What’s worse than a bad bank? David Steven
November 24, 2008 | More on Global system | No comments
The Citibank rescue is being described as a ‘good bank/bad bank‘ deal. Not so, says Paul Kedrosky:
Here is the gist:
- Citi will carve out $300-billion in troubled assets, which will remain on its balance sheet:
- The first $37-$40-billion in losses on those assets will go to Citi
- The next $5-billion in losses will hit Treasury
- The next $10-billion in losses will go to the FDIC
- Any more losses will go to the Fed
- There will be no management changes at Citi, because, you know, they are all fine and upstanding people who have done nothing wrong.
- There will be some compensation limitations, but those have not yet been made clear.
To be clear, this is not a “bad bank” model. Assets are not, apparently, being taken off the Citi balance sheet and put into another entity walled off from the Citi biological host. Instead, they are being left on the Citi balance sheet, but tagged and bagged for eventual disposal via taxpayers.
He dubs it the ‘fucked bank’ model.
Update: John Carney likes the deal (not):
Citi shovels a steaming pile of $306 billion of crap assets into a corner of its balance sheet. It gradually writes down their value. Citi takes the first $29 billion of losses, and taxpayers take the next 90% (about $250 billion). In exchange, taxpayers get $27 billion of Citi preferred stock.
Would Warren Buffett have made that deal? No way.
At the very least, there should be a sliding scale for taxpayer ownership: The more the value of the crap assets deteriorates, the more of the company the taxpayers own (and the government should be assessing the value of these assets, not Citigroup). Because as it is, Citi has an incentive to write the whole pile off tomorrow for a song. (This would actually be good for the economy, but not for the taxpayer’s “investment”).
By the way, there is no guarantee that this taxpayer largesse will save Citigroup. $306 billion of assets sounds like a lot, but it’s only about 15% of Citi’s massive asset pile (10% if you count the stuff that was so hideous that Citi shoveled it off the balance sheet long ago). Presumably Citi could keep having to take writedowns on assets outside of the bailout’s $306 billion, weakening the company’s capital and eventually possibly forcing yet another bailout.
So taxpayers may get yet another chance to get hosed.
Update II: This from the WSJ is ominous:
In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren’t reflected there… Among the off-balance-sheet assets are $667 billion in mortgage-related securities.
So there’s many more toxic assets still to be owned up to (read Felix Salmon’s take). Meanwhile, the Economist points out the obvious:
One thing that we know will be fun is watching Mr Paulson defend the purchase of $100 billion of Citi’s junk, while simultaneously arguing that Detroit shouldn’t get a dime from TARP.
Update III: Shareholders like the deal – initially at least. Commentators from left and right think the US government got ripped off: Krugman:
A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more. Amazing how much damage the lame ducks can do in the time remaining.
The one sector that definitely needs to contract is the financial sector. Maintaining Citi as a zombie bank is not really constructive. I would feel better if it were carved up, with the viable pieces sold to other firms and the remainder wound down by government. In my view, getting the financial sector down to the right size ought to be done sooner, rather than later.
My questions: (i) How long before another bank wants the same kind of deal? (ii) Is there anything Paulson can now do to rescue his credibility? (iii) How long before the scale of Citi’s problems are fully understood?
Some answers/guesses: (i) Two weeks. (ii) No – he’s changed direction too many times. (iii) Between 2 and 5 years.
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