More money to Citi shareholders!

You would take it requires a pretty incompetent Treasury Secretary to so badly oversee the transfer of trillions worth of loans, grants, and guarantees to financial institutions that, even after those trillions, two of the largest are still insolvent.

You would be right.

April 28 Bloomberg — Bank of America Corp. and Citigroup Inc. have been told by regulators that they may need to raise more capital as a result of U.S. stress tests on lenders, the Wall Street Journal said, citing people familiar with the matter.

Bank of America’s shortfall comes to billions of dollars, the newspaper reported. Both banks plan to mount a detailed rebuttal to the Federal Reserve’s preliminary report following the tests conducted on 19 large financial companies, and Bank of America may appeal today, the Journal said.

via Fed Questions Citi, Bank of America on Capital, WSJ Reports – Bloomberg.com.

Timothy Geithner has already given trillions worth of loans, grants, and guarantees to his friends in Manhattan, and the shareholders who enabled them.  Considering where this has got him (a promotion to DC), why should he stop?

11 thoughts on “More money to Citi shareholders!”

  1. I could tell these “stress-test” were just a facade. It was pretty obvious they would need more capital.

    *sigh*

  2. If they were a facade, how could they need more money? Krugman basically said the stress tests were a facade because Geithner would rig them so all the banks would pass – like a self-esteem test.

    Now you say they were rigged because some of them failed. I’ll give you this, you’re smarter than Krugman.

    Anyway, they are going to give them additional tax money – beyond the 700 billion – TARP. They will be converting preferred stock to common. Since preferred, and FedEx can correct me if I’m wrong about this, is not counted in all of the capital calculations, and common is, a conversion of preferred to common ups capital in a non-cash transaction.

    So Geithner is sailing along quite nicely, given the roughness of the seas, toward his ultimate status of being one the most highly thought of Treasury secretaries in the history of the nation. And like any good story, the ending starts out looking like the impossible.

  3. Glenn,

    You are right. These tests were a facade.

    Instead of being a method of putting down zombie banks, they are simply an excuse to give them more money. An absolute joke.

    sonofsamphm1c,

    Your comment is incoherent.

    The stress tests are not being used to seperate zombies from viable financial institutions. Instead, they are being used as a mechanism to provide more capital to those that Geithner has political sympathy for.

    Likewise, your assertion that these zombies will not receive additional subsidies, grants, and hand-outs is contradicted by your own prediction that they the government will convert its preferred shares into common shares.

  4. You said C was going to get more money – I assumed you meant from the taxpayer The conversion is a non-cash transaction. It is matched, I believe, by a private-sector conversion.

    Not one red cent will go to C in that transaction.

    After they do that, I don’t know whether or not C will need more money, but should they, it would come from the original 700 billion allocated to TARP, which is not additional tax money. They still have 109 billion in the treasury, and that will grow as banks that present no risk to the taxpayer’s overall position are allowed to repay their TARP.

  5. Also, the conversion dilutes common, so C’s shareholders will lose money on the transaction, for now.

  6. sonofsamphm1c,

    Your distinction between ‘cash’ and money is pointless.

    By converting preferred shares to common shares, Geithner is reducing the wealth of the Treasury (by exchanging something of more value for something of lesser value) and increasing the wealth of Citi (by exchaning something of lesser value for something of more value).

    When you say, “Not one red cent will go to [Citi],” you are correct if by that you mean the Treasury will not mail any pennies. Of course, mailing pennies would be an ineffecient way of transferring billions in wealth from the Treasury to Citi, so again your claim is besides the point.

    Your claim that transfering wealth from the Treasury to Citi is not “additional tax money,” likewise, is an attempt to draw a meaningless distinction. Whether wealth is directly transfered from the Treasury to Citi (Treas -> Citi), or indirectly transferred from the Treasury to Citi after having been washed by a third entity (say, Treas -> Goldman -> Treas -> Citi), it still represents a transfer of wealth from the Treasury to Citi.

    Your claim that Citi’s shareholders lose through dilution is once again senseless. It is as if someone gives you a thousand-dollars, for which you pay some small transaction fee, and you complain taht you are poorer than when you began. The alternative for Citi (absent political connections) is not non-dilution: it is bankruptcy.

  7. not to overstate the obvious, but if treasury converts to common, wouldn’t that mean treasury can vote their stock?

    and wouldn’t that be the “nationalization” of at least one of the “zombie banks”.

    so i’m just curious, why is this being objected to by the person who has said we should nationalize the zombie banks over and over and over and over again for the last four months?

  8. Fed X.,

    Thanks for the comment.

    You raise a good point.

    Citi owes the Treasury approx. $45 billion. Citi’s market-cap is approx $17 billion.

    I do not know the terms of the TARP, but during the debate I remember that the preferred shares were ‘convertable’ to common shares. Assuming there is a dollar-for-dollar equivalence, it should be possible for the Treasury to convert only a fraction fo the preferred shares to common, and enjoy the position of both the largest creditor and the largest shareholder.

    Do I think Geithner wants to do this without a substantial ‘haircut’ to our position, to bail out the shareholders? No.

  9. i’m not sure i understand why treasury would want to keep any debt. if they convert everything to equity, gtehy are the largest shareholder, adn run the firm from that point on. its nationalized at that point.

    i’m also not sure there are many shareholders with any margin on their investment at all. i would imagine there are very few. there is much by way of bailout for the shareholders if treasury converts to common… if anything, there’s even a bigger loss.

    you said you wanted a zombie bank nationalized, it sounds to me like citi is going to be the first.

  10. Fed X.,

    i’m not sure i understand why treasury would want to keep any debt. if they convert everything to equity, gtehy are the largest shareholder, adn run the firm from that point on. its nationalized at that point.

    It’s pretty clear to anyone who keeps in mind high-school-level business law.

    Roughly, an obligation has a legal obligation to secured creditors, unsecured creditors, and shareholders, in that order. Shareholders, however, have the advantage of being able to elect a Board, and through the Board to name a Chairman and CEO. The advantage of controlling an effective majority of shares is the ability to easily run the company. The advantage of controlling an overwhelming amount of secured debt is the responsibility of the comapny to you.

    Simply trading in the debt for a controllling majority of shares simply gives the federal government the responsibility to run the company for the benefit of the remaining debtholders. It’s like a starving man giving up food for a menu, when all he can do with the menu is inform the other starving people what sort of food they can now eat.

    If Geithner is allergic to the Constitutional approach [1], then the appropriate path is to gain as much secured debt over Citi as possible, while holding enough influence of the company to ensure Citi’s assets flow to the Treasury in as appropriate and rapid a manner as possible. One way to do this is through an effective majorty. I am sure there are other ways, too.

    i’m also not sure there are many shareholders with any margin on their investment at all. i would imagine there are very few. there is much by way of bailout for the shareholders if treasury converts to common… if anything, there’s even a bigger loss.

    Not sure what you mean by ‘margin’ here. I assume most of them have lost some money, but what of it? The last 1% is the hardest part of a fortune to lose.

    you said you wanted a zombie bank nationalized, it sounds to me like citi is going to be the first.

    Well, certainly Geithner is busy nationalizing losses. This hardly is a benefit, however.

    [1] http://press-pubs.uchicago.edu/founders/documents/a1_8_4_bankruptcys14.html

Leave a Reply

Your email address will not be published. Required fields are marked *