What is the difference between Sirius and Citi?

Obama is choosing to allow Sirius to go bankrupt, while choosing to bail out Citi’s stockholders

Nearly two years to the day after announcing a plan to merge, Sirius XM Satellite Radio is plunging headlong into bankruptcy, The Post has learned.

Washington has allowed many firms, such as VeraSun, to go bankrupt. But Obama once again emphasized his deisre to prevent the shareholders of Citibank from experiencing the cost of failure.

For a taste of the cataclysm Citi’s reckless investment in subprime mortgages nearly caused, start watch from 2:20 to 3:45 in this video (h/t Weekly Standard).

The Citibank apologists at CNBC of course would protest, saying CitiBank has already lost “all” of its value. But of course it has not: Citibank’s stock price is non-zero. Further, one of the lessons of this financial crisis is that markets are as irrational as humans are: even if Citi’s stock price would decline to 99% of its original value, the difference between losing 99% and 100% is mentally a lot bigger than the difference between losing 98% and 99%.

10 thoughts on “What is the difference between Sirius and Citi?”

  1. It’s not just Obama who thinks that, it’s a large number of economists, the former President and his people, and a majority in congress.

  2. Here is what the USAGOV should do – and it should be done quickly and without mercy:

    1) Have Bank regulators set the appropriate capitalization level for the bank
    2) Assuming level not met, declare bank insolvent.
    3) Wipe the shareholders (common and preferred) equity out.
    4) Wipe out a significant amount of the long term debt (at least 50%)
    5) Convert the rest of the debt to “equity”.
    6) Fire the Board. Fire the Executive Leadership team. Fire the Auditors.
    7) Hold an Open Auction for Preferred Stock and Common Stock to get capital infusions.
    8) If the appropriate capitalization level set by regulators is not reached, USAGOV also makes an investment as either as a secured loan or as a purchase of prefered stock (plus warrants) at an above market coupon rate to reach that level while also transferring all of the “toxic assets” to a USAGOV fund that maybe the Taxpayers can get something back someday.
    9) The executives, boards and auditors should be investigated for fiduciary misconduct and civil litigation undertaken by US Attorneys to recover cost and looted wealth on behalf of the old shareholders.

    Primary End Result: A working bank with an appropriate level of capitalization that is without “toxic assets”

    Secondary End Result: Taxpayers/USGOV may collect some money eventually from the Toxic Assets.

    Note 1: USGOV should consider creating closed-end mutual funds to sell off pools of the Preferred Stock to recover USGOV upfront outlays.

    Note 2: I don’t have any “rescue” for Mortgage holders. Let the mortgages fail, and don’t prop up housing prices. This needs to correct.

    Note 3: I don’t have any “rescue” for long failing companies. Let them die. let Creative Destruction take place. Don’t feed the zombies.

  3. As I predicted [1], Obama is the third Bush term in a number of ways [2], so Obama pushing the same Bush-era line of saving Citi’s shareholders is hardly surprising… unfortunately.

    Purpleslog makes a number of good points. We need to investment wealth where it can do the most good, and not just save the giants of yesteryear.

    [1] http://www.tdaxp.com/archive/2008/05/23/obama-as-bushs-third-term-talking-to-enemies-who-agree-with-us.html
    [2] http://www.weeklystandard.com/weblogs/TWSFP/2009/02/surprise_were_not_leaving_iraq.asp

  4. i saw the infamous kanjorski vid, read the obama interview where he states that the swedish model would be prefereable but then as much as says we’ll be doing the japanese model, read bidens comments on the admin’s 70% chances, timmays non-plan plan and i’ve come to this conclusion:

    bush/obama and paulson/giethner aren’t screwing things up because they’re “idiots” — it’s that they’ve seen the banks books. insolvent. all of them. and if we nationalize on the scale required, the nation is insolvent. like iceland except not w/ 300k, but 300m. and the worlds reserve currency. and 25% on world gdp. and a huge % of the worlds food exports.

    bernanke famously said that he’d drop $$$ from helicopters if he had to. but he’s finding out it’s not that easy. banks won’t lend and people won’t borrow. the only option left to get $$$ into the hands of people who might spend it would be to have a massive tax-holiday.

    but we can’t do that because that would require QE on such a massive scale we would go from deflation to hyperinflation to collapse in a single afternoon. which is why the stimulus bill, big as it is, is not the 2 or 5 trillion that it should be — our creditors would flee for the exits. they’re starting to inch towrds the door now. which is why timmay came out with a muddle thru plan. obama et al are hoping against ‘hope’ that the economy will recover as per cbo forcast and that will begin to close the gap. unfortunately, this isn’t a recession, it’s credit revulsion event.

    read wretchards post where obama says if his plan doesn’t work, we will be getting a new president. we are closer to that than we know.

  5. Purple: i think that is very close to what Timmy G outlined. though i’m sure Timmy G would not “wipe out” a “significant amount” of LTD. assuming you’re including secured and unsecured debt in that, it won’t happen. nor should it. secured creditors take only the risk of their collateral, and they are allowed by law to redeem it for what its worth. unsecured (GUCs) debt takes on the risk of solvency to pay the note. you can’t go around willy nilly breaking contracts and throwing away property rights just cause. can you?

    i suspect the “stress tests” Timmy G outlined will accomplish a lot of what you are looking for, and it will be published and open for inspection. there’s an information gap caused by lack of transparency. shining a light on the banks will help, immensely.

    those that fail the stress test will see their equity wiped out overnight. then, the feds can pick it up for cheap.

    this is a waiting game. and as much as everyone is boo-hooing what timmy g said, think about why? “we want clarity, we want a plan” no, they really wanted to hear (we’re unloading the trucks of cash at the nearest shiny bank. and they didn’t get that. what they got was what mgmt of any near bankrupt insitutition gets: a shot across the bow. DIP lenders will wait until you file to provide the loan. thats when they’re cheapest, and thats when all the secrets are out.

    so in 12 mo., the near zombie banks of WF, BOA and others will be actual zombie banks, and they will be easier to slay.

    this is a huge gamble of course. but it takes some f-ing balls to do it, and they just did it.

  6. oh. and the difference between citi and sirius… citi has better lobbyists, and owns a bunch of mortgages that constituents in congressional districts need refi’d.

    if sat radio was as addictive as refiinancing mortgages, they’d be in better shape 🙂

  7. The “stress test” will involve around a hundred regulators for Citi alone [1], and are charged with definint Citi as solvent, in need of capital, or insolvent. Unfortunately, without defined criterea or even an open process, they will be used to give cover for political decisions, rather than making a technically correct decision.

    Fed X is right that the most important difference between Citi and Sirius here is the scope of lobbying and governmental connections of the companies.

    Doug is repeating a line — that Obama is hoping for the best, and planning on it — that I’ve heard from other respected sources. Hope the financial crisis does not become his Iraq War. He won’t get another term, if it does.

    [1] http://www.calculatedriskblog.com/2009/02/stress-test-almost-100-regulators-at.html

  8. tdaxp: i think thats not right. or at least, i hope its not right. they “could” be used for political cover. but for what sort of cover? you only need political if you are doing something to upset the status quo. if they are used to cover, it will be to cover our tracks when we nationalize a couple of these behemoths. they are just too big to fail, and too big to save. so we simply get rid of them.

    i’m not very sure that citi as a whole has any going concern value at the moment. and in 6 mo., neither will WF nor BoA. to be sure, some of their enterprises will have GCV, but not many. there are plenty of people doing the same job, only better. look at canada’s banks! look at BB&T! they are all going to be fine, and going to sweep up whats left.

    if there is a nationalization of any of the big banks (and there already has been sort of a pre-nationalization if you think about it). then there isn’t going to be much upside. there will be some units worth picking spinning out and picking up. but much of the GCV for these guys is goodwill… which is a gimmick.

    the whole damn thing is a gimmick… except the relationships and networks, which are real, and will be repackaged into denser networks that have less leverage and more opportunity to grow.

  9. Fed X,

    Excellent comment.

    By “political cover,” I meant that the outcome will be more based on political give-and-take, and less on any rational standard. Citi’s spending on lobbyists for a reason, as are other large banks, and other blocs are influential as well (people whose homes are underwater, people late on payments, credit card companies, etc.)

    Obviously, politics are going to enter into any process, but I’d rather the solution be technically more wise than technically more foolish.

    Calculated Risk has some more thoughts about transparency in the process [1], by the way.

    [1] http://www.calculatedriskblog.com/2009/02/fed-paper-effective-practices-in-crisis.html

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