I am reconsidering my earlier comment about it not getting any worse.
It might not get any worse for CITI or for the rest of us, market included, if we consider ONLY CITI’s ‘nationalization’ per se.
But overall, and for many other reasons, it is likely to get a whole lot worse . CITI cannot be considered in isolation.
I agree with most of the comments in today’s blog. People posting here are very astute IMO.
Most especially I find myself in agreement with the sentiments of Paul C. Martello. While home ownership for everyone is theoretically a great social goal, it is wholly unrealistic and unsound in our society. One day it might not be so unrealistic. As wealthy as we are though, we are not yet so wealthy as a civilization, that we can just “make it happen”.
Today it remains just another utopian pipedream. It may have just bankrupted us or if not yet, may yet do so.
“Privatize the profits and socialize the losses!” That is becoming the aphorism of our day.
The problem is that if the government socializes enough of these losses, the result will be that ALL the toxic financial poisons will eventually be ingested by the public sector, in its futile attempt to ’save’ everything and everyone.
Result? Collapse. Or at the minimum, a terrible prolongation of the agony — an agony that we might look back on, as only just having STARTED in 2008-2009.
It all depends on the actions of the government. In its ‘wisdom’ and with great hubris, it really appears to think that it can ’stimulate’ its way out of our current economic predicament.
How do you do that when you burden the still productive sectors with all this additional debt? Because make no mistake, that is the ONLY place the burden will eventually fall.
Doug Noland had a great recent piece in his weekly article. His personal thoughts are usually presented in the last few pages of his post. He dwells on the mistakes we are making with Fannie Mae and Freddie Mac — they will not save us. They may well doom us. He is terrified that the government will employ Fannie and Freddie to try to “reinflate” the economy.
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10193
Among other gems in his last few paragraphs in the subsection “Surreal” from February 19, 2009:
“The nuts and bolts of today’s reflationary policies will not be received warmly by the majority of taxpayers that work hard, live within their means, and pay their bills. Post-Bubble policymaking, by its nature, can be reliably counted upon to throw good “money” after bad. And the bigger the Bubble the greater the amount that will find its way down the rat hole.”
“At the same time, an increasingly emboldened government — with its simple mandate to make things better — mobilizes massive financial and real resources in its less-than-studied effort to fulfill its newfound role as System Stabilizer of Last Resort.”
“Today’s synchronized busts create a precarious global policymaking dilemma at home and abroad. My greatest fear at this point is a Government Finance Bubble that insidiously destroys our government’s Credit worthiness, similar to what occurred on Wall Street… the GSEs [Government Sponsored Entities] are financial blackholes.”
Mr. Noland is saying that if we are not careful, the only thing we will achieve is the wholesale transfer of the deadly poison from the private to the public sector. And that it will kill just as surely in that sector as it has been killing in the private sector up until now.
In other words, that “giant sucking sound” won’t be, as it was in Ross Perot’s day in 1992, the sound of American jobs heading south for Mexico — that sound will be the final revelation of our entire economic and financial system imploding into one giant black hole, taking us along with it.
C will probably go down; it’s a really ugly conglomerate of pieces that don’t fit or work together. Divide it up among a bunch of small, healthy banks. BAC is worth saving; it survived the Great Quake (bad), World Wars I and II (worse), the Great Depression (worst), and 8 years of Doobya (by far the worstest). Although it will take some work (kicking ass and cleaning house), it truly is worthy of the title ‘Bank of America’ and should be saved without loss of taxpayer money.
The new government is making the right moves: jobs first, banks later, and let housing settle back to pre-bubble pricing (probably 1998 levels). There are plenty of houses and banks; there are not enough jobs.
The ARRA stimulus is about 1/3 aid to the states (stop the bleeding), about 1/3 tax cuts (restart the heart), and 1/3 public works (rehabilitate the patient). It’s a good start.
The banks are going to have to wait. They will feel increasing pressure to sit down with their borrowers and renegotiate mortgages. Those banks who don’t will face a very dark future. Banks will be seized, uncooperative executives will be fired on the spot, and the federals will straighten things out at minimal cost to the taxpayer.
Housing prices are still too high in many parts of the country. When the prices are affordable, buyers will come out of the woods.
We’ll get through this. Spend what ya got, but no more. Save a little bit of mattress money, just in case …
Which is worse, exercising monopoly power over a market for one good or service or posing a systemic threat to the financial industry of the nation?
Why do we break up monopolies but allow banks to become “too big to fail”?
Yes, nationalize the big banks first. Then break them into at least 5 much smaller pieces and sell them off. The stockholder pain does not outweigh the fairly obvious risks to the entire economy.
The self-serving and irresponsible behavior of the major banks in securitizing garbage mortgages provides all the moral justification required to nationalize the banks. So, I support Nouriel Roubini’s assertion that the big banks need to be broken up.
I am confused. People seem to think that “W” got us into this. That is partially true. However, as a teacher of history, I can confidently write that the “Community Reinvestment Act of ‘77 (Jimmy Carter), and the expansion of it in ‘95 (Bill Clinton) created the catalyst by which all of us are suffering today. Forcing banks to loan to individuals who could not afford it, then have “W” deregulate the industry without addressing the Slick Willy’s expansion of the Act in ‘95 only exasperated the situation. Now we want the same liberals (Obama and the gang) to bail us out with more Socialism? Liberals got us into this and they cannot get us out! If I were one, I would be jumping up and down right now saying, “It worked! We fooled them! We created the problem, justifying the cause for “our” solution. How stupid these Capitalistic morons are!” God help us all.
You get more of what you subsidize and less of what you penalize and tax. Guess what Obamaa wants.
No matter what the formalities, most likely the banksters will game the system and make out like bandits. That is the Chicago way.
Who cares about the “market”? Since the advent of 401k’s and electronic trading the market is no longer a viable indicator of the economy as a whole. Look at an 80 year chart on Yahoo. Since 1990 the metrics are skewed beyond usefulness.
Why doesn’t Obama repeal the Law of Gravity? And why doesn’t he lead us into Utopia? Why the delays in bring our 401ks back to full value?
Bring back George! Ha Ha
Maybe some business’ need to be allowed to fail. If they can’t stand up, then they fall.
Big is not necessarily better.
Some firms seem to be too big and no-one knows what is going on. Just sweep the errors under the carpet and because the firm is so big no-one will notice until it is too late. Much too late.
Cheap and easy money is part of the problem. The interest rates need to be raised so that people are very careful before they go into debt. No debt is good – it is all BAD.
Why doesn’t Obama say something or do something tp stabilize the markets? Plans without details, rumors of nationalization, blame of previous administration, etc. Where is the leadership? Why the delay in decision making?
It’s time to Nationalize the big banks, get rid of the Federal Reserve and start all over again. Greenbacks work. A national currency with a national bank and no federal debt to pay. We keep protecting the Rothchilds and Rockefeller Barons, why are we protecting a few instead of helping the masses?
We can forgive all third world debts, wipe out the national debt and start all over again with a clean slate.
Why is that such a bad thing?
Dear Paul,
Now it’s the time for you to talk about the optimism you advocated about a year ago. The stock market has bottomed. Put in your money and be patient, you will be glad to see it grow.
To Jim of King City of CA just a small correction.
I think the current capitalization of Citigroup Inc. (symbol = C) on the NYSE Big Board is about 12 Billion.
Please see: Mkt Cap: 11.88B from Google Finance http://www.google.ca/finance?q=NYSE%3AC
Or please see CNN quote at http://money.cnn.com/quote/quote.html?symb=C
That does not mean we should be indifferent to the current shareholders. A stock that was worth over $50 is now about 4 percent of that. But most of the pain has already been inflicted (and maybe accepted).
As to the question of good or bad news, it is probably already as bad as it will get — once even temporary ‘nationalization’ needs to be considered, it is not likely to get much worse. We all know Citi won’t be allowed to go under in any permanent fashion.
Although you have to wonder whether it would not be better to give the management over a new one — that is, to a large, better-run institution?
Would that not restore some of the lost confidence?
Assuming of course that some large, better-run institution still exists somewhere.
For George Newhall
When the fireman pours gasoline on the house, yes, he gets blamed as well as the arsonist.
First people have to understand the pharse too big to fail when used with banks really means the bank has failed and it’s too big for FDIC to save. Citi bank has hundreds of billions of bad toxic loans on it’s Asian credit cards so to expect the American tax payer to bail out Asian credit card holders is basically unAmerican.
Second the health care industry is about to implode as too many people have been laid off and Medicare and Medicaid have both run out of money. This sole bright spot is about to join the rest in a dark deep black hole.
I don’t know if the take over would be good for the markets or not. The markets have only the slightest reflection of anything real, so maybe it is time to stop caring what “they” think.
As for the wider economy,
It wont make a darn bit of difference. Believe it or not, even the megalith of Citigroup is small change compared to the size and scope of the current paradigm shift. Climate, population, food production, energy use, political balance, debt economies, growth – every one of these things is changing or about to change and none of them will ever be the same again. Get used to it.
And I agree with Mohammed in AL. We are all acting like Katrina “victims”. But that is about to change too. Just like Katrina, the government simply is not capable of coming to rescue each of us. Time to first, take care of ourselves. Then take care of our families, then our neighbors, and then, those that still have means, need to step out and help the community at large.
Let some of these banks and insurers fail. Are their businesses any more important than yours or mine? The administration wants to save all these incompetents. Autos & parts, banks, homeowners. What next? I know – let’s bailout Berie Madoff!!
Mike in Redwood your remarks are right on, and articulately said. Those who continue to rant and rave against the actions of this administration need to remember, the decisions by the prior adminstration, the same ones you continue to push, are what placed us in this situation to begin with. The crash has already taken place. Now it’s time for someone to fix what was broken.
This is Wall Street’s way of fighting Obama… They don’t want to change, they want the good, old day fat profit, cheat sheet day to come back…
The way this can work is if it has some of the same terms imposed on the automakers. Namely that ALL of the employees from the top to the bottom receive the same wage and benefit package “enjoyed” by the non union auto plants in the South. High wage and benefit packages are supposed to be rewards of hard work and success, not entitlements for rich boy bankers who have screwed up.
As far as wiping out shareholder equity, that is the downside risk of Capitalism. Either you believe in it or you do not. The shareholders knew that there was risk when they bought in. The only people who should be protected are depositors.
Here’s a question for the republicans writing here. When a house is burned do you also blame the fireman (Obama) instead of the arsonist (bushjunior)?
We need to get Obama and the Nancy Pulosers, Barney Frank BIG TIME SPENDING Democrates out of there before the whole thing crashes
Why can’t the government get out of the way. Have they not done enough damage from Bush and Tarp, and now Obama and Porkulus bill, and now a housing bailout all of this is rewarding bad behavior.
The market is going to drop to where it has to and then we can start climging out of the downturn. Government is only prolonging the pain and retarding the upward movement of the markets and employment of people.
Obama just get out of the way, and be quite.
It depends on what you mean by “nationalize”. If the government were to take over ownership it could wipe out the equity that shareholders have in the bank. Even at $2 per share that still adds up to around $1 trillion. I can’t imagine that would be good for either the market or the economy.
On the other hand, if we were talking about receivership there is a chance it could be a good thing, but only if the receiver were able to do things better than current management. A receiver might be able to have Citi take the lead in “detoxifying” the toxic assets that are the underlying problem. This would mean accepting that losses are inevitable and working to minimize those losses by re-working the mortages included in the mortgage backed securities. This would have the added advantage that it would keep people in their homes. The home owners would in turn have cash flow frred up that could help stabilize the economy.
I agree with Mike in Redwood City. We must not allow banks to grow so big that they can convice the government and/or the market that they are too big to fail. I propose the best way to do this would be to reinstate inter-state banking restrictions. This would require a major restructuring of our banking system and would have to be done slowly, but the benefits would be worth the time and effort. Remember “Banking is too important to be left to bankers”.
The gov’t is a bull in a china shop; Raiding the cash register and burning the store down to cover the evidence.
Anything the gov’t “does” now, except get out of the way, is longterm bad news for the market and economy. On second thought, they can’t even be trusted not to take a five finger discount on the way out.
This is the 1984 reality show; Memes for today are “nationalization” and “we have to act quickly”. Ever feel like you have been used like this before?
I wish they had let Citi and BoA fail just like Lehman Brothers did in September. It would be more painfull but at least the pain wouldn’t be postponed. We are being set-up right now to take an even bigger bullet at a later time.
Previously I have advised about a government owned bank, now CITI is about to be taken over. Why is the government not calling it a government owned bank? Yet the march to socialism continues. Over the years I have written about this danger of “untold wealth”, about the “creation of wealth” and our adoration of , if not out right worship of money.
Sooner or later, we all will have to change our lifestyles, willing or not our lives HAVE already changed, at least for the foreseeable future. Only problem is that ninety percent of the people still have no idea what has happened, or are unwilling to accept this new reality, the paradigm shift.
As we keep digging the hole of the deficits deeper, and the rich refuse to create jobs to feed the poor, which only proves I have been right all along, housing the banks and the industries are being taken over -helped- by the feds, the illusion of free market economy dims.
On individual and moral basis, we have failed to prove we are capable of taking care of ourselves, to take care of our responsibilities. While many in the nation looked down upon the Katrina victims for waiting for someone else to come to their aid and feeling that it was the responsibility of the government to take care of them, today everyone, from bankers to automotive executives to average laid off worker to a home owner who took on too much debt are looking for the government to bail us out, are we all not just like those Katrina “victims”? Ofcourse we are all victims, and uncle Sam is the only sugar daddy.
A government takeover of C would be good news for both the market and economy. The waiting game is just torturing people.
James Lockhart has done a fantastic job of cleaning up corrupt organizations in the past, such as PBGC. Now, he’s in charge of cleaning up two more: FNM and FRE. Adding C to the pile would not be overwhelming, and he’s just right guy.
Under conservatorship, the government could QUICKLY cut costs, downsize C, and replace executives without parachutes, bonuses, etc. Once C, FNM, and FRE are healthy, the government has to decide what to do with them.
In any case, we must not allow any banks to get bigger than the Fed (like Lehman was) ever again. It’s much better to have lots of small, healthy banks than a few, creaky big ones. And, there’s no time like the present to make the necessary changes.
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To Mr/Ms Viirlaid, this has become a very interesting thread; the homeownership issue is part of the problem, but by no means all of it. The US has about 80 million homes, 50 million mortgages (30 million own free and clear !), for a total of about $11 trillion of mortgage debt (average $220,000 mortgage). The average US used home price was $170,000 this week (and coming back down to earth), so you can see the problem (the average mortgage is $50,000 bigger than the average used home price). The average new home price was a little bit higher, but it’s coming back down to earth, too. These numbers are not a problem by themselves, except for the fact that the average American grosses $40,000 per year, or about $19 per hour. An average price of about $160,000 with a mortgage of about $120,000 would be affordable at 6%, or about 25% of his gross income. So, the average American home borrower is in way over his head on his mortgage. But, this problem is manageable. Renegotiations can fix this without any bailouts: lower rates, some repossessions, etc. Force the lenders to sit down with the borrowers and renegotiate, or the borrowers can just walk away from these no-recourse loans: problem solved.
The big mystery is how much money the banks have gambled and lost on various kinds of derivatives, such as swaps. I’ve heard it’s many multiples of the $11 trillion mortgage totals. These derivatives need to be completely written off, with no bailout. And, we need to shut down these markets so that this problem goes away and does not return.
It will be interesting to see what happens when home prices approach $100,000. At this price, many people will be able to afford to buy again, and some will be able to just pay cash (save $4,000 for 25 years) and skip the banks. The American dream returns.
I don’t know what the economy is like in Canada, but it must be better than in the USA.