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When the Big Three automakers were finally settled in their chairs before the Congressional committee investigating whether they deserved a handout of $50 billion, they were asked a defining question; “How many of you flew commercial airlines to get here?”
No hands went up and they were sunk. Somehow the hubris of trotting about on private jets while asking for public money was simply too much for a suddenly stingy Congress.
No such questions were asked of the Citi bankers, in fact no hearings were even held, and they were given access to over $306 billion on the most favorable terms you could possibly imagine. This illustrates the power that the banking industry holds over our political process and it is a ruinous power. Why should Citi receive not only special treatment, but exorbitantly preferential treatment at taxpayer expense? I don’t know, but I’d like some answers.
First, check out the terms of the deal:
Citi's Taxpayer Parachute
Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. U.S. taxpayers, who invested $25 billion in Citigroup last month, will now pour in another $20 billion in exchange for preferred shares paying an 8% dividend.Taxpayers will also help insure $306 billion of Citi's mortgage-backed securities. Citi will cover the first $29 billion in losses on these toxic assets, and then taxpayers will cover 90% of the rest, in exchange for another $7 billion in preferred.
What’s so special about this deal? First, the next $20 billion only provides taxpayers with an 8% yield. This is well below current market rates and, as such, represents a giveaway. I would guess that the cost of capital for Citi should be in the vicinity of 15% (or more) right about now.
So $10 billion of that $20 billion is pretty much of an outright gift. Second, I am concerned about how the toxic assets have been valued when setting this deal. The fair way to do it would have been to mark them to market forcing Citi to eat the losses that are already baked into those assets.
However, the implication in every article I’ve read is that the Citi “assets” were valued at their full cost (not value). This means that they are overvalued by some 30%-50%, almost without a doubt.
But that’s not the worst of it. When I dug into the Treasury Department website the terms of the deal said this:
Treasury Statement on Citigroup
As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
This is the most staggering giveaway I could have possibly imagined. To understand why, let’s review the definition of a non-recourse loan:
A nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance
This means that when, not if but when, Citi defaults on this loan there will be no mechanism for recourse for the taxpayers.
Why am I confident that Citi will default on this particular rescue loan? Because they are smart people and paying it off would be stupid.
The $300 billion of “assets” pledged as collateral for this loan are worth, perhaps, half that. Possibly as little as 10% if Citi has done its job and purged the worst of the worst from its balance sheet to tuck into this sweetheart deal.
So it's very simple. Either Citi makes good on the loan and repays all $300 billion and then takes possession of perhaps $30 billion of damaged assets or it defaults and keeps $300 billion.
What would you do?
I am, again, more than a little angry at this deal. It seems that when productive industries or actual citizens are involved, money is hard to find and difficult questions are asked. When banks need the cash? The results are enormous, immediate, and exceptionally favorable.
- cmartenson's blog
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WOW
I wonder if SNL is going to have the guts enough to poke fun at this?????
Maddening. They get:
- The houses
- The cash
- The safety net
We "the people" get:- Depreciating property values as a result of distressed comps (51% of ALL sales this past month were distressed up from 16% a year ago)
- Higher taxes as a result of lost tax revenues
- Higher taxes as a result of having to bail out stupid business decisions
- And those who lost their homes because of a contracting economy (and lets be real, since August 2008 OVER 50% of foreclosures are PRIME NOT subprime) get to be homeless
- These "Bail Outs" wont work, this will only prolong the mess and excerbate the problem
Sounds pretty American to me? I say toss the CEO's out in the street, seize their homes and their assets and give them to the people. Bottom line, you screw up the banking industry - then you pay for it, not me and my kids and my kids kids. Congress is screwing up by not setting a good example, they are rewarding the brain dead with our money. Those in Congress voting for this insanity should lose everything. Dr. Bartlett is right, "our" (and I use that loosely I wouldn't vote for this crap) solutions make our problems WORSE!Account deactivated per user's request.
These "Bail Outs" wont work, this will only prolong the mess and excerbate the problem
“We had a good country and they ruined it.” --Icelandic citizen
(picked from the Revolt in Iceland forum topic)
Other countries will be joining this painful sentiment...
These deals are not because of the incompetence of the unelected bureaucrats dealing with this stuff. (In any case, elected, unelected, same thing at the end.) This is by design. I bet that Citi lawyers wrote the terms, no negotiation involved whatsoever. The bankers own this country.
No questions for CitiBank, but I do have some for everyone: when will we make our voices heard? When will we form a movement? Can we? Under what principles and objectives? Are there others out there reading this forum that also think that organization is important or possible? After we raise awareness, what is next?
yeah..... REVOLUTION!
As I have said many times here, set a date, and STOP MAKING PAYMENTS ON YOUR DEBTS!
Peace on Terra http://damnthematrix.wordpress.com/ http://groups.yahoo.com/group/roeoz/
I think they were panicked (Paulsen and Bernanke et al) and just threw together whatever they could over the weekend to have something in place that might, just might, help the markets on Monday and keep Citi from going under this week. It lacked insight, thoughtfulness, and any kind of indication they have a realistic grasp of the troubles facing the global economy.
I think Citi is a little bit different because although they are a U.S. based company, they hold enormous global assets, liabilities, and toxic debt. If they fail they will significantly impact the global economy and probably cause a horrible domino effect which hurts many other countries even more than it hurts the US. The US is already being held responsible for the economic crisis worldwide (whether or not rightfully I don't know... it seems to me other financial systems made the same poor decisions we did, and eagerly bought up the same toxic debts our institutions did, even though the toxicity did arise in the US).
I think in their minds there was no time to craft a better deal. And they are probably right - they should have predicted this and could have predicted this but instead they buried their heads in some wishful non-reality based interpretations until the building had already burnt halfway to the ground.
Maybe its the lame duck administration, doing nothing more than being extremely reactive, no proactivity whatsoever, thinking they'll dump the whole mess in the laps of the next administration come January. But things are moving too fast for that.
Agreed. Wholeheartedly. In the last week I've asked the following question of many friends and family: "Why is it that Americans across the country march in the street to protest a vote by the majority of Californians banning gay marriage, but we sit idly by as the political establishment robs us blind?" The answers to my question. Dumbfounded stares.
People in this country have not a clue as to what is being done to them. Unless and until there is some John Galt-esque broadcast to the people they will remain clueless. While I am not a proponent of violence, one has to wonder when such a proponent will have had enough and start the burning, or the shooting in order to stop the looting. When is enough, enough?
Don't forget about CitiBank Park, the new home of the NY Mets. It's costing CitiBank (us) $20 million a year for the naming rights.I wonder how many jobs you could keep with $20 million? I did a search on "Federal Reserve families" and was amazed, the families are so intertwined with the various federal banks around the country. Now I know why they receive such preferential treatment.
Larina/David:
I think Gold Digger hit the nail on the head. I use iGoogle (Big Brother) for news, and it pulls RSS feeds in faster than Bernanke can print funny paper. The food from the blogisphere is like food from Whole Foods and the crap that the mainstream "reports" is like glued together processed chicken from a fast food joint.
I've watched news clips from around the world on the net and from the U.S.
What am I saying: Americans will be mad and I'd bet they won't even know who they should be mad at. The guilty won't hang. The innocent will likely hang each other instead. Like Menscken said, "No one ever went broke underestimating the intelligence of the American public." Sad, but sorry to think, true.
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