New Bank Bonus Releases – Heads: Bankers Win, Tails : Taxpayers Lose

July 31, 2009 · Posted in General Economics · Comment

And more unsurprising news on the TARP front. Cuomo releases ugly details on bank bonuses:

NY Attorney General Andrew Cuomo released his report on bonuses at the TARP Top 9. At these firms alone, over 800 people made north of $3 million in 2008. That’s a lot of scharole. See Appendix B for the bonus breakdown at each bank.

The key info is in one particular table, however:

(Click to enlarge in new window)

The columns to the right list the number of employees that received bonuses in excess of $3 mil/$2 mil/ $1 mil.

Banks that are still sitting on their TARP money (Citi, BofA, Wells among them) have no business paying out big bonuses before paying back the government. For that matter, neither do the others, who all continue to benefit from FDIC guarantees on debt and Fed lending facilities through which they’ve traded toxic loans in exchange for perfectly liquid Treasuries. They can use the Treasuries for repo collateral, get cash and then put that on deposit at the Fed where they now get paid interest on their excess reserves. It’s a great scam. One that feeds lots of cash into the 2009 bonus pool.

And GazetteOnline writes:

Citigroup Inc., one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008, New York’s attorney general said Thursday in a report detailing the payouts by nine big banks.

The report from Attorney General Andrew Cuomo’s office focused on 2008 bonuses paid to the initial nine banks that received loans under the government’s Troubled Asset Relief Program last fall. Cuomo has joined other government officials in criticizing the banks for paying out big bonuses while accepting taxpayer money.

Comparisons to historical payouts weren’t available, as the banks are not required to disclose the information publicly. They provided 2008 details to Cuomo’s office under subpoena.

Cuomo’s office found that the companies, which also included Bank of America Corp., Merrill Lynch & Co., JPMorgan Chase & Co. and Goldman Sachs Group Inc., awarded nearly 4,800 million-dollar-plus bonuses, with much of the money going to Wall Street investment bankers.

Citigroup, which is now one-third owned by the government as a result of the bailout, gave 738 of its employees bonuses of at least $1 million, even after it lost $18.7 billion during the year, Cuomo’s office said. The bank’s top four recipients received a combined $43.7 million.

The New York-based bank received $45 billion in government money and guarantees to protect it against hundreds of billions of dollars on potential losses from risky investments.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” Cuomo said in the report, noting banks have not in recent years actually tied pay to performance as they claim when describing their compensation programs. Cuomo added that when banks’ performance deteriorated significantly, “they were bailed out by taxpayers and their employees were still paid well.”

Bank of America, which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million and the top four recipients receiving a combined $64 million. Merrill Lynch, which Charlotte, N.C.-based Bank of America acquired during the credit crisis, paid out $3.6 billion, including a combined $121 million to four top employees.

Bank of America earned $2.56 billion in 2008, while Merrill lost $30.48 billion. Cuomo’s office said Merrill Lynch doled out 696 bonuses of at least $1 million for 2008.

Bank of America has been sharply criticized for its acquisition of Merrill Lynch because of mounting losses at the Wall Street bank and the size of bonuses Merrill paid its employees. Of the $45 billion in bailout funds Bank of America received, $20 billion was to support the acquisition of Merrill. Neither Bank of America nor Citigroup have repaid their TARP loans.

A Bank of America spokesman declined to comment on the report. A spokesman for Citigroup did not return repeated calls for comment.

The truth is: The public has no business discussing and quarreling about how much banks decide to pay their employees in bonuses. Legislators had the choice to unconditionally reject the TARP bailout ripoff. Many tried to talks sense into people. They didn’t listen. They rewarded companies whose financial irresponsibility led them to collapse, so they could continue their adventures in screw-up land. What did they expect to see happen? Now these clowns are running around, trying to find scapegoats for their own incompetence and cluelessness. What a circus!

Paola Sapienza and Luigi Zingales appropriately call for the government to Stop Subsidizing the Street:

The word for “crisis” in Chinese, weiji, is written with two characters: one (wei) means danger; the other, ji, means opportunity. That’s because every crisis challenges the status quo and in so doing creates the opportunity for something new to emerge. “This process of Creative Destruction,” wrote economist Joseph Schumpeter, “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

We have experienced the destruction wrought by the financial crisis. Now it’s time to focus on the opportunities it brings. The first place to look is the site of the greatest destruction: the banking sector. While finance will remain a pillar of a well-functioning economy, it’s unlikely that banking will survive for long in its current form. The current banking model is broken. Citigroup has been on the verge of failing in three of the last four downturns: This is hardly a viable business model.

Even more important is that Americans are rapidly losing trust in their banks. A survey we conducted at the end of March showed that only 29% of Americans trusted banks, down from 34% three months earlier and 42% a year ago. Twenty percent of respondents felt that a bank had cheated or misled them in the previous 12 months, while 10% had withdrawn their FDIC-insured deposits and squirreled away the cash. The word “credit,” speaking of telling etymologies, comes from the Latin credere, which means “to trust.” Trust is essential in banking, and it’s unlikely that banks can restore it. It’s always difficult to regain trust; it’s easier to start anew.

Luckily, starting anew is exactly what’s happening in the banking sector, with the launch of several start-ups with innovative ideas. They range from new ways to insure mortgages to new models of lending to reliable consumers by bypassing the current banking system. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy. It’s too early to tell if these attempts will succeed, but it’s vital that they occur. Through trial and error, a new world of banking will rise from the ashes of the old one.

Should the government subsidize these efforts? In a New York Times column this spring, Tom Friedman said yes, suggesting that it should dedicate a fraction of the Troubled Asset Relief Program (TARP) money to promote innovation. Fortunately, several venture capitalists have rejected the idea online, and with good reason: The government’s record as a venture capitalist is rather poor.

Nevertheless, the government can foster the new and innovative in a crucial way: by ceasing to subsidize the banking dinosaurs. The evidence shows that subsidies to failing companies not only waste resources in keeping obsolete and inefficient firms alive, but also delay the entry of new and more efficient organizational models.

TARP was sold as a way to keep credit flowing, but it could wind up delaying the success of new ventures that could help revive credit in the economy. For finance to begin allocating resources efficiently again, the government must stop propping up Wall Street.

Tags: bailouts, bank bonuses, banks, Citigroup, tarp

Citigroup – CEO’s phony statement sparks phony rally

March 10, 2009 · Posted in Business · 1 Comment

Yahoo Finance writes Dow ends up nearly 380 on Citigroup profit news:

Wall Street has had its best day of the year, storming higher after some good news from Citigroup. Citigroup Inc. says it operated at a profit during the first two months of the year. That energized financial stocks and in turn, the entire stock market. Surprised investors drove the major indexes up more than 5.5 percent to their biggest one-day rally of the year. The Dow Jones industrials shot up nearly 380 points.

However, many analysts are still cautious — noting that Wall Street has seen many blips higher since the credit crisis and recession began. Word of Citi’s performance broke a months-long torrent of bad news from the banking industry but analysts weren’t ready to say the stock market was at a turning point and about to barrel higher after a slide that’s lasted more than 16 months.

“To have a sustained rally, we have to have a shift in sentiment,” said Kurt Karl, chief U.S. economist at Swiss Re. “One day isn’t going to make a trend.”

Still, the Citigroup news offered investors some hope that the first quarter will show signs of improvement.

In a letter to employees Monday, Citi Chief Executive Vikram Pandit said the performance this year has been the bank’s best since the third quarter of 2007 — the last time it booked a profit for a full quarter. Based on historical revenue and expense rates, Citi’s projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.

Pandit declined to say how large credit losses and other one-time items have been that would at least partially offset profit.

…which would be sort of interesting and/or relevant numbers to know if you’re proudly reporting a profit for the period in question.

Tags: Citigroup

US Stake in Citi Won’t Fix a Darn Thing

February 24, 2009 · Posted in Business · Comment

Reuters writes New U.S. stake in Citigroup may not calm doubts:

Even if the government took a large common equity stake in Citigroup Inc, worries would likely persist about the bank’s ability to absorb soaring losses in a deepening recession.

The third-largest U.S. bank by assets is in talks with federal regulators on a plan for the government to increase its stake, a person familiar with the matter said. Converting $45 billion of preferred stock, which the government obtained last fall, to common stock is one of many options, the person said.

An agreement could be announced Monday or Tuesday, CNBC television said.

Citigroup shares rose on Monday after the White House repeated that President Barack Obama believes keeping banks in private hands is “the best way to go.

U.S. bank regulators, meanwhile, said they stood ready to provide more capital to the sector and keep “systemically important financial institutions” viable.

But investors remained worried that losses from credit cards, emerging markets, trading and toxic assets could overwhelm Citigroup Chief Executive Vikram Pandit’s efforts to restore the bank’s fiscal footing. Analysts do not expect the New York-based bank to be profitable in 2009 or 2010.

Converting preferred shares to common equity “helps their capital ratios but it doesn’t help their problem assets,” said Walter Todd, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. “If Citi were out of the woods, the stock would not be at $2.”

The government plans on Wednesday to subject banks with more than $100 billion of assets to “stress tests” to decide which need more capital. Citigroup ended 2008 with $1.95 trillion of assets.

Citigroup shares closed up 9.7 percent at $2.14. They earlier traded as high as $2.48, but gave up some gains as broader indexes fell.

One needs to wonder how many more times it needs to be pointed out until people realize that Citigroup is dead:

Citi’s Endgame

Citigroup Agony Prolonged

Game Over for Citi

Now regulators are discussing a conversion of $45 billion from preferred stock into common stock. How is this supposed to solve any structural problems? All that is behind this move is that Citi doesn’t want to pay the preferred dividend to the taxpayer anymore. Kiss the idea goodbye that taxpayer money invested will be recovered in any way. Citi’s common stock market cap is at around $10 billion now. A $45 billion conversion of preferred into common stock will all but wipe out common shareholders. Citi’s shares will follow Fannie Mae and Freddie Mac’s leads and turn into penny stocks.

In reality the company’s common stock isn’t even worth $0.00. I have explained this so many times and it can be read up on in the links I posted above. So I won’t get into it again.

How does any of this clean up Citi’s balance sheets?
How does any of this help investors trust that assets are marked to fair market value?
How is any of this supposed to restore trust in the US banking system?
How are we supposed to get credit flowing again if the banks’ balance sheets are full of garbage and people don’t trust banks with their savings?
How have any of these policies helped avert the continuous decline of the US economy?
How does the taxpayer get anything out of this?

To hell with Citi. Let them go bankrupt and be done with ongoing postponements of the inevitable.

The source of the crisis is that in response to the most irresponsible monetary and fiscal policy, US consumers and government borrowed too much, spent too much, and saved too little, setting in motion The Business Cycle via Credit Expansion and creating an environment of capital consumption. Nothing of what the government is currently doing even remotely addresses these issues. To the contrary, it continues and aggravates the irresponsible habits of the past. Big government is getting bigger by the day. Just as it has been for the past decades, with no change in sight under the Obama administration.

Tags: Citigroup, corporate bailouts, government bailouts

Fix It!

January 28, 2009 · Posted in Business · Comment

High-Flying Citigroup Grounds Plans for $50M Jet:

The high-flying execs at Citigroup caved under pressure from President Obama and decided today to abandon plans for a luxurious new $50 million corporate jet from France.

The decision came 24 hours after the banking giant, which was rescued by a $45 billion taxpayer lifeline, defended buying the state-of-the-art Dassault Falcon 7X — one of nine to be flying in U.S. skies — as a smart business deal.

The jet, the epitome of corporate prestige and privilege, can carry 12 passengers in elegant comfort.

ABC News has learned that on Monday officials of the Obama administration called Citigroup about the company’s new $50 million corporate jet and told execs to “fix it.”

As disturbing as it is that Citigroup had planned on purchasing this jet up to this day, it is encouraging to see that this administration is keeping close tabs on what seems to be happening with taxpayer money. Citigroup is bankrupt. They ought to sell off what is left, not keep buying more.

What is unfortunately unspoken of are the countless deals that we don’t hear about and will never hear about.

Tags: Citigroup, jet

Game Over for Citi

January 14, 2009 · Posted in Business · Comment

Citigroup is beginning to fall apart. As already mentioned 2 months ago the company has no other choice but to sell off its units.

Reuters writes

Citigroup Inc faced growing uncertainty on Wednesday about whether it could ever function well, leading investors to drive its shares down below $5.00 to their lowest level since the bank won a government rescue in November.

As I mentioned in my article, once Citi begins to actually offer units on the market, it will be unavoidable to put the cards on the table and expose the house of cards.

Once the world’s largest bank, Citigroup is expected to shrink by about a third as it focuses on corporate, investment and retail banking and trims its trading operations, a person familiar with the plan said. Citigroup will also put businesses and assets it no longer wants into a separate structure, with an eye toward eventual sales, the person said.

I wouldn’t be surprised if in this process the Citi stock continues to tumble toward zero, just as Fannie Mae and Freddit Mac did.

The annual cost of protecting $10 million of Citigroup debt against default for five years rose to $410,000 on Wednesday from $265,000 on Tuesday, according to Phoenix Partners Group.

I wouldn’t be surprised if this cost goes up exponentially during that same process.

And once they are done dealing with their balance sheet, the big question will be: “Hey, who wants these toxic 1.1 trillion off-balance sheet assets?” Expect the Fed and the Treasury to heroically jump in and have the taxpayer foot the bill.

Tags: Citigroup

Citigroup Agony Prolonged

November 24, 2008 · Posted in Business, Interventionism · 2 Comments

The associated press writes in “Government unveils bold plan to rescue Citigroup”:

The government unveiled a bold plan Sunday to rescue Citigroup, injecting a fresh $20 billion into the troubled firm as well as guaranteeing hundreds of billions of dollars in risky assets.

There is nothing bold about injecting $20 billion and guaranteeing hundreds of billions. It’s what we have been doing, keep doing, and will be doing until we’re broke.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

Its collapse would wreak havoc? Like the havoc that we have been seeing since we started to bail out one failing business after another with billions of dollars?

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

There is nothing sweeping about this plan. The stock has been hammered because the company isn’t worth a dime

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement issued late Sunday night. “We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks.”

How are we protecting the U.S. taxpayer by taking their money and throwing at failed business operations. This is so far from reality, if it wasn’t so sad I would say it’s laughable.

The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief also participated.

This gives us a preview of the “Change” that Mr. Obama is about to bring: The person who will lead the bailout scams will have a different name. That’s about it.

Vikram S. Pandit, Citi’s chief executive officer, welcomed the action. “We appreciate the tremendous effort by the government to assure market stability,” he said in a statement.

Of course he does. Who doesn’t like getting rewarded handsomely for being a miserable failure.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government also received an ownership stake.

…and which of course didn’t resolve anything at all. The new $20 billion will accomplish just as much.

As part of the plan, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

These number are insane. Yet, they don’t match the insanity going on at Citi. This bank has $1.1 trillion in off-balance sheet assets alone. That is only on top of all the defaulting loans already on their balance sheet. $306 billion will be of help for a few months to a year. They will do nothing but postpone judgment day.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

Among all the nonsense I am surprised to actually find something that makes sense.

Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.

…which of course means that the underlying mortgages will have to be adjusted on the books (as they should). More write downs ahead…

Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail. The company has operations stretching around the globe in more than 100 countries.

…and that’s precisely why we should NOT bail them out as I explained in The Economics of Coporate Bailouts.

Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up huge losses on the soured investments. The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs.

…but what they are not telling us is that Citi will pretty soon be writing down massive amounts of simple consumer credit, credit card debt. This appears to be an issue that the media and government don’t even want to hint at.

Again: Citi is a lost cause. Stop throwing more bodies onto the pile. It won’t work.

Tags: bailouts, Citigroup

Citi’s Endgame

November 21, 2008 · Posted in Business · Comment

2 months ago I wrote that Citigroup, GM, Ford, or GE will go bankrupt soon unless they receive additional bailout money. Of course this wasn’t a strike of genius, I was merely pointing out the obvious.

As far as GM and Ford, they don’t deserve any more mention. These two giant jokes cannot possibly be called business operations. It is insulting to see the media seriously pose the question as to whether or not the taxpayer should even consider sparing his change for these miserable failures. It hurts to see their executive junkies squander more money on private jets to capitol hill in order to petition for yet another bailout fix. They, along with the UAW, need to be wiped off the face of the earth once and for all and stop making the American car industry the ridicule of the world.

Citigroup is finally approaching its endgame, too.

TheStreet.com writes:

Citigroup executives began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright, the Wall Street Journal reports.

This would actually be the right move. But it would expose the truth that Citi isn’t worth anything. At this point, the only salable unit appears to be Citi’s GWM (Global Wealth Management) division. Its profit only dropped by 27% for the first 3 quarters of 2008 when compared to the same period in 2007. Global Cards was still profitable in the first 3 quarters but dropped by 79% and will, without a doubt, get wiped out in 2009/2010 with the inevitable collapse of consumer credit. The other 2 divisions, ICG (International Clients Group) and Consumer Banking have turned profits in the first 3 quarters of 2007 into substantial losses in the same period for 2008 (1.8 billion and 10.4 billion, respectively).

The internal discussions are at a preliminary stage and don’t signal that Citigroup’s board and management are backing down from their insistence that the New York company has ample capital, funding and strategic direction, the Journal reports, citing people familiar with the matter.

Just a few facts:
- Based on their recent 10Q Citigroup has Shareholder’s Equity of around $113 Billion
- Citi is holding $1.1 Trillion in off-balance sheet assets.
- These assets have been used to fund holding firms for risky mortgages, short term commercial paper, and CDOs
- All of these will eventally have to return to Citi’s balance sheet
- If Citi had to write off only 15% of these assets this would wipe out their entire shareholder’s equity unless they manage to recapitalize the business significantly
- Who is going to help recapitalize a business that faces multi-billion dollar write downs, yet still pays a dividend? (except of course for the distinguished Prince Alwaleed of Saudi Arabia who seems to enjoy burning his money)

Citi is a lost cause. Finally their management is waking up to reality. The company, as we know it, will not survive.

Tags: Citigroup

True Money Supply – September 09th 2008

November 18, 2008 · Posted in Monetary Economics · Comment

As you can see above, the intermediary money supply data for September 08 indicates a further slowdown in true money supply growth. The effects of the bailouts of Fannie May, Freddie Mac, and AIG are not yet included in the data available, as this is from 09/08/2008.

It will most likely be available with the next set of data.

Over the past three months the impact of the slowdown of the true money supply has finally reached commodities and consumer prices, in addition to the already declining home and stock prices.

The overall outlook for the next months is a further lowering of stock, real estate, commodities, stock prices.

The US is facing a major credit crunch and an unprecedented economic correction. Rather than allowing the correction to occur freely, the government has embarked upon a path that it will not be able to back down from. One financial institution after another is being bailed out with public funds.

The Federal Reserve Bank has already filled up close to 50% of its balance sheet with bad debt. Policymakers have realized this and hence suggested setting up a completely separate entity to do just that: Buy bad debt from troubled banks, backed by taxpayer money.

I assume their reasoning is that they want to avoid turning the FED, it being the supposedly trustful lender of last resort, into a junk deposit which would sooner or later have to write down delinquent mortgage loans and factually declare bankruptcy. Instead they are trying to spread the garbage evenly across different institutions: Large banks (BofA with Countrywide, JP Morgan with Bear Stearns), the FDIC (Indymac), the Federal Reserve Bank (AIG and various bad debt instruments acquired against treasury bills in the term auction facility), and presumably the soon to be established Treasury sponsored entity.

Of course all these measures are bound to fail. With every intervention the final shakedown is merely being postponed and aggravated.

The main actors involved are clueless about the essence of the problems of credit expansion, the credit boom, and the credit crunch: The President has completely extricated himself from the process; Hank Paulson, the Treasury Secretary has fully endorsed a policy of interventionism as the panacea to the crisis; Congress leadership is hopelessly lost (as Senate majority leader Harry Reid said: “no one knows what to do”) and will most likely go along with anything that the President’s Working Group on Financial Markets will suggest, no matter how much it will cost the taxpayer. The SEC is about to announce another pseudo measure tomorrow: banning short sales on financial institutions. More prestigious businesses will be in line for bailouts shortly, in particular Citigroup, General Motors, Ford Motors, and General Electric are likely candidates.

What has been keeping the dollar strong recently is the fact that the federal reserve has not yet resorted to the ultimate weapon: hyperinflation. The money supply, as shown here has been slowing down. Most likely the Federal Reserve officials are not even aware of this because they are using wrong data to monitor the money supply. The question is if this trend will hold up with the interventionist path that the government continues to move forward with. We will keep monitoring the money supply closely.

Events indicate that we are approaching the collapse of the global financial system as we know it. As Libertarians and Austrian Economists have been warning again and again, and have been ridiculed for again and again: A fiat money paper currency system, facilitated by a central bank, will ultimately lead to the destruction of the paper currency and the collapse of the financial system.

One can only hope that once all this is over and decision makers will have to get together and frame a new financial system, maybe, just maybe people will at least sit down for a second and listen to the common sense solutions that we have been asking for over the years:

- Abolish the Federal Reserve Bank
- Allow for free market competition in the money market
- Let the market return to a gold standard
- Significantly downsize the federal government
- Abolish the federal income tax
- Abolish unconstitutional (and wasteful) federal institutions, in particular the IRS, the SEC, the Department of Homeland Security, the Department of Education
- Phase out the federal social security and medicare programs and let people manage their money themselves (one can only hope that at this point people realize what the government will do to your money)
- Reduce US troop presence around the globe, strengthen the defense of the homeland against foreign enemies (which is the first and foremost task of the federal government)
- and finally: legalize the US Constitution

It is disturbing that the crisis is giving me hope that people will listen. Common sense should lead people to these conclusions. Unfortunately common sense has not been very popular over the past decades.

(This article was first posted on 09/19/2008)

Tags: bailouts, Citigroup, credit crisis, credit crunch, Ford, General Motors, money supply, september 2008