Let’s get this out of the way first, the automakers still do not deserve a bailout.
Citi has been in some deep doo-doo ever since they lost the heart of Princess Wachovia to the noble Knights of Wells Fargo 6 weeks ago. They’ve always been that bank that you’ve heard of but you don’t know anyone that banks there. This is for good reason because most of their business comes from working with other businesses, and they have a huge international presence. Regardless, Citi is one of the 4 largest banks in the country (JP Morgan Chase, Citi, Bank of America, & Wells Farchovia) and they play a vital role to the health of this economy. Of note, they employ more people than the big 2.5 automakers combined.
Why did Citi need access to the Paulson Piggy Bank (known as the TARP – Troubled Asset Relief Program)? This is the part the media seems to be ignoring. They’ve already been to the TARP for $25 billion 2 months ago. Unlike the money that has been distributed already to banks, what has been this time is another bailout of a bank about to fail. I thought that was the point of TARP, and here they are needing a full bailout which goes much further beyond writing a blank check and capping executive pay.
Under the new deal Citi will get another $20 billion from TARP. However (this is the part where Citi gets special treatment) the federal government and Citi will participate in a “loss sharing program”. Think of this as insurance. Citi will own the first $29 billion in potential losses, and any losses beyond that will be shared with the government. The taxpayers will be responsible for 90% of all losses beyond $29 billion with Citi responsible for 10%. Any losses the government must absorb will come out of TARP. That is a bunch of bullshit.
Citi has over $300 billion in bad assets on their books, which basically means they are getting half of the bailout. That whole thing where Paulson was saving $350 billion for the Obama administration is a bunch of crap. Obama’s team will now have to consider potential losses every time they spend any amount of new TARP money. I liken this to putting a Citi guy in the room every time the Treasury thinks about using more TARP money. Basically speaking, all the money from TARP is now committed. But if our government is anything like our banks, they’ll allocate the same dollar to two different things at one time. Our government is very much like our banks in this matter.
The agreement between the government and Citi does call on Citigroup to take steps to work with distressed homeowners. Nowhere does it say “show us how you’re helping homeowners or we jack up the interest rate on our loans to you”. Nope. It’s basically just a request that they do it.
Not only am I upset that all the money is tied up now, I’m also disappointed in the original purpose of TARP. The program was designed to help keep the banks afloat. The banks were supposed to receive a capital injection from the government which served two purposes: to give banks the funds needed to start lending again and to give investors confidence in the banks. The initial injection failed on both points. Almost as soon as Citi got their first infusion, the price of the stock tanked. Since then blogs (including mine), CNBC, and paper media have all reported negativity. In essence, getting money from the government painted a bad picture instead of a good one
Those suggestions to go ahead and close down TARP don’t seem like a bad idea right now.
 By The Weakonomist |
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