We DID NOT make a profit on Citi

On April 13, 2010, in The Public, by Tiffiniy Cheng

Healthcare was a big win because it was a big hump. Now, it seems the Democrat Party can’t get the financial crisis right. Why? I feel I have no real idea because one explanation seems too cynical, the other one seems too preposterous.

For the former, the explanation is that they are too corrupt, they love the money coming to them and it’s coming in a wide stream. For many blue dog dems, that’s true. They’re limousine liberals who think they have a bleeding heart because they can talk education.

The latter explanation is that the Dems don’t how to play smart and aren’t as good at policy marketing as Republicans. Can this possibly be true? Can it be possible that I or you know better? We know what the american people want and it’s to do what actually works, punish and fix the bankers and our economy.

In the end, both explanations are probably the issue. We haven’t had think tanks or an intellectually unified left execpt behind single leaders (like Obama) and since Congress does not need to be accountable to the people, they probably think they can pass a few bad policies without getting too much flack.

Anyway, this article from Mark Thoma about throwing in the towel on the Dems is important.

I’ve been pushing hard for more help for labor markets for quite awhile — at times I’ve thought it was a bit repetitive, but necessary — but it’s probably time for me to give up and accept that we are going to have a slower recovery than we could have had with more aggressive fiscal policy. Unless there is a dramatic reversal of recent indications that we are at the beginning of a recovery, Congress is not going to provide anything more than token help from here forward.

Mainstream media is protraying the economy as having a recovery. It is also saying that we are making a profit on Citigroup. Anyone who has about 20 seconds to look at this article knows it’s simply not true that we are turning a profit on Citi. Instead, we’re still a long ways out on it. The idea is that there are numerous subsidies and programs that have helped Citi appear to be making money, all funded by the taxpayer or puts the taxpayer on the hook in the end. Here’s most of the story, it’s not a soundclip explanation, but it can easily be turned into one: We did not make a profit on Citi, we have paid for its losses and have not been paid back for that or probably ever will:

While we had put up enough money in November to buy Citi outright, when Treasury did the conversion to common stock, taxpayers only got a 27 percent stake…

Of course this is just the beginning of the list of handouts to this sick financial giant. The rescue in November of 2008 was actually Round II. The first round took place the prior month when Treasury handed Citi $25 billion in TARP money. While we did collect interest payments on this money, in addition to stock warrants, taxpayers got far less than the market rate. The Congressional Oversight Panel for TARP commissioned an independent study to compare the value of the assets that Citi gave us with our $25 billion investment. In their assessment, we overpaid Citi by $9.5 billion.

Citigroup also borrowed money that was explicitly guaranteed by the Federal Deposit Insurance Corporation (FDIC). As recently as this January, Citi still had $64.6 billion in FDIC guaranteed loans outstanding. It was paying just a 0.91 percent interest rate on these loans due to the government’s safety blanket. If we assume that this crippled giant might otherwise pay something close to 3.0 percent on these loans in a free market, then this subsidy would be worth almost $1.4 billion a year.

So far we have $4.4 billion in TBTF subsidies, $9.5 billion in TARP handouts, and $1.4 billion in FDIC subsidies. That’s a total of $15.3 billion. This is in addition to only getting 27 percent of the company when taxpayers put up more than enough money to own Citigroup outright. But wait, there’s more….

Citigroup’s assets and deposits give it roughly 10 percent of the market. If we assume that it accounted for 10 percent of the overpriced mortgages sold to Fannie and Freddie in the conservatorship era, then Citi’s Fannie and Freddie subsidy comes to $6 billion. We also have roughly $30 billion in losses incurred at the Federal Housing Authority (FHA) over the last two years……

There are also the various special lending facilities created by the Federal Reserve Board, in addition to its ongoing operations through the discount window. Through these facilities, Citigroup could borrow short-term money at near zero cost. At its peak, more than $2 trillion was lent through these facilities. The Fed refuses to tell taxpayers who it lent our money to, but let’s assume that Citi got 10 percent of this stash as well, or $200 billion. If Citi lent the money back to the government by buying Treasury bonds that pay 3.7 percent interest, then it could earn more than $7 billion a year by lending our money back to us. Nice work if you can get it.

And, there is also the matter of the Fed’s massive program to buy mortgage-backed securities to push down mortgage rates. If the impact of this program lowered 30-year mortgage rates from 5.5 percent to 5.0 percent, then this would raise the price of the 30-year mortgages on Citi’s books by more than 7.0 percent. If Citi has $500 billion in mortgages on its balance sheets, then this would increase the market value of these mortgages by more than $35 billion. This gift will not be costless to the Fed. It bought $1.25 trillion in mortgages. If it ends up reselling them in a market in which the 30-year mortgage rate averages 6.0 percent, then it will have incurred a loss of almost 15 percent, or more than $180 billion.

In short, anyone looking at the fuller picture would see that it is silly to claim that taxpayers made a profit in our investment in Citi. But, hey the banks and the bankers did well, not much else matters in Washington Post land. (For a recent tally of how much money is still outstanding from the bailout see Wall Street Bailout Cost.)

Congress and mainstream media and other economists need to come and say so — tell the real story of Citigroup and the economy’s recession. And then there are all the lost jobs and foreclosures caused by the crisis.

From Thoma:

I’ll still complain — there’s no reason to let policymakers off the hook — but it’s time to give up the hope that anything more will be done to help the unemployed find jobs.

(tx Mary Bottari)

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Important News Stories

On February 19, 2010, in Background and Research, by Tiffiniy Cheng

Inside the crisis at AIG Fortune: An interview with their general counsel who left because of compensation rules at AIG. She would not be able to get severance pay/golden parachutes if she got into the top 10 highest paid at AIG.

Fears of mass UK banking exodus prove unfounded Guardian: “Numbers of people applying for jobs in Swiss financial sector last year actually fell, despite warnings by Boris Johnson that new taxes would drive them away”.. “If you are in a global economy, a national supervisory regime cannot be enough, so you’ve got to look at the rules under which financial institutions operate globally. One of those rules is that the banks… make a proper contribution to society,” said Brown. And what is so wrong with that?

Shock as British deficit equals that of Greece Independent: “It is clear that a more credible plan to restore the public finances to health will be required shortly after the general election in order to keep the markets and rating agencies at bay.”

The Safety vs. Easy Money Policy Dilemma Comes Into Focus Yves Smit: ”

Our economic and financial model of the last 30 years, that of a high degree of international trade and robust cross border capital flows, may be inherently unstable. There are three factors that suggest why.

The first is empirical: large cross border capital flows are associated with bigger and more frequent financial crises. Correlation is admittedly not causation, but that conclusion emerges resoundingly from Carmen Reinhart and Kenneth Rogoff’s work on financial crises. Similarly, the post war period through the mid-1970s, which was notably free of major incidents, was one of capital controls and less trade than now.

The second is that we have a defect in our current currency arrangements, similar to one that plagued the gold standard. Countries that run sustained trade deficits are punished via deflationary adjustments. But there are no mechanisms from discouraging countries from running sustained surpluses, particularly by pegging their currencies too cheaply. France accumulated large gold reserves in the runup to the Great Depression in just this fashion, as China and the Asian tigers have accumulated large foreign exchange reserves in our day. While it is easy to blame the profligate borrower, it takes two to tango.

The third is that it may prove impossible to have an effective international regulation for capital markets firms. As a second Financial Times piece, on Obama’s plans to increase capital ratios, indicates, some of the measures the US would like to implement do not sit well with European banks:”

Jobless claims report points to long-term unemployment problem Ed Harrison

In the week ending Feb. 13, the advance figure for seasonally adjusted initial claims was 473,000, an increase of 31,000 from the previous week’s revised figure of 442,000. The 4-week moving average was 467,500, a decrease of 1,500 from the previous week’s revised average of 469,000.

The jobless claims series is the best real time dataset we have – and right now it is pointing to a weak and halting recovery. There are still 5.5 million people on the unemployment roles (4.6 using the seasonally-adjusted data).  However, there are a record 5.8 million people collecting extended unemployment benefits as well.  So, this brings us to a record 11.3 million people collecting some sort of unemployment insurance benefit in the United States.

“The most distressing difference however is the last line – EUC 2008. This is the number of individuals on extended benefits – and that number has trebled since the depths of the recession. Translation: long-term unemployment rates have skyrocketed. And since long-term unemployment equals loss of skills and employability, we are looking at statistics that will translate into a human tragedy for many Americans if and when the employment picture brightens.”
The Future of Public Debt Big Picture: “From the BIS, a paper on the future of public debt, some lucid and helpful musings on the entitlement mess on the other side of the current sovereign debt explosion in OECD countries: The Future of Public Debt”. Public debt is unwieldy and growing, bad for business.

Administration to provide more aid to homeowners Washington Post: “President Obama will announce a plan Friday to direct $1.5 billion in taxpayer money to five state housing finance agencies to help them develop new programs for addressing the housing crisis in their communities, according to a senior administration official.

The five states — California, Nevada, Arizona, Michigan and Florida — have been among the hardest hit by the housing crisis and have seen home values decline more than 20 percent. The initiative will be financed through the government’s Troubled Assets Relief Program (TARP).

Obama is scheduled to make the announcement in Nevada on Friday morning alongside Senate Majority Leader Harry M. Reid (D-Nev.), who faces a tough reelection battle this year.”

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The debate over banks and banking came front and center this week. In his toughest language yet, President Barack Obama vowed to veto financial reform legislation that is not tough enough on Wall Street. “The lobbyists are already trying to kill it,” Obama told Congress in his State of the Union address. “Well, we cannot let them win this fight. And if the bill that ends up on my desk does not meet the test of real reform, I will send it back.”

The President’s rhetoric offers an important measure of progress. Now we can be assured that the political elite are paying attention to the poll numbers showing an unprecedented anger at the big banks and the Wall Street bailouts. Democrats are starting to figure out if they don’t take up this populist message and run with it in November, the Republicans will.

But the rest of the President’s speech and the other dramatic developments in the banking world this week indicate that Democratic actions are falling far short of their rhetoric, a pattern that voters are sure to notice.

First, the speech. Many had anticipated a big announcement on jobs. With jobless rates in the double digits and a projected 5-10 year haul to get employment back to normal levels, workers were hoping for something big and bold. Instead, Obama proposed $30 billion in TARP funds to get credit flowing to small businesses. $30 billion to put 16 million Americans back to work? $30 billion when the Wall Street bonus pool for a few thousand bankers was $140 billion this month? Democrats will live to regret this missed opportunity.

Also on Wednesday, U.S. Treasury Secretary Tim Geithner was called on the carpet once again by irate members of the House for his mishandling of the AIG bailout. To their credit, several Democrats asked the toughest questions. But Geithner bobbed and weaved and no knock-out punches were landed. This is a problem for the Democrats. The whole incident paints an ugly picture of the federal response to the financial meltdown, best described by Representative Edolphus Towns (D-NY): “The taxpayers were propping up the hollow shell of AIG by stuffing it with money and the rest of Wall Street came by and looted the corpse.”

On Thursday, Federal Reserve Chairman Ben Bernanke was reconfirmed by the Senate for another four year term. His nomination had been in trouble and a record number of senators voted no, but Obama stood by his man and pushed him through. The problem with Bernanke is best summarized by economist Simon Johnson: “Bernanke is an airline pilot who pulled off a miraculous landing, but didn’t do his preflight checks and doesn’t show any sign of being more careful in the future – thank him if you want, but why would you fly with him again (or the airline that keeps him on)?” While Bernanke may have saved Wall Street, he has shown little interest in using his power as Fed Chairman to aggressively aid Main Street. He is not the man for the job in these tough economic times and that will soon be apparent to the detriment of the Democrats who secured his confirmation.

Ultimately, however, the most important developments of the week were played out behind closed doors in the Senate. Senate Banking Chairman, Chris Dodd, made the decision some time ago to try to devise a bipartisan financial reform package. His package of reforms was then handed over to four bipartisan working groups. With thousands of bank lobbyists swarming the hill, it is no surprise that these groups are busily making the Dodd bill worse.

The derivatives language is being weakened and bankruptcy is emerging as the preferred method of unwinding financial institutions, which could leave taxpayers to foot the bill for this expensive procedure. To truly end the “too big to fail” problem and crack down on the reckless behavior of the biggest banks, we need strong, specific preventative measures such as leverage limits, capital and margin requirements, limits on counterparty exposures, a ban on proprietary trading and limits on bank size through a low cap on total liabilities. Even Obama’s signature reform, an independent consumer agency is in danger of being whittled down to a corner desk in a failed federal agency.

The President understands that the Wall Street bailout was “about as popular as a root canal.” But if Democrats continue to peddle this type of rhetoric while neglecting meaningful reform as they have done this week, the Republicans will run away with the anti-bailout message and with the election in November.

Crossposted from http://www.banksterusa.org/