I'm currently reading Sheila Bair's new book* (published by Simon and Schuster) and this phrase comes to mind in connection with a couple of things. One, in the prologue she slams Vikram Pandit who resigned on 16 October, 2012. Bull by the Horns was released on Sept. 25th but it's really starting to hit now with discussion in the blogosphere (Tyler Cowen here and DeLong here). Bair asserts that Citi was the worst run big bank and that its political connections helped it enormously. She suggests the famous TARP meeting was possibly all for Citi's benefit.
Is she correct that (Two) correlation implies causation in that Citi benefited from political connections? Robert Rubin was as at Citi and helped recruit hedge fund manager Pandit. Tim Geithner was one of Rubin's proteges. Hank Paulson was at Goldman Sachs with Rubin. Geithner and Paulson were in charge of the bailouts. As Bair admits though they were in the midst of a crisis and overkill was preferable to not doing enough (if only Geithner felt that way about fiscal stimulus).
Bair also says that "Mr. eHarmony"** Geithner (while at the NYFed) had tried to broker a sale of Wachovia to Citi under Pandit with Federal help. Pandit and Geithner were mad at her for not objecting to Wells buying Wachovia without tax payer help, which preempted their deal. At Bair's Wikipedia entry it says, "In a response to the Inspector General for the TARP program, Bair remarked, "We were told by the New York Fed that problems would occur in the global markets if Citi were to fail. We didn't have our own information to verify this statement, so I didn't want to dispute that with them."" Were these European banks?
Regarding Pandit's resignation, there is also this from Citigroup's Wikipedia entry:
On Tuesday, March 13, 2012, the Federal Reserve reported Citigroup is one of the four financial institutions, out of 19 major banks, that have failed its stress tests. The tests make sure banks have enough capital to withstand huge losses in a financial crisis like one Citigroup faced in 2008 and early 2009 when it almost collapsed. The 2012 stress tests determine whether banks could withstand a financial crisis that has unemployment at 13 percent, stock prices to be cut in half, and home prices decreased by 21 percent from current levels.[60][61] According to Citi and the Federal Reserve stress test report, Citi failed the Fed stress tests due to Citi's high capital return plan and its international loans rated by the Fed to be at higher risk than its domestic American loans.Also:
Over the past several decades, the United States government has engineered at least four different rescues of the institution now known as Citigroup.[52] During the most recent tax-payer funded rescue, by November 2008, Citigroup was insolvent, despite its receipt of $25 billion in federal TARP funds, and on November 17, 2008, Citigroup announced plans for about 52,000 new job cuts, on top of 23,000 cuts already made during 2008 in a huge job cull resulting from four quarters of consecutive losses and reports that it was unlikely to be in profit again before 2010. On the same day, Wall Street responded by dropping its stock market value to $6 billion, down from $300 billion two years prior.[53] As a result, Citigroup and Federal regulators negotiated a plan to stabilize the company and forestall a further deterioration in the company's value. The arrangement calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. The assets remain on Citigroup's balance sheet; the technical term for this arrangement is ring fencing. In a New York Times op-ed, Michael Lewis and David Einhorn described the $306 billion guarantee as "an undisguised gift" without any real crisis motivating it.[54] The plan was approved late in the evening on November 23, 2008.[10] A joint statement by the US Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp announced: "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."and
As a condition of the federal assistance, Citigroup's dividend payment was reduced to one cent per share.
In September 2011, a book titled Confidence Men|Confidence Men: Wall Street, Washington and the Education of a President, written by former Wall Street reporter Ron Suskind, states that Treasury Secretary Timothy Geithner ignored a 2009 order from PresidentBarack Obama to break up Citigroup in an enormous restructuring and liquidation. According to the book, Obama wanted to consider restructuring the bank into several leaner and smaller companies while Geithner was executing stress tests of American financial institutions. Another book, A Presidency in Peril by Robert Kuttner, says that in spring 2009 Geithner and chief economic adviser Larry Summers believed that they could not seize, liquidate, and break up Citigroup because they lacked the legal authority or the tools to do so.
The Treasury Department denied the account in an e-mail to the media stating "This account is simply untrue. The directive given by the president in March 2009 was to develop a contingency plan for tough restructurings if the government ended up owning large shares of institutions at the conclusion of the stress tests that Secretary Geithner worked aggressively to put in place as part of the Administration's Financial Stability Plan. While Treasury began work on those contingency plans, there was fortunately never a need to put them in place."[114][115]So is there fire where there's smoke? What were/are Citi's international entanglements?
Also Suskind was wrong about the Romer quote that Obama said the Fed had "shot its wad." It's a phrase from shooting muskets not sexual. So since he was wrong about that he could be wrong about the Obama order to liquidate Citi.
--------------------------
* The Devil's Derivatives and The New New Deal are in the queue.
** Fictional John Mack's nickname for Geithner in HBO's "Too Big to Fail."
No comments:
Post a Comment