Capital Commerce
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Citigroup Nationalization: Good Bank, Bad Bank
Continue reading… 0 CommentsSeveral sources are now reporting that Citigroup is nearing a deal with the government to create a seperate "bad bank" to house $50 billion worth of toxic mortgage and other assets, as well perhaps a $1 trillion or more in off-balance-sheet entitites. The WSJ's version of the story also says the following: "Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said." CNBC adds this: The Government will absorb much of the losses for citi if there are losses and Citi would issue preferred stock to the government."
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Citigroup Nationalization: Coming Fast?
Continue reading… 1 CommentSooner rather than later. Much sooner, according to DC insider and analyst Pete Davis:
"What's ahead? My Washington banking sources expect a backdoor nationalization of Citigroup, possibly before 6 p.m. today, when Asian financial markets are poised to hammer Citi stock from $4 to far less 90 minutes from now. That after Citi fell from a 52-week high of $35 in early December, 2007, to its Friday close of $4.
Nationalization of Citi would probably include the injection of billions of dollars more from the Troubled Asset Relief Program (TARP), on top of the $25 b. Citi has already received. Citi is too big to fail. Over half of its deposit come from foreign investors. Thursday, Saudi Prince Alwaleed bin Talal upped his stake in Citi from 4% to 5% in an effort to stave off a bank run. Monday, Citi announced more layoffs, bringing the total to 75,000 out of a total workforce of 375,000. Unfortunately, this probably won't be enough."
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Citigroup Nationalization: How It Might Go Down
Continue reading… 16 CommentsThe Bronte Capital blog lays out what I think is a fairly reasonable scenario for the nationalization of Citigroup -- and probably other big banks, too. It would go like this:
1) The FDIC (led by Sheila Bair) seizes Citigroup after declaring it unsound. Sorry stockholders and debtholders. "Indeed this is precisely what Bair did at Washington Mutual. What she did once she might do again."
2) Uncle Sam (a.k.a. taxpayers) recapitalize Citigroup.
3) The FDIC could "IPO the new Citigroup once this market mess had died down (and remit most the proceeds to former bond holders)."
But here is the big ramification:"If Sheila Bair was to confiscate a really big bank and cancel all the parent company liabilities then no other bank in America would be able to raise parent company debt. Indeed I think that has been the case ever since Sheila Bair did the reckless and irresponsible takeover of Washington Mutual… but it would certainly be the case if the parent company liabilities of Citigroup were cancelled. And that would be a huge decision indeed because then every bank with parent company liabilities (meaning almost every bank in North America) would fail.
Many – but not all – could be taken over in the same fashion at little cost to the government. But almost all of them would wind up property of the US Government. Full nationalisation, Swedish or Norwegian style, is an effective end to a financial crisis – and Sheila Bair has the power and has proved that she is willing to use it. But it is a decision way above her pay grade. (Where is President Obama’s new Treasury Secretary?) ...
Actually I think the die was cast for Citigroup when Sheila Bair confiscated WaMu. The lesson was learnt that bank debt could be treated very unfairly by regulators and hence banks were never going to be able to get finance again. The worst decision of this cycle was to let Lehman fail so badly - creditors got very scared. The second worst was the reckless way in which creditors of WaMu were treated - it made them even more scared."
Me: The core truth here: The problem is confidence, confidence, confidence.
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The Obama Economic Team
Continue reading… 8 CommentsTeam Obamanomics, courtesy of the WSJ:
"The team is expected to include New York Federal Reserve Bank President Timothy Geithner, who will be nominated as the next Treasury secretary, Mr. [Lawrence] Summers, and incoming budget director Peter Orszag. Jacob Lew, a former White House budget director, is expected to be Mr. Obama's National Economic Council chairman. Jason Furman, who coordinated economic policy for the Obama campaign, is likely to be Mr. Lew's deputy. And Austan Goolsbee, a University of Chicago economist, is expected to be the chairman of Mr. Obama's Council of Economic Advisers.
Me: These guys are not Marxists, protectionists, or believers in a return to 90 percent marginal tax rates. They are believers in free trade bolstered by an expanded government safey net for workers, increased government spending on infrastructure (green and transportation) and education to increase growth and reduce income inequality,and higher taxes (though certainly less than a 70 percent top income tax rate) to help fund it all. But will they support a) the nationalization of our banking system or b) a pricey homeowners bailout? My guess is that they will recommend doing, to use the words of Obama, "whatever it takes" to keep us out of a depression. Other than cut taxes on capital or business of higher incomes.
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Treasury Secretary Geithner: Further Thoughts
Continue reading… 3 Comments1) Comfort. Like Obama, Geithner is 47 (Obama is 14 days older), a fast riser and a technocrat.
2) Multipolar. If Larry Summers takes a White House post, you will have two bright academics (Summers, Bernanke) along with a bureaucrat running U.S. economic policy. It would be nice to have someone with business experience in the mix, yes?
3) Condi II. I wonder if Geithner will end up a mediator of sorts between competing economic centers of power such as Summers and Bernanke. Geithner strikes me as an executor of policy not a creator. And fiscal policy would seem to reside in the White House.
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Timothy Geithner: Obama Treasury Secretary
Continue reading… 4 CommentsIt looks like New York Federal Reserve Bank President Timothy Geithner is our next Treasury secretary. A few quick thoughts:
1) He has the edge of being from Wall Street and understanding that world without being of Wall Street and having his hands "dirty" from the subprime crisis.
2) CNBC's Jim Cramer won't be happy, having called for a Senate investigation of Geithner because he supposedly was the prime factor behind the decision to let Lehman die. ("I think Geithner is one of the key architects of what went wrong here," Cramer said.) I am sure the Senate Republicans will be happy to make that dream come true with some very tough questioning.
3) Assuming Geithner is confirmed, his main job would presumably credit be as Credit Crisis Czar, leaving other key aspects of economic policy up to the White House.
4) He is not an economist.
More to come ...
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Should Uncle Sam Buy Citigroup?
Continue reading… 3 CommentsBrad DeLong thinks so. Current Citigroup market capitalization: $22 billion.
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Obama as President of the Recession
Continue reading… 7 CommentsNote to President-elect Barack Obama: Terrible economies make for topsy-turvy politics. A sky-high "misery index" of runaway inflation and elevated unemployment helped Ronald Reagan defeat incumbent Jimmy Carter by a landslide in 1980. But the horrendous 1982 recession took a huge chunk out of the Gipper's popularity. Recall that Reagan had just a 35 percent job approval rating at the start of 1983. (The dissipation of political capital even pushed him to raise taxes.)
Reagan might have been a one termer, but then the economy took off like Carl Lewis at the Los Angeles Summer Olympics. The economy surged 4.5 percent in 1983 and a mind-blowing 7.2 percent in 1984 as unemployment dropped from a high of 10.8 percent in December 1982 to 7.2 percent in November 1984. Reagan won by an even bigger landslide in 1984 than in 1980, and a 25-year "long boom" was underway. Surely Obama, another presidential victor who won by a hefty margin and inherits a lousy economy, hopes the overall pattern will repeat itself. Recall an ominous passage in his otherwise joyous election-night speech: "The road ahead will be long. Our climb will be steep. We may not get there in one year or even in one term." That was a call for patience until prosperity returns.
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The Biggest News of the Week!
Continue reading… 1 CommentThis may seem like an archane, wonky point to some, but yesterday the S&P 500's dividend yield nudged above the yield on the Treasury 10-year note. That has not happened since 1958, the year when the dividend yield first slipped below bond yields. Back then, it was a sign of greater comfort with holding stocks, that some of the nervousness from the Great Depression had finally faded.
Today, the oppposite action could mean a tipping point in people's attitudes toward holding stocks. Not that I could really blame them given the horrible return from stocks over the past decade or so. But to abandon the stock market as a way of building net worth would be a shame with market down so much. Terrible timing, especially since the stock market is our only escape from the meager retirement returns being promised by Social Security.
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How Tom Daschle Might Kill Conservatism
Continue reading… 212 CommentsThe GOP strategist had been joking about the upcoming presidential election and giving his humorous assessments of the candidates. Then he suddenly cut out the schtick and got scary serious. "Let me tell you something, if Democrats take the White House and pass a big-government healthcare plan, that's it. Game over. Government will dominate the economy like it does in Europe. Conservatives will spend the rest of their lives trying to turn things around and they will fail."
And it turns out that the fearsome harbinger of free-market doom is the mild-mannered ex-U.S. senator with the little, red glasses, Tom Daschle. He'll be the guy shepherding President Barack Obama's healthcare plan through Congress via his probable role as secretary of health and human services. At the core of Daschle's thinking on the subject is the creation of a "Federal Health Board that would resemble our current Federal Reserve Board" and ensure "harmonization across public programs of health-care protocols, benefits, and transparency." (Forget secretary of state, Hillary Clinton should shoot for chairman of Fed Health and run one seventh of the U.S. economy.) And the subject of that "harmonization" would be a $100 billion to $150 billion a year plan that would let individuals (and small businesses) buy insurance from private companies or from a government plan.
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Ronald Reagan on Election Night, 1980
Continue reading… 0 CommentsIt's been a long week and think we could all use some of this. It's the Gipper from Nov. 4, 1980:
"You know, Abe Lincoln, the day after his election to the presidency, gathered in his office the newsmen who had been covering his campaign and he said to them, 'Well boys, you're troubles are over now, mine have just begun.'
I think I know what he meant. Lincoln may have been concerned in the troubled times in which he became president but I don't think he was afraid. He was ready to confront the problems and the troubles of a still youthful country, determined to seize the historic opportunity to change things. And I am not frightened by what lies ahead and I don't believe the American people are frightened by what lies ahead. Together, we're going to do what has to be done.
We're going to put America back to work again. You know, I aim to try and tap that great American spirit that opened up this completely undeveloped continent from coast to coast and made it a great nation, survived several wars, survived a Great Depression, and weГll survive the problems we face right now."
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Financial Crisis Elbowing Out Climate Change
Continue reading… 2 CommentsExpect to see more stories like this:
LIMA (AFP) – Climate change is fading as a priority in the Pacific Rim as the gloomy state of the global economy takes precedence, a survey of opinion leaders showed Wednesday. The private Pacific Economic Cooperation Council released an annual survey of leaders in government, business and media ahead of a summit in Peru of 21 Asia-Pacific nations, which account for more than half the global economy. Twenty-four percent of some 400 opinion leaders surveyed said the top priority for Asia-Pacific leaders should be addressing the US-bred financial crisis, far outweighing other issues. Last year, the top priority was reviving stalled global trade negotiations, at 12 percent, but climate change came close at eight percent. Global warming did not even figure among the top priorities this year.
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Stock Returns Washed Away
Continue reading… 3 CommentsBrad DeLong does the terrible math:
"Average real capital gain over the twelve years since Greenspan's "irrational exuberance" speech in December 1996: -2.1% per year.
Average dividend paid on the S&P composite over the twelve years since Greenspan's "irrational exuberance" speech in December 1996: 1.6% per year.
Real return on the S&P composite over the twelve years since Greenspan's "irrational exuberance" speech in December 1996: -0.5% per year."
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Dow Down 22 Percent Since Election Day
Continue reading… 3 CommentsOK, we've had a bear market even if you count only the losses since Barack Obama was elected.What, don't investors know the MegaStimulus Package is on the way? Maybe instead of a guesstimated $500 billion, it should $1 trillion or maybe even $2 trillion (which I actually heard suggested on CNBC). Or maybe we should do what we did the last time we faced a severe economic downturn ...
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Washington Continues to Chill Stocks
Continue reading… 1 CommentThe great Andy Busch, FX guru at BMO Capital Markets, thinks the Beltway Boys should go on vacation ASAP:
"For the week, I underestimated the negative impact of two appearances by the auto executives in front of Congress. This has cast a pall over the markets analogous to the October appearances by Bernanke and Paulson as they lobbied for the TARP program. When we have this high profile media appearances, it forces the market to focus on the bad things that are happening in the economy. While I did warn that this was the last/next shoe to drop on the stock market, I underestimated (how could I!) how poorly the executives would be handled by Congress. I'm sure they are wondering whether they will get their cash as they head back to Detroit on their private jets."
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The Gingrich Middle-Class Tax Cut
Continue reading… 3 CommentsNow was that so hard? Want to boost the economy? Cut taxes. Newt Gingrich, in the WSJ, proposes cutting the 25 percent tax bracket to 15 percent, basically creating a 15 percent flat tax for 90 percent of all Americans. As Gingirch puts it:
"This would be much more effective than Mr. Obama's tax plan with it's $1.3 trillion in redistributive tax credits, as well as yet another so-called stimulus package based on another $300 billion or more in increased government spending.'"
Me: Gingrich's plan makes it even clearer to me that John McCain should have made tax reform the centerpiece of his campaign, particuarly the idea of creating a two-rate structure -- 25 percent and 10 percent. Instead, Obama won the "tax cutter" mantle and the presidency.
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The Terrible Scare Story Hank Paulson Told Congress
Continue reading… 3 CommentsWhat does a Treasury secretary from a lame-duck Republican administration have to tell the leaders of a Democrat-dominated Congress to persuade them to fork over $700 billion to rescue Wall Street by buying toxic mortgage securities. Well, according to Sen. James Inhofe, Hank Paulson said something like this: "He said, ‘This is going to be far worse than the Great Depression in the '30s.'" (Recall that unemployment hit 25 percent back then vs. 6.5 percent currently.)
But now Paulson has scrapped Plan A. And a new University of Chicago study of a similar plan conducted by Japan in the 1990s concludes Paulson should have never gone that route. Here is what the study found:
"The U.S. financial system is in very fragile shape. As in the recent Japanese financial crisis, the shortage of capital is the fundamental problem that must be fixed. The U.S. bailout plan is similar to the Japanese approach in that it does not clearly identify the capital problem as critical and instead proposes using AMCs to remove distressed assets from bank balance sheets. When Japan used AMCs, their effectiveness was limited in part because they did not purchase enough assets. AMCs did not help recapitalization, either, and Japan had to come up with different mechanisms to use public funds for recapitalization. Both these risks are also present for the U.S. plan."
Me: Indeed, in an interview with CNBC, Paulson seemed to imply that $700 billion was not going to be enough money to make the asset-buy work. And good luck going back for more dough. The first bill barely passed. What's more, FBR Capital Markets estimates that Wall Street needs another $1-2 trillion in new capital, in the form of direct injections, to stablize. And it continues ...
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Like Orange Juice and Toothpaste
Continue reading… 0 CommentsHere is a scary thought: We could get the sharp contraction of the 1982 recession with the "jobless recovery" that came after the 1990-1991 downturn. The worst of both worlds. Is it 2010 yet? I want this decade over!
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Dow Down 16.9 Percent Since Obama Election
Continue reading… 9 CommentsAnother day, another decline. In the 11 trading sessions since Barack Obama was elected president, the Dow has fallen 16.9 percent, or an average of 148 Dow points a session. The stock market is forward looking. The stock market discounts. The stock market cares about what happens in Washington. That is all ...
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Sheila Bair: First Woman Treasury Secretary?
Continue reading… 4 CommentsGoing by Sheila Bair's chat with Larry Kudlow, it sounds like she wouldn't say no. And I don't think the Secretary of State, AG, Defense Secretary and Treasury Secretary are all going to be men.
