Having just come off an IV drip-fueled recovery from pneumonia last week myself, I know it’s hard to work at full capacity even now. I’m still weak. Citigroup will be paying for its government payback by offering new shares and — surprise — taking on new debt!

Obviously one golden rule escapes Citi: “Neither a borrower nor a lender be.” Too bad that’s their business model’s backbone. Punishing shareholders with dilative offerings is their only “powerful” move. Just like collecting higher interest on their customers maxed-out credit cards, this move doesn’t equal solvency. We’d dump shares of Citi right now – our Federal Government plans to do so “sometime this year.” (Too bad they weren’t daytrading like the rest of Wall Street.)

Of course, the time for outrage was long ago… back in the go-go late 80s. Like today, it was a time between recessions. Unlike today, it was a time when the Fed Government was about to look at balancing the budget. But on Wall Street right now, banks are paying back TARP left and right and “it’s a wonderful life” once again.

We don’t believe the WSJ hooey, and look toward a “Ghost of Citi Past” to show us the true health of his former company.

Contrite Former CEO Tells All as Citizen

“I would compartmentalize the industry for the same reason you compartmentalize ships.  If you have a leak, the leak doesn’t spread and sink the whole vessel.  So generally speaking, you’d have consumer banking separate from trading bonds and equity.”

– Former Citicorp CEO, John S. Reed, on Nov. 6, 2009

Now you tell us, John?  This is not a case of better late than never. The bastard company that he stitched together with the infamous Sandy Weil is just one of many overweight passengers on our beleaguered ship of state.

Back in 1989, Sarah Bartlett for the New York Times wrote of John:

“Talking with John S. Reed, the chairman of Citicorp, is a little like standing on the bow of an ocean liner and peering into the distance through a spyglass. There, just barely visible on the horizon, is the fuzzy outline of the Citicorp of tomorrow.”

Reed boasted to her of creating “the world’s first truly global institution.” Mombasa, Bangkok, Sao Paulo, Dusseldorf… it all sounded so good, until the merry-go-globe stopped in its tracks in the credit crisis.

Today, in late 2009, Reed writes to the New York Times to apologize for his role in creating Citigroup.  His mea culpa asks pardon: “When you’re running a company, you do what you think is right for stockholders. Right now, I’m looking at this as a citizen.”

A citizen?  Wow, he must still be holding a lot of Citi stock… We’re now on equal footing with Mr. Reed, since our government Treasury now holds 34% of this accursed stock.

Now we’ve hit on the base problem of modern economics. Back in Adam Smith’s day, “citizenship” was getting a new patina: fresh blood crying, Freedom! Non-feudal economics played out as moral philosophy. Wall Street tells you its science, while it’s calculations and models constantly fail.

Our 70-yr-old talking ghost of a former global financial wunderkind, John S. Reed shows us the dilemma in black and white. Back in ’89, a few day’s before hitting 50, Reed was a greed-based, bigger-is-better economist. Even the Third World was his oyster.  Today, he’s decided to become a philosopher from his Park Avenue office.

We wonder whether this Scrooge will really pay campaign donations to those who would re-instate the Glass-Steagall Act.  Moral philosophy only chugs along into the fighting ring when plenty of money backs it.

The One-Man Bank Smack-Down

However, this would mean giving dough to one Vermont independent, Senator Bernard Sanders. (This guy is also the only conscientious objector that says: Remove Ben from his Fed Perch. 60 votes are needed this week, and Ben has no reason to quake in his Italian loafers.)

Sanders says: “If a bank is too big to fail, it’s too big to exist.” His proposal allows Treasury to come in and take a hacksaw to institutions in the financial sector. Note that the New York Times now calls this sector: “the nation’s financial system” — another sign that Wall Street’s merged darlings and bank holding companies are way too big for their bespoke britches.

So Sanders leads the charge: Break-up Citigroup. And while you have the machete out, Geithner, tackle Bank of America, JP Morgan Chase, and Wells Fargo. It should come then as no surprise that when pressed, Senator Sanders would check the box labeled “Socialist.” I’m betting that’s why he did not include government sucklings Fannie Mae and Freddie Mac on the list of break-up candidates.

Regards,
Samantha Buker

December 15, 2009

Citigroup to Repay TARP But Still on Government Dole was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The loss transfer scheme met with more than a cold shoulder from the public. It met with outright hostility. One New Jersey congressman said his calls were running 50-50: 50 percent “no,” and 50 percent “Hell no!”

The bailout also generated the derision it deserved. One blog posting described it succinctly: “Taking money from people who made good investments and giving it to people who made bad investments will make good investments in the future and the people who made good investments will keep making them even though they will have less money to do so.”

The lame-duck president let Secretary Paulson call the tune, while he tap-danced through a couple of White House performances: “…without immediate action by Congress, America could slip into a financial panic.” (His first treasury secretary, Paul O’Neill, said of the president at the time, “I don’t think he understands or knows much about any of this and it shows.”) Paulson, the former Goldman Sachs CEO, was determined to reliquefy Wall Street even at the risk of the treasury’s solvency. The bailout was sold to the governing classes under the guise of reinflating the mortgage market, an act of self-evident futility. If the last bubble could be reinflated, people would still be coughing up million s for dot-com business plans scrawled on cocktail napkins and the NASDAQ index would still be over 5,000. Unlike their counterparts in the Senate, members of the House, closest to the people and all up for reelection in a month, resisted the bailout at first go-around, but the pork fest of more giveaways, the heavy arm twisting, and talk of opponents being blamed for the next Great Depression prevailed. One representative, Brad Sherman, D-CA, claimed on the House floor that members were told without the bailout there would be martial law in America. And so the Paulson plan passed, a mechanism to transfer the losses from institutions that in the expectation of gain willingly undertook the risk of loss to those who had no opportunity for gain or willingness to undertake loss.

If the idea seems antithetical to the American way, it is. Philosophical consistency is not to be expected from politicians, but shouldn’t shame for supporting the giveaway have spread rampantly among Republicans? After all, the 2008 Republican platform had just been passed at the beginning of September. It addressed the mortgage meltdown in these terms: “We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself.” And what about modern-day conservatives who some years before opposed Hillary-care, insisting that socialized medicine is a mistake for the body politic? How then had socialized investment banking become overnight a prescription for economic health? When foreign heads of state, from Iran’s President Musaddiq, who was toppled for it in 1953, to Putin in Russia or Chavez in Venezuela, nationalize their country’s oil, they become enemies of the American state. But when American leaders nationalize finance, the people are told it’s for the good of all concerned. Before long South American Marxists including Hugo Chavez were taking great delight in calling “Comrade Bush” a fellow traveler.

The early costs of the frenzy of “rescues” were astonishing. A week into October, Bernanke claimed the Fed had already committed $800 billion in loans to banks and other activities, and that was before $200 billion for Freddie and Fannie and before the $700 billion bailout. The bailout gave news life to the expression “Legislate in haste, repent at leisure.” It only took a couple of months to notice that the bailout produced none of the promised results in mortgage values. The Treasury handed out the first tranche of the TARP money, $350 billion with virtually no accountability for how the money would be spent. Early in 2009 the Congressional Oversight Panel was able to conclude that the Treasury had paid $78 billion more than market value for the first $254 billion it spent.

While all eyes were on the bailout debate, September 30, like some eerie fiscal planetary conjunction, went unnoticed, a silent harbinger of America’s economic future. While fiscal year 2008 ended that day, rolling up an all-time-high deficit of $455 billion, the explicit national debt actually increased by more than a trillion dollars for the year, breaking through an astronomical $10 trillion. Meanwhile, all but eclipsed by the debate over the bailout bill, President Bush signed another stopgap spending bill that day. This one was for $634 billion, including $5 billion in earmarks, $25 billion in low-interest loans to automakers (yes, even foreign ones!), and a 6 percent bump in Pentagon spending. By the time he signed the bailout bill three days later, it had been a $1.34 trillion week. As part of the bailout, commanding the sun and the moon of economic reckoning to stand still, Congress raised the national debt ceiling to $11.315 trillion. (Four months later it would raise the debt limit again, this time to $12.1 trillion.)

The Paulson plan was presented as an attempt to undo the harm of mortgage market excesses by again inflating mortgage assets on the balance sheets of Wall Street players. It was a strange, homeopathic remedy, a “hair of the dog” approach for a problem that was caused by excess credit engineered the Federal Reserve to begin with. Rather than letting housing prices that had inflated beyond sustainability deflate, instead of letting a market of buyers and sellers arrive at some equilibrium, at values that reflected the actual conditions of supply and demand, the plan called for more of the asset inflation that led to the pumping of more air into the tire that had already had a blowout was ridiculous on its face, and the populists were right in suspecting that it was Wall Street welfare, a case of the politically connected of American finance passing the Old Maid of loss to the people.

Informed observers, the Cassandras who had seen the bubble forming and tried to raise the alarm when it would still do some good, were, of course, not consulted about the plan. Five years to the month before the Fannie and Freddie bubble popped, Congressman Ron Paul introduced a measure that would have avoided the calamity. His September 2003 remarks in the House Financial Services Committee on the dangers of government-sponsored enterprises (GSEs) like Fannie and Freddie are nothing less than a shockingly precise preview of exactly what came to pass:

“This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt…

“Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market…

“Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever.

“When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

“Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.”

In viewing the Paulson plan, the Cassandras must have wondered how often the same discredited economic nostrums need to be refuted. But the administration didn’t turn to Ron Paul for advice. Nor did it consult the scholars at the Ludwig von Mises Institute, who had warned about the government-sponsored expansion of bank credit and money and its inevitable cycle of bubbles and busts. Instead Bush turned to Henry Paulson and his team from Goldman Sachs, despite the fact that under Paulson’s leadership as CEO, Goldman Sachs had been among the industry’s leaders in the issuance of subprime and other mortgage-backed securities, rotten paper that was downgraded scores of times by Standard & Poor’s and Moody’s Investors Service. And Bush followed the counsel of Fed chairman Ben Bernanke, who was on board and at the helm as the Fed frothed up the real estate and mortgage bubbles to begin with.

Sincerely,
David Goyette

December 7, 2009

The Bailout Was a Wealth Transfer Scheme was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Life in the Leafy Suburbs

There is a problem with living in a leafy suburb. When autumn rolls around, the leaves turn brown and fall off the trees. So you have to deal with cleaning up the yard. And after being away in South Africa for two weeks, I sure had a lot of dead leaves in my yard. Thus did I spend time the other day, working like a man on a chain gang — totin’, liftin’ and haulin’.

There I was, raking leaves and dragging them down to the front curb. From curb side, the local municipality has a dump truck with a big sucking machine (the “suck truck”) that scoops up the leaves and takes them to some place called “away” — wherever that is.

And then this guy drives up in a pickup truck and says, “Hey sir, are you the owner?”

I acknowledged that I was the owner, and the man said “I need work. Could I help you clean your yard for a couple hours and you could just pay me?”

The guy seemed OK, and I had a heck of a lot of yard work to accomplish. So I figured I’d hire him for a couple of hours and get the work done faster. Thus did Mike — my casual employee — and I clean up the area around my house.

As we worked, Mike and I talked. Mike is 45 years old. He’s a high school graduate. He served in the Navy (See? I knew he was OK.) After the Navy he worked at a manufacturing job, from which he was laid off in the early 1990s. Then he worked in a warehouse, which closed in the mid-1990s. Then he worked as a mechanic, until his employer went bankrupt in 2000. Then he drove a truck and hauled freight, until that fell through last year after his major customer moved operations out of the country.

“It’s the story of my life,” said Mike. “I’ll work someplace for a couple of years. Then the economy changes or there’s a business setback, and I’m out on my butt.”

Doing Jobs That Americans Won’t Do

Now Mike drives around leafy suburbs. He looks for people who might need help with cleaning up around their house. Mike’s wife is a cashier at Target, “so she’s got the real job in my house.” Mike has settled down to where he lives in the world of cash, earning a few dollars here and there.

“Y’know,” said Mike, “George Bush said that we need more immigrants here in the U.S. because ‘they do jobs that Americans won’t do.’ What the hell was he thinking when he said that? Here I am. I can strip a diesel engine down to the last nut and washer. And I’m cruising neighborhoods looking for yard-work. Heck, I was born in Pittsburgh. I served my country and I’m no immigrant. But I can’t tell you the kinds of crappy jobs I’ve done just to pull a couple of bucks out of the economy for me and my family.”

“We’re All Immigrants Now”

Mike continued. “I don’t see it getting much better for people like me. That’s for sure. And now all the big banks and big businesses are laying people off too. Everybody’s losing their retirement funds. I guess we’re all immigrants now.”

Where Do We Go from Here?

So where do we go from here? At least Mike can strip a diesel engine down to the last nut and washer. Are we all destined to become — as Mike so delicately put it — “immigrants.”

Call me quaint — even old-fashioned — but I’m proud to be an American. It’s just that I don’t like this “immigrant” sort of governance that has evolved within the U.S. We have too many family political dynasties, taking care of their old friends from way back — if you know what I mean.

Really, it seems like every political administration of recent vintage has had people from Goldman Sachs hiring other people from Goldman Sachs to bail out more people at Goldman Sachs.

Yes, it may be paranoia at work. I confess that I think along these lines quite often. But it has been especially prominent in recent days, as Treasury Secretary Hank Paulson — a former Goldman man — comes up with new and different versions of the Wall Street and banking bailout plan.

First Congress authorized $700 billion — quite a bit more than the entire Department of Defense budget — for some sort of “troubled asset relief plan (TARP).” (Nobody ever really explained it to my satisfaction. Somehow we were going to throw money at a very big problem and fix it.) Then the money flowed like rainwater to Wall Street and a bunch of banks. Then the banks and Wall Street houses continued to pay their insiders’ big salaries and bonuses. And the banks have not exactly been lending into the economy. Meanwhile nobody has been buying up any of those so-called “troubled assets.” So for $700 billion, we are not getting any results. And there’s little or no accountability.

Then Sec. Paulson comes along and says that the TARP money really doesn’t have to be used to buy “troubled assets.” He says we’ll use it for other things instead.

But wait a minute. It would be like Congress authorizing funds for the Navy to buy a new aircraft carrier (actually, 100 new aircraft carriers for $700 billion), and then the Secretary of Defense saying, “No, we won’t use the money to buy aircraft carriers. We’ll use it to pay big salaries and bonuses to defense industry executives.” How long do you think that a charade like that could go on?

Let’s go back to the beginning. Did it ever make any sense for the U.S. Treasury to buy up “troubled assets” — whatever those are and however one might value them? And does it make any sense for the Treasury to just hand out funds to banks and bankers? Like I said, call me quaint or old-fashioned, but of course not.

Until we meet again,
Byron W. King
November 18, 2008

Americans as Immigrant Workers in America was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.