Earthside Comments: The Wall Street casino is now open and the 'house' is winning in early action -- according to the talking heads -- because the federal government is in serious negotiations to take a forty percent interest stake in the doomed bank, Citigroup.
If there was ever an example of how irrelevant the Dow Jones Industrial Average is to regular people ... this is it. If there was an example of a central government clueless and out-of-touch with the people it allegedly represents ... this is it. If this "investment/rescue" actually happens it will be the same as if the Secretary of the Treasury had taken a hundred billion dollars, put them out on the mall in Washington, doused the pile with kerosene, and lit the whole mound on fire. The only benefit would be that we would have a good quantity of ashes with which to fertilize the spring flowers.
What it seems we are witnessing is not only the revelation that the big transnational banks are and have been completely corrupt for years, but also that the federal government is little more than the pawn of a few billionaire power-mongers.
There are some signs that the American people are beginning to comprehend that this republic has been stolen from us, that it is not our servant as it was intended to be, that it has been subverted by corporate interests, and that incremental change is not going to restore freedom and liberty to "we, the people."
The time may be approaching when we all must resist taxation and orders from the "authorities"-- because it primarily benefits only the corporate elite and their government toadies. The present course is just a further looting of the national treasury, indeed, it is even the theft of your children's treasure (if any) -- could anything be more immoral, unethical, criminal and tyrannical? Failed companies and institutions must be made to fail -- to accept the consequences of their irresponsibility and degeneracy.
If we do not soon see the central government change its direction, if it insists upon maintaining its alliance with the mega-transnational corporations that are destructive of the prosperity and freedom of "the people" ... then we should look to the Declaration of Independence for what our future course of action should be:
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness."
In other words: "Power to the people."
NEW!
Citigroup's Clever Plan to Screw Taxpayers Again | Henry Blodget/The Business Insider/Yahoo! Finance
So Citigroup has proposed that the US taxpayer and other preferred shareholders convert up to $75 billion of preferred stock into common stock, thus bolstering the company's tangible equity and putting it in less desperate need of a complete takeover.And what will the US taxpayer get for this preferred stock conversion? 40% of the company for some of its $45 billion of preferred, say reports. The reports add that Citigroup's goal here is to keep the US's ownership under 50%, so this won't be a de facto nationalization.
Well, that's nice for Citigroup...and another ream-job for taxpayers.
Citigroup's common equity is currently worth $10 billion. If the US were to convert all $45 billion of its preferred at the current stock price, it should end up with 80% of the company, not 40%.
For the US to convert $45 billion of preferred to common and only get 40% of the company, Citigroup's existing common equity would have to be valued at $65 billion, not $10 billion, and the conversion price would have to be about $10 a share. Or the US would only be able to convert $4 billion of its $45 billion, which wouldn't help Citigroup's tangible equity ratio much.
So is that what Citigroup is trying to do here? Persuade the US goverment to convert to common stock at a price miles above the current trading price, screwing the US taxpayer yet again?
Or does Citigroup have some other secret plan up its sleeve whereby it can take up to $75 billion of debt (preferred stock) off its books and not end up diluting its current shareholders 90%?
Citigroup Begs To Be 40% Nationalized | Mike Shedlock/GlobalEconomicAnalysis.blogspot.com
Citigroup is in deep trouble. Its share price is $1.95 and the market is recognizing what I said a year ago: "Citigroup Is Insolvent". Of course it is not just Citigroup that is insolvent, the entire global banking system is insolvent.Nonetheless, Citigroup pretends otherwise.
Inquiring minds are reading Citi presses officials to take 40% stake.
Citigroup is pressing the US government to agree on a new capital injection that would increase the authorities’ stake in the troubled bank to about 40 per cent but stop short of an outright nationalisation.People close to the situation said Citi executives had been in discussions with regulators during at the weekend over a plan that would enable the government and other shareholders to convert up to $75bn of preferred shares into common stock.
According to its proponents, the injection of common stock would bolster Citi’s capital base while at the same time allaying market fears of a nationalisation. Under the plan, first revealed by the Financial Times last week, Citi could also try to raise fresh equity with a public share offering. The aim would be to keep the government stake to no more than 40 per cent or at least below 50 per cent, said people familiar with the plan.
People familiar with the plan said it would hinge on the price at which the government and other shareholders, which include sovereign wealth funds and Prince Al Waleed, convert their shares as well as how many of its $45bn-worth of shares the government converts.
Top Government Officials – who are trying to establish seeking a want a more strategic and less ad hoc response to the crisis – were and are anxious to avoid if possible the type of Sunday night crisis announcement that became a staple for Hank Paulson for ’s crisis management at the Treasury last year.
The Treasury said secretary Tim Geithner would “preserve a financial system that is owned and managed by the private sector”.
Citigroup Is A Black HoleCitigroup is a black hole, sucking in every dollar thrown at it and it still wants more. No amount seems enough to save it. Taxpayers have already guaranteed a whopping $300 billion dollars worth of Citigroup debt. Now, two months later, Citigroup is begging for still more capital, pretending that will save it.
Tim Geithner's Brain Is A Back Hole
Not only is Citigroup a black hole from which no taxpayer dollars can escape, but Geithner's brain is a black hole from which no intelligent thought can escape.
How the hell can you preserve a system this way? The answer is you can't. Nonetheless the Obama administration tries to end bank nationalization talk.
The White House on Friday insisted it's not trying to take over two ailing financial institutions, even as stocks tumbled again. On Wall Street, talk of nationalization of Citigroup Inc., and Bank of America Corp., prompted investors to continue to balk, worried that the government would have to take control and wipe out shareholders in the process.
Spare me the sap.Geithner is attempting to bail out his banking buddies, no more, no less, and he does not give a damn what it costs taxpayers to do so. And while everyone and their brother has hopped on the Nationalization Train (please see The Nationalization Train Has Left The Station), I think there are at a bare minimum a half dozen questions that need to be addressed first (please see Nationalization Revisited).
Citigroup is struggling to remain independent even as it knows full well, that without still more government intervention, it is worthless. In fact, Citigroup is less than worthless because without more taxpayer cash infusions it cannot survive.
To hell with Citigroup. Bust it up and sell it. It's the best possible outcome for everyone involved.
Earthside has found it rather pathetic to see some "liberals" so easily taken in by this talk of "nationalizing" the big banks. Even CommonDreams.org has succumbed to this knee jerk reaction. It's as if the prospect of some kind of "socialism" is so arousing that these folks are for it even before they understand what it means.
Take a look at the Wikipedia entry on "nationalization" -- it isn't authoritative, but it is illuminating. As we noted in last Friday's post, nationalization means accepting liabilities as well as assets: "Since the nationalised industries are state owned, the government is responsible for meeting any debts incurred by these industries." Most of the people excited for nationalizing Citigroup and Bank of America are oblivious about the complete consequences of these debts and liabilities. In this case, nationalization would appear not to be a "liberal" or "progressive" or "socialist" move, but rather a further bailout and transfer of wealth from working people to the super wealthy elite.
Also note in the Wikipedia list of past governmental nationalizations what is usually going on -- the government takes control to provide an asset to the people and/or the nation (for instance, if we nationalize the health insurance industry in this country, we get affordable health care for all of us). What in the world do the American people get from nationalizing Citigroup? The "hope" of a more stable bank, whatever that means? Wow. The truth is that we will probably get a banking system on sounder footing if we let the irresponsible and corrupt crash and burn than if "we" try and prop them up. The sooner the better for the end of these corporate vampires, we say.
On Bank "Nationalization" | Karl Denninger/The Market Ticker
Let's deal with this directly, since there have been articles on both Bloomberg and The NY Times in the last couple of days, among other places.First, some definitions. Some would claim that we have "already" nationalized the banks via the TARP. I disagree - a capital injection is not "nationalization", although it shares some characteristics with one.
An FDIC takeover is also not "nationalization". In an FDIC takeover, such as happened with IndyMac Bank, the FDIC (a government agency) strips off the assets and liabilities and then either runs down the portfolios or sells them off. There is no intention to return the firm to private ownership or continue operating it in its present form - it is dissolved,
"Nationalization" is control of a financial or other institution by government while it continues to operate "transparently" for its customers and creditors.
The NY Times said:
"The aim is to clean up the banks efficiently, rather than allow the problems to become bigger, and then — as soon as possible — to sell the banks back to private investors. They will be smaller institutions. And there will be proper regulations in place to ensure that this catastrophe does not happen again."Unfortunately Nationalization will do no such thing. Nor is it similar to other takeovers done thus far, as is also alleged:
"Critics will charge that government bureaucrats do not have the skills to pull this off. But the United States has a successful history of seizing insolvent banks through the Federal Deposit Insurance Corporation. The takeovers contemplated here are larger in scale and would be more complex than those that have generally fallen under the F.D.I.C.’s purview. But the notion that the government totally lacks the know-how to nationalize insolvent banks is not valid. "Of course it is valid. When the FDIC comes in and takes over an institution it is not to "clean it up"; it is to resolve it - or rather, to dissolve it. The insolvent institution effectively goes into a vat of acid, with the precious metals and other valuables dropping to the bottom where they are fished out and sold. The rest of the firm disappears - literally.
Now on to Bloomberg:
Treasury Secretary Timothy Geithner’s refusal to clarify his intentions regarding either bank “is allowing for the absolute decimation of the values of Bank of America and Citigroup on a daily basis,” said William Smith of Smith Asset Management in New York. At the White House today, spokesman Robert Gibbs said the Obama administration “continues to strongly believe a privately held banking system is the correct way to go.”Now there's reporting. Actual reporting.
"Belief" is not a strategy and is not tradeable.
Let's once again point out what I've pointed out dozens of times before, going back to Fannie and Freddie - The Market always calls all bets.
President Obama's administration appears to be no more intelligent than President Bush's in this regard, despite having the benefit of watching Paulson and Bernanke get run over multiple times in this precise same way.
The bank CEOs, particularly Bank America's Ken Lewis, have likely put themselves in personal criminal jeopardy if they're lying with statements like this:
"Bank of America Chief Executive Officer Kenneth Lewis said in statement that “speculation about nationalization is based on a lack of understanding of our bank’s financial position as well as a lack of appreciation for the adverse ramifications for our customers and economy.”Bank of America “is profitable with strong levels of capital and liquidity,” Lewis said in the statement, released by a spokesman."
Maybe true, maybe not.
But the market isn't that impressed with such protests, because the last two clowns that made such a pronouncement - Bear Stearns' Schwartz, Cayne and Lehman's Fuld - were either lying or wrong and within days (Bear) to weeks (Fuld) their firms collapsed and both of these gentlemen remain free rather than being under indictment.
Clarity isn't helped by statements like this:
Yingling said he met with Geithner recently and the Treasury secretary wouldn’t directly comment on nationalization. “He’s been clear that he thinks that nationalization is a bad idea,” Yingling told CNBC. “I see no signs that they’re interested in nationalization.”The administration simply must get out in front of this mess and start speaking with clarity and honesty as to their intentions and expectations.
This is not now and never has been about belief, it is about facts, and the market will force the destruction of these firms if there is no clarity provided.
Unfortunately we are unable to "nationalize" the banking system on the grand scale that some have put forward. Doing so risks the destruction of America; there is roughly $1.2 trillion in debt on the balance sheets of Bank America and Citibank alone, ignoring the "off balance sheet" conduits and other "guaranteed" interests. The total debt thus involved is likely in excess of $3 trillion if we were to do Bank America, Citibank and, for example, Wells Fargo.
The public float of treasury debt is somewhat over $5 trillion dollars. To take these onto the balance sheet of The United States Treasury would add more than 50% to that float immediately; this might provoke an immediate sovereign debt rating downgrade for The United States and that (or the jitters that could lead to one) would spike borrowing costs for Treasury. Since we're running a deficit of nearly $1.6 trillion in the current budget year this would be catastrophic.
This same issue, by the way, is why Fannie and Freddie have not been consolidated onto the Government Balance Sheet (even though the CBO says we should) and why despite the bleating of Asian Nations we have not issued a "full faith and credit" guarantee for their debt. Bluntly put, we can't without serious and perhaps catastrophic consequences for a government that simply refuses to live within its means.
This is where people like Roubini get it wrong; Treasury simply cannot afford a bond market dislocation or any significant increase in short-term borrowing costs when it is running deficits of $1.5 trillion annually. Any consolidation of these bank balance sheets onto the debt of the United States, whether announced or de-facto, is very likely to produce a near-immediate funding cost spike which could start a destructive or even fatal spiral in treasury funding costs, with the potential outcome being a sovereign default by The United States. Treasury, over the last few years, has committed the same idiocy that many corporations did in shifting borrowing to the short end of the curve in order to hold down financing expense - at the cost of adding significant rollover risk. Should that risk become realized the outcome would be catastrophic. Many corporations got "schooled" when commercial paper seized up and the dangers of their attempt to shift long-term debt to short-term paper became realized instead of theoretical; we cannot afford such an event on a national scale. ... MORE
Obama May Pick Banker to Be His Man in London | Independent
President Barack Obama is considering appointing his biggest Wall Street fundraiser to become ambassador to the UK, according to rumours circulating in Washington.The job, traditionally seen as the most prestigious in American diplomacy, is likely to go to Louis Susman, a former executive at Citigroup, nicknamed “the vacuum cleaner” for his ability to suck up money from donors.
Comments