if it took over Citibank.

    Parent
    Deal with it honestly (none / 0) (#72)
    by Big Tent Democrat on Fri Feb 27, 2009 at 02:15:10 PM EST


    Parent
    As I understand it, (none / 0) (#37)
    by sarcastic unnamed one on Fri Feb 27, 2009 at 12:51:36 PM EST
    Citi has a gazillion dollars of crappy loans on it's books which means its in really bad shape. Being in really bad shape makes lending money to Citi very risky and hard for Citi to borrow money.

    And those that will lend them money, will do only it at a very high interest rate to compensate for the high risk.

    Since they are paying such a high interest rate, they, in turn, have to charge very high interest rates to those who borrow money from them.

    Clearly, the only people who'll borrow money from them at the high interest rates, when the other lending institutions have much lower rates, are those who's businesses/finances are also in bad shape.

    Which means Citi can only make loans to risky borrowers.

    Which means Citi itself becomes even more risky.

    Which means it has to borrow money at ever higher rates...

    If the US Gov owns the bank, many if not all of these problems goes away.

    Unless the US Gov itself becomes risky...

    Parent

    An interesting tidbit I found (none / 0) (#38)
    by Anne on Fri Feb 27, 2009 at 12:51:41 PM EST
    buried in a CNNMoney.com article:

    The Federal Deposit Insurance Corp. considers a bank to be critically undercapitalized if the tangible equity-to-asset ratio is 2% or less. Citi's ratio hovers around 1.5% now. Citigroup said it believed that ratio will rise to more than 4% as as result of Friday's moves.

    Would appear from that that Citi was on the brink.

    Also interesting that the government upped its interest at $3.25 a share, well above the current price.

    Will this beast ever be full, or will we just have to keep feeding it to keep it from eating us alive?

    FDIC cracking down on small regional banks (5.00 / 1) (#86)
    by DFLer on Fri Feb 27, 2009 at 05:56:14 PM EST
    and holding them to that "capitalization" standard.

    FDIC hits 2 Minnesota banks with cease-and-desist orders

    By CHRIS SERRES, Star Tribune

    The Federal Deposit Insurance Corp. has issued cease-and-desist orders against two Minnesota banks for engaging in "unsafe or unsound business practices."

    The federal agency, which insures the nation's bank deposits, cited both Horizon Bank of Pine City and Paragon Bank of Wells for operating with inadequate capital and failing to set aside adequate allowances for possible loan losses, according to separate cease-and-desist orders filed in January but made public today.

    The actions bring to five the number of community banks in this state that have been hit with federal or state cease-and-desist orders since last September, as a growing number of banks face staggering real estate losses amid a faltering economy. The Minnesota Department of Commerce's watch list of troubled banks has nearly doubled to 51 banks from 26 over the past 18 months.

    Both Paragon Bank and Horizon Bank accepted consent orders with the FDIC without admitting or denying any unsafe bank practices.



    Parent
    This was in WSJ (none / 0) (#43)
    by Polkan on Fri Feb 27, 2009 at 12:58:56 PM EST
    a few days go, too.

    According to WSJ, the conversion of preferred stock to common shares had the objective of increasing TCE and reducing debt, which would make Citi solvent, presumably able to pass the stress test and hopefully raise its stock price.

    WSJ said the reason it was done was because the AIG model of 80%-government control didn't work and its stock price is now in the toilet.

    Parent

    The banking regulators' primary test for (none / 0) (#66)
    by Green26 on Fri Feb 27, 2009 at 01:46:27 PM EST
    capitalization has been Tier 1 capital for many years. Generally speaking, Tier 1 capital includes certain type of preferred stock. A more conservative view of capitalization is the tanglible equity to assets. This relies more on common equity and generally does not include preferred stock. The US has only recently started to look at the tangible equity to assets ratio.

    Here's a recent article on capitalizatioin:

    http://www.reuters.com/article/BROKER/idUSN2335724020090223

    Parent

    Slouching Towards A "Temporary Takeover" Of Citibank | 92 comments (92 topical)

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