Tag Archives: Citi

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?

Obama pretends to be tough

Politico has a quote little piece about how Barack Obama is pretending to stand tough against Wall Street’s raid on the treasury.

Of course, the only reason Wall Street is actually raiding the Treasury is because of Obama and Obama’s Treasury Secretary, Timothy Geithner.

Obama has already spent tens of billions on corporate welfare on his favorite banks and other financial institutions, such as Citi and Goldman Sachs, all while every week sees the federal government seize local and regional banks.

Citi and Goldman Sachs have enough money to spend on Washington lobbyists, and butter up the Obama administration.  More honest bankers do not.

eBay or Zombies?

So Tim Geithner’s latest awful idea works like this: put up $1. The Treasury will double it. Then give you $6 dollars. The only catch: you need to bid on securitized debt, such as subrprime mortgage derivatives.

And you need to be a zombie “primary dealer” like Citi, and you can’t hire foreigners, and…

Still, the idea of an eBay for subprimes operating at a perpetual 85% discount is pretty attractive.

If Tim Geithner is serious about upping the market price of these subprime assets, and Obama is serious about “transparency,” and eBay approach should be used. Any investor who registers should be able to get the same terms as any of the zombie companies Geithner has set up, such as Citi and AIG.

Alternatively, the goal is not to inflate the price of these subprime assets, but merely to enrich the zombie institutions. This would be a raid on the Treasury, and should be dealt with accordingly. If the goal is simply to help zombie firms like AIG and Citi avoid bankruptcy, they should be turned into de facto utilities. This should include a 90% marginal tax on all income of the firms involved in the purchase of the securities, as well as on the income of employees and officers of the companies.

The 90% Tax

Every American who believes in limited government, the freedom of contracts, and the protection of citizens against arbitrary government taxation, should support the 90% tax on TARP-funded bonuses

paul_bernake_geithner

The greatest threat we face is rent-harvesting by large companies. Large companies have begun using their political influence to survive. GM and Chrysler are welfare argencies. AIG and Citi are zombie financial institutions. These companies are now farmers of corruption, harvesters of unjust enrichment.

Some degree of political corruption, favoritism, and lobbying has always made things move smoother in Washington. This is to be expected. But in spite of this, it once was possible for large companies with political friends to go bankrupt.

Enron is gone, because Enron is bankrupt. Enron is bankrupt because, even in spite of having personal connections to President Bush, at the time we still lived in a market economy. It was once possible for large companies to go bankrupt.

That is no longer possible. Welfare agencies like GM and Chrysler, and zombie institutions like AIG and Citi, now exist to convert political influence into operating capital and stock-holder value. At least as far as these politically powerful branches of the federal government go, the market economy is completely broken. They now operate in the world of political favoritism, where their lobbyists and connections help them burn through the Treasury’s cash.

Supporters of GM, Chrysler, AIG, and Citi, private companies that can only keep operating because of generous and limitless hand-outs from the federal government, argue that these institutions are too important to fail. Very well. We have lived in a world of companies that are too important to fail all of our lives. In fact, we have a word for such companies: utilities.

Unless we want these raids on the Treasury by big business to continue, we have to turn these zombie companies into utilities. Further, we should do so in a way that prevents anyone of the corporate officers and employees whose buy-in was vital for the raid on the treasury (the CEO, the high-ranking officials, high-paid employees who, if they had left, would have crippled the company, etc.) from benefiting.

In an ideal world, we would simply pass the ‘Utilization Act of 2009,’ in which AIG, Citi, GM, Chrysler, and the rest would be turned into utilities, the common-stock zeroed-out, all contracts renegotiated, and so on. Of course, we don’t live in an ideal world. The next best thing is to so cripple the ability of these zombie utilites to operate in the free-market that they become wards of the state, utilities who cannot function independent of the government and who lose any ability to earn a profit beyond what is given to them by the government.

In other words, those welfare offices (GM and Chrysler) and post office savings institutions (AIG and Citi) should be run along the lines of the Department of Health and Human Services, where the employees and officers are public servants who are remunerated and a public scale.

The 90% tax on bonuses paid from TARP-funded companies is a good step. So would a 90% tax on salaries paid from TARP-funded companies. And a 90% tax on capital gains from TARP-funded companies. The 90% tax on AIG bonuses is as good as we can get now to a Utilization Act, and may lead to further crippling of these companies in the future.

We have had 90% tax rates before. We have these so-called ‘retroactive taxes’ (meaning taxes that are collected for the tax year they are written in) all the time. There is no constitutional objection to the 90% tax on zombie bonuses. This 90% tax is not an enemy of the free market, but a friend of the free market.

The tax on zombie companies — this de facto Utilization Act — helps protect real contracts. All contracts rely on a functioning price system, a functioning market economy, to mean anything. But AIG, Citi, GM, and Chrysler do not live in the world of contracts. They live in the world of political favoritism. If AIG/Citi/GM/Chrysler get away with this rent-harvesting of the Treasury, it will encourage others to do so. Allowing these zombie institutions to get away with it make contracts meaningless, because only the politically weak are held to them, while the politically powerful can expect bailouts to save them from any inconvenient debt.

The tax on zombie companies – this de facto Utilization Act – helps protect us against arbitrary taxation. Whatever ‘taxes’ AIG ever paid has been more than made up for in federal bailout money. Taxes, in a TARP-funded world, are a simple accounting fiction. They may drive the politically weak to bankruptcy, of course. But for the politically powerful, like AIG, Citi, GM, and Chrysler, they do not matter. If you have political friends, you make money. If you don’t, you don’t. In the world of zombie companies, taxation is always arbitrary, and what the IRS says you owe has no relationship to whether or not you will receive or send cash to the federal government at the end of the year (if you are politically powerful).

There is only the defense of limited government the power of contracts, and the protection of the citizens against arbitrary taxation. In order to protect our economy, our contracts, and our tax system, Congress must impose the 90% tax on AIG bonuses.

The Focus on AIG

Many people are talking about AIG. Some are losing focus. One is Chris Dodd, who denied writing the portion of the Obama Stimulus that protected AIG bonuses, before “remembering” that he did write it at the behest of Geithner.

Another person losing focus is Barack Obama, who seems to be poorly served by both his Treasury Secretary Timothy Geithner:

The Weekly Standard
At his bizarre town hall last night, President Barack Obama joked that “Washington is in a tizzy” over AIG and the $165 million in bonuses to be paid to its executives. The New York Times yesterday quoted White House chief of staff Rahm Emanuel complaining that the whole affair was a “distraction.” At Tuesday’s press briefing, White House press secretary Robert Gibbs could not even provide a rough timeline of the administration’s handling of the AIG affair.
Yes, it’s true that the bonuses represent less than one percent of the total bailout money that has gone to AIG. And yes, there are legitimate points to be made about retention bonuses in general and (though less persuasive) retention bonuses for these AIG employees. But it has been clear for a while that something — an event, a comment, a cable news tirade, a speech — was going to focus the growing public anger over bailouts and government giveaways.

Sadly, some people losing focus on AIG are my friends. Some people even think that taking the bonus money back from AIG solves anything!

For instance, my friend Adrian writes :

And regarding the scariness of punitive tax – there’s nothing wrong with following the letter of the law. The IRS code says “reasonable” salaries are deductable for tax purposes. These bonuses are obviously not reasonable. So, don’t allow AIG to deduct them, problem solved.

Of course, Adrian is wrong. Adrian’s suggestion is as sensible as punishing a women who has been raped by stoning her, or (if your wallet is lifted) withdrawing some more cash from the ATM, and considering everything back to normal.

While some AIG stock is still held by non-government investors (about 20%), this is easily wiped out (and should be too). AIG’s largest stockholder – and largest creditor – is the US government. Making AIG pay back the bonuses, or making AIG to pay more tax, or whatever, is as sensible as responding to a theft against the federally owned United States Postal Service (USPS) by making USPS pay taxes to the federal government.

The best thing to do is to levie a 100% excise tax on these bonuses.

Of course, this will hurt AIG and similar zombie banks. It will make individuals doubt the ability of these firms to actually follow-through with contracts, and deprive AIG, zombie banks like Citi, and others of talent. Hurting AIG and zombie banks is a good thing. The TARP-funded zombies are a complete disaster, a guarantee by the federal government that as long as you have government friends, you can never go bankrupt. TARP-funded Zombies like AIG and Citi should be so eviscerated that any company thinking of a bailout will be s o afraid of arbitrary and capricious federal oversight that it will not ask.

Citi Undead

As I write this, it appears that Obama has chosen the worst of all possible paths and chosen to turn Citigroup into a Zombie bank.

Reports from CNBC, Wall Street Journal, Marketplace, Calculated Risk, and so on indicate that the government will in effect sell its preferred shares at a large discount to Citi in exchange for a 40% of the common stock. The government essentially is trading tens of billions of dollars of preferred stock that we bought as part of the TARP into $4 billion, or so, of common stock.

Citi is undead. Citibank is a zombie bank. We are using capital that could be used in other ways to save Citi. We are saving shareholder value for shareholders who helped create this crisis. A few cosmetic changes will be made, a couple people will resign on the board, but we will Citi to continue to act like a growth-oriented company while letting it socialize its losses onto us.

Citi is a zombie bank, like the Zombie banks Japan created in the 1990s. Now that we have demonstrated we care Citi’s shareholders more than the Treasury, and that we have invested in Citi in the most speculative and least safe form imaginable (common shares), does anyone believe that we will let Citi go bankrupt?

If not, there is no reason for any business to use any bank except Citi. Indeed, not doing so may open up officers to charges of negligence. There is some chance that some honest community bank may be seized by the FDIC, and deposits in excess of $250,000 may be lost. Is there anyone left who thinks Citi may suffer the same way?

Today, what remained of the functional parts of our banking system is gone. Instead, our banking system is as corrupt, politically-centered, irresponsible, and worthless as, say, the Chinese banking system in the early 1990s. The difference, of course, is that the Chinese did help pay for millions of dollars worth of bonuses annually. While signaling that shareholders of politically powerful banks should not be wiped out, that upper management of those banks should not be fired, that those who risked assets on such risky institutions should not be wiped out, Obama is clearly stating that he is behind the high salaries and bonuses of those who work in these institutions.

We have corporations in the United States that run on socialized, low-risk, heavy-government-influence lines. They are utilities. They are run to do a technical job well. Those who work in utilities tend to enjoy a middle class lifestyle. I see no signs that Obama is willing to allow his Wall Street fundraisers to fall to such depths. Obama is continuing to subsidize Citibank, allowing Citi shareholders and Citi executives to continue to hold and earn tremendous amounts of wealths while the U.S. Treasury is on the hook for all losses.

The government, by bailing out Citi in the worst way possible, cripples our banking sector.

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

IN SIRIUS TROUBLE – New York Post
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%.