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.

8 thoughts on “Citi Undead”

  1. The capital is already in C. I guess I see this another way. If the government is determined that C survive, then, as a taxpayer, I would prefer the G’s investment be in common. This is a paper transaction. They bought C preferred to bolster a number that determines credit worthiness. Now they are switching some C preferred to C in order to bolster some other number that helps determine credit worthiness.

    If, and I sort of chuckle when people talk as though there never will be a recovery, there is a recovery, C shares will go through the roof. It hasn’t been that long ago when I was visiting friends in Sioux Falls. We were talking about C selling at around 58. So if the government converts for C at 5, which is not a good deal (but could be necessary to hit the credit worthiness number they need), and C is 15 in 2010, then the G sells their C for a nifty 50 billion in profit.

    Remember that all the G has to do to change the landscape for C common is lift mark to market.

    As a taxpayer, I sort of want my G to be very aggressive about buying cheap assets and selling them for gobzillions in profits when things get better. The one thing they did not do during the S&L crisis – because George Herbert Walker Bush did not believe the G should make a lot of money on the crisis. He thought only the private side should get in on the spoils.

    full disclosure – I have never owned a financial stock. I hate them. Banksters – FDR.

  2. Also, I’m used to XOM. They have common stock piled up in storage sheds all over Texas. They could just roll up a garage door and let the government haul off 25 billion in common stock. Apparently C does not have that capability, so this is diluting. On this news, C is down 34%. The commoners are sustaining a big owie. I guess they’re sort of used to it.

  3. I thank sonofsamphm1c for his comment.

    sonofsamphm1c is correct this is a “paper transaction,” in the same way that tearing up an IOU for $2,000, and accepting an IOU for $200, is a “paper transaction.” It does not impact the government’s cash position. Only its debt. It’s bailing out a politically favored company by tearing up IOUs. [1]

    sonofsamphm1c’s second paragraph, regarding recovery, is irrelevent. It is like defending a policy in which the government makes up losses investors make in the stock market, but requires some fraction of the growth of that investment back.

    sonofsamphm1c’s point, that the government (as both as regulator and competitor) can alter the rules in order to make a narrow profit is correct. Books on corrupt states document this phenomonen extensively. [1]

    sonofsamphm1c’s request that the government “be very aggressive about buying cheap assets” is understandible. However, Obama’s new approach to doing this is actual socialism: buying the largest company an industry, and attempting to run it at a profit. The supposed original objective of the TARP, by contrast, would have bought assets (instead of equity) from many companies (instead of the most politically favored).

    [1] http://www.calculatedriskblog.com/2009/02/citi-deal-details.html
    [2] http://www.onebillioncustomers.com/
    [3] http://www.amazon.com/One-Billion-Customers-Lessons-Business/dp/0743258398

  4. sonofsamphm1c,

    Your second comment crossed with my first, so I will quick respond again! 🙂

    Also, I’m used to XOM. They have common stock piled up in storage sheds all over Texas. They could just roll up a garage door and let the government haul off 25 billion in common stock. Apparently C does not have that capability, so this is diluting. On this news, C is down 34%. The commoners are sustaining a big owie. I guess they’re sort of used to it.

    Certainly it’s diluting, but the remaining shares are for a company with much less debt than they were for in yesterday.

    I suspect the market price for Citi absent any rents it may achieve from the government is $0. Obama and his administration seem to be doing all they can from preventing the outstanding common stock from hitting its equilibrium point.

    Common investors, who unlike Citi do not have personal friends in and around the Obama administration, do not receive such bailouts from the government (unless they were part of favored class of mortgage speculators [1]).

    [1] http://www.tdaxp.com/archive/2009/02/24/where-obamas-mortgage-bailout-will-go.html

  5. C is insolvent. G’s investment, if you agree with it, stinks because it is paying too much, for too little.
    I don’t agree with it. The value of C’s assets has fallen too much. G will never make money on C. Eliminating mark-to-market will allow a legal fiction, but it will not float the real value of the underlying assets. We are in a deflationary cycle and it will be years (as in decade plus) before real assets reach prices that they had less than two years ago.

    The government’s moves in regard to C and BofA have less to do with the holders of common stock, than to do with the bold holders, the largest of which is Pimco. Notice how Pimco’s ceo Bill Gross vigorously argues against nationalization (and the wiping out of bond holders). When he talks, he is always talking his book. [2]

    [1]
    http://globaleconomicanalysis.blogspot.com/2009/02/bernankes-boiled-frog-plan-to.html

    [2]
    http://www.bloomberg.com/apps/news?pid=20601103&sid=aSVGILBa.kgM&refer=us

  6. As for my comment about changing the landscape by lifting mark to market:

    “Some analysts, including Rochdale’s Bove, argue Citigroup is solvent, and a victim of accounting rules that place too much emphasis on the current market value of assets. Because no one wants to buy soured mortgage-related assets that banks including Citi hold, their values have plunged — although the loans underlying many of them are being paid. …” –

    http://www.google.com/hostednews/ap/article/ALeqM5ig2krO4Lu5Yn2dJAP1hRouUjBP2gD96K6QGG4

    Good article on the C issues.

    But we have “toxic” assets set at zero that could be worth a great deal of money. This is irrational.

  7. Mark to market can only be done in a rational market. In an irrational market, one gripped with fear, there is no market, so they mark the asset at zero.

    Meanwhile, a high percentage of the loans pooled in the asset are performing. The value of these loans is clearly more than zero, and the fact that in a market gripped with fear has no buyers does not change the fact that performing loans are worth more than zero. Of the loans that are not performing, it is obvious that the underlying collateral will sell for more than zero, so the zero valuation on non-performing loans is clearly irrational.

    In a market gripped with irrational fear, performing assets should never be marked below a floor value – say 65% of cost, and non-performing assets should never be marked below a floor value – say 35% of cost.

    Once buyers reenter the market, a metered, but quickly paced, move to market could be effected.

    There is nothing corrupt about correcting a mistake or oversight. Mark to market was not schemed well to perform in irrational market situations.

  8. The “rational market” sonofsamphm1c refers to cannot exist. All markets suffer from systemic biases in human cognition. This creates problems when we attempt to assign a quantitative value on something without using price

    ElamBend has a great catch in describing Pimco’s take on the bailout. The Obama administrations attempt to make create de facto “FDIC insured” style accounts out of commercial bank paper is distressing.

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