Citigroup Agony Prolonged

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.

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Citi’s Endgame

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.

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True Money Supply – September 09th 2008

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)

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