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Go Home Free Lunch On Wall Street

THE PLANK NOVEMBER 24, 2008

Free Lunch On Wall Street

BY CLAY RISEN

Judging by the market’s upswing today, Wall Street loves the Citi bailout. But pretty much everyone else hates it--Mark Thoma at Economist’s View has a handy collection of reactions from around the econo-sphere. Setting aside the problems with the deal itself--an 8 percent dividend is nice, but Warren Buffett got 10 percent from Goldman Sachs; plus, it requires almost no structural or leadership changes at the bank and addresses a mere 10 percent of its assets--is that it highlights how poorly Washington has dealt with the underlying causes of the crisis. Admittedly, the collapse in the housing market and the disappearance of credit are now only part of the overall cluster of problems, but they are still the roots of the crisis. But Washington’s approach thus far has been to prop up the banks and assume that they will know how to fix the problem, and that they'll want to. Of course, they haven’t; rather than loosening credit or resolving troubled assets, they’ve gone on spending sprees, burning through the cash without any clear sense of how to right themselves. The really galling thing about the Citi deal is that the industry’s recalcitrance is now readily apparent--and yet the government negotiators continue to give it the benefit of the doubt. As someone with accounts at Citibank, I am personally happy to see it get bailed out. But as a taxpayer and a citizen, I am furious at the government’s willingness to spend enormous amounts of money without any apparent strategy. And while the markets seem happy today, if past is prologue, the next few days will show investors coming to the same conclusion, just as they did after September and October’s free-lunch bailouts.--Clay Risen

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12 comments

Perfect example of a double standard: an industrial sector is told "no money for you, show us your plans first, go to a corner and diediedie", but the money men are showered with cash with no strings attached.  Sickening.  And NO ONE can honestly say this isn't a brazen arrogant double standard.  I say let the money men who pray at the altar of free markets and no regulation die at the hands of their own religion.

How many bribes did the money men give out to get these deals?  It sure seems like bribery was needed to get these kinds of sweetheart deals.

When this mess is over I pray the feds step in an finally bust up these megabanks and never allow it to happen in our lifetime again.  These "too big to fail" ibanks are too dangerous for the global economy.

- tnmats

November 24, 2008 at 11:22am

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I get all my student loans via citibank.  If they go under do I still owe them a quarter million?

- wroth2

November 24, 2008 at 11:47am

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The DOW has to pull back some ground to that 200MA before it sinks again, basic market physics, which has nothing to do with that days news cycle. Buy-and-hold into that trend at your peril.

Clay - nothing on the under-the-radar Fed's billions/trillions being doled out? Congress didn't even have a say in any of that, doesn't even know how much and to whom and, I understand, it's left to some journalists who are now bringing court action to try and get some information on it.

Also Bloomberg now calculates that the total bailout is over 7 Trillion! With Paulson now hoping people see him as incompetent rather than malicious and complicent.

- The Ignorant Populist

November 24, 2008 at 12:12pm

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Iggy, what hidden money are you talking about, the one in the trillions?  I profess ignorance.  I know how to engineer  real things, not engineer financial lies.

- tnmats

November 24, 2008 at 1:28pm

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Mats - bloomberg.com/.../news

The Fed doesn't need congressional approval for it's end of the trough.

- The Ignorant Populist

November 24, 2008 at 3:27pm

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Clay, if your deposits are insured and each is under--whatever the new sum is--why do you care if Citi is bailed out?

- tec619

November 24, 2008 at 3:36pm

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Good point, wroth.  Is there any way this crisis can be finagled to get me out of my student loans?

- cspencef

November 24, 2008 at 3:57pm

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Thanks Iggy.  Now I can rest easy tonight that I'll be wiped out by the time the Bush "fire, reload/fire again, then maybe look at where the gun is pointed" crew is out of office.  No more uncertainty!

- tnmats

November 24, 2008 at 5:49pm

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Why do we care if Citi is bailed out?  I don't know about Clay, but as the link Clay provides to Economists View shows, not only are we on the hook for future losses, but the same people who got Citi into trouble are still running the house.

I don't know what wrong with Paulson, but as that article shows, not only is Paul Kedrosky et. al unhappy about those conditions, but hosts on several of the talk shows on CNBC, those that I would consider gung ho for such a bailout, are also highly critical of the 'no pain' bailouts.

Where does it end?  Does Citi keep making bad calls with the same management team with the taxpayer responsible for future failures?

- jet

November 24, 2008 at 9:16pm

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Believe it or not, Clay, if we are going to have an economy, we have to have a functioning finance sector.   A continent-spanning economy supporting 300 million people cannot work with barter.  (In contrast, we don't have to be in the American-owned auto-making business, although I do believe that we have very good reasons for not allowing the liquidation of Detroit to occur.)  That means that, whatever the sins of Wall Street, and they are many and grave, we have to reconstitute the finance sector.  That should not, however, mean bailing out the stakeholders in these businesses.  If they have mis-managed and produced losses, they should own those losses and bear them, even if it wipes out their entire investment.  Good, on both moral and practical grounds.  Of course, the stakeholders want everyone to be as confused as possible about the distinction between their interests and the business so that any bailout or recapitalization will work to their benefit.  We should remain clear-sighted about the distinction as we have not up until now.

The Citibank deal is too generous to Citi's stakeholders by far, but at least it is moving in the right direction.  Rather than limiting the stakeholders's losses, it should have been structured so that, once the losses exceed a certain level, ownership of the operating bank shifts to the government, wiping out the stakeholder interest therein in its entirety, and the stakeholders get the bum assets to wring out what value they can.  But at least this deal leaves $29 billion of future losses with the stakeholders.  

The problem with the negotiations seems to have been that the Feds, with lots of help from the greedy stakeholders and their representatives, modeled the deal on Wachovia at al without noticing that in the former case the purpose is to make a bad asset attractive to a new buyer who was then going to take on additional risk.  In the Citi case, there is no new buyer; it is the existing stakeholders who get the benefit of the limitation on losses, not a new buyer bringing new capital.  The government is the new buyer and hence it is the party whose losses should be limited, not the other way around.  Duh!  

Frankly, I am amazed at how ignorant the people in charge, even Geithner, are of some very basic aspects of corporate finance.  Is there nobody there who has actually once structured a deal as a principal putting up his own money and knows how to do it?  They really should ask Warren Buffet for help if indeed the only way they can acknowledge their need of intellectual assistance is to pretend that the problem is insoluble by all but a genius.

None-the-less, this is a long step forward from the original dumb-ass Paulson program and I think the market will respond positively.   The fact that it rose but did not "panic upward" is a good sign that there is a fairly sober assessment by the market of what is going on.  If the market and the world  understand that the US financial sector is not going to be permitted to collapse, that is a very important step.  (Note:  Contrary to what everyone seems to thing, Lehman is alive and well in most of its parts, just under new ownership.  Those who think that the current problems would have been avoided by maintaining illusions longer are, in my opinion, mistaken.  Lehman, and the direct line to the run on Citi's stock, have finally set us on the path of doing this right rather than pretending that a little handwaving and "confidence" measures were going to solve the actual, real, in the world problem of the loss of the finance sector's capital base.)

Having said all that, we should understand that there is still lots of bad news to come.  We are in the early stages of what will be a serious recession and if a bright and shiny totally fixed up financial sector is not going to stop that descent because the finance sector cannot restore the rapidly declining demand.  So, don't expect the market to be at current levels 3 months from now as the bad news rolls in.  

- roidubouloi

November 25, 2008 at 8:20am

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If institutions (financial and otherwise) are "too big to fail" then they are too big period.  Hopefully the new regulations that are (ostensibly) forthcoming from the Obama adminstration will include not only a reconstitution of anti-trust laws but also a more vigorous enforcement of those already on the books.  What would serve the country more than anything right now would be a nice round of TR style trust busting.  Break up Citi, break up Chase.  It is much easier to keep smaller institutions afloat without having to resort to apocalyptic measures.  The problem though is that neither Geithner nor Summers seem to be willing to push in that direction.  Don't fix what doesn't work, just throw more money at it, seems to be the motto all around.  That attitude does not give me confidence in the future.

- poortomsacold

November 25, 2008 at 9:33am

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Lots of people are saying it's more like a 'shitty bailout.'

- Anonymous

November 25, 2008 at 1:17pm

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