Monday, February 23, 2009

Set It Right

In dealing with the ongoing financial crisis, the Obama Administration is going that of G W Bush one worse.

During times of crisis last year, Treasury Sec'y Henry Paulson would appear Sunday afternoon to make an announcement of some feckless but important action. The rationale was to get the news out before the Asian markets opened. (Why? We've got troops in Japan, not the other way round.)

A disquieting pattern may be emerging out of Treasury. Recently it had a delayed major policy talk by Mr. Geithner which was widely panned for being merely the announcement of a plan to have a plan. Last night we saw a Sunday evening trial balloon. This also moved Asian markets, as reported in Citigroup Rises on Report Government May Boost Stake:
Citigroup, Inc., which has accepted $45 billion from the U.S. taxpayer, climbed as much as 28 percent in German trading following a report that the government may increase its stake in the lender.

Citigroup was up 24 percent at $2.41 a share as of 12.05 p.m. in Frankfurt trading today. The New York-based bank slumped 44 percent last week on concern it may be nationalized. .

(Note: the "news" came out before the European markets opened. In response, the Japanese stock market moved from down about 2% to almost even. Also note that the stock has been plummeting for a year and a half, as it has become more and more clear that not only is the Company insolvent, but it has been much more disastrously run than its peers.)

The lender is in discussions with U.S. officials about an increase in the government’s ownership, the Wall Street Journal said earlier today, citing people familiar with the situation. The government may end up owning as much as 40 percent of Citigroup’s common stock, while the bank’s executives would prefer the stake to be closer to 25 percent, the Journal said. Citigroup spokesman Jon Diat declined to comment.

“It’s good news that the bank likely won’t be 100 percent nationalized,” said John Haynes, senior U.S. equity strategist at Rensburg Sheppards Plc in London. “It’s a relief even if only 20 percent remains out of government hands.”

(My comments:

1. The Haynes comment is gibberish. What difference if Government owns 80% or 100% of a worthless company? And on what evidence is he even concluding that Citi will not be 100% nationalized?)
2. Why did Bloomberg bother to highlight that idiotic comment?)

Citigroup proposed to its regulators that the government should convert a large portion of its preferred shares into common stock in a transaction that wouldn’t cost taxpayers more money, the Wall Street Journal reported.

To me, this "story" smells more like a pathetic short squeeze effort than real news.

In any case, the above Bloomberg report is disingenuous in the extreme. Currently, the Feds own a semi-senior stake in Citigroup. Why should we move down to the bottom of the credit ladder? To speculate? What are the ethics and the practicalities of the U.S. Government having a common equity stake in one particular company whose fate it controls? How unfair is that to its competitors, anyway? Does anyone suspect that Robert Rubin, who likely still holds lots of Citi stock and options, has been influencing matters to favor Citi?

Overall, given how consistently Treasury has been favoring the Citis of the world over you and me under both Presidents Bush and Obama, I'll take the Paulson approach. At least with him there was a specific policy, disgusting and ad hoc though it may have been.

Though the financial crisis has been worsening for a year and a half, does President Obama even have a policy? (Mr. Summers, the President's senior economics adviser, let it be known two months ago that he and his team were working day and night to solve this problem.)

Some bloggers answer both yes and no to the above question. Yves Smith's answer is a yes and no, disquieting answer, as her Naked Capitalism reported last night: Now It's Official: Stress Test Reports Pre-Determined. The post, which is a very worthwhile read in its entirety, references one especially odd quote from CNBC:

Said one high-level (government) official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

Excuse me? The stress tests are designed to prove what Treasury already knows?

And if the banks (read Citi and perhaps BofA) have enough capital, what's this about giving them access to capital?

There have been innumerable references in the press comparing this economy and the financial crisis to the 1930s. Let's not forget the miserable 1970s:

Citigroup and the markets are twisting slowly, slowly in the wind (sometimes not so slowly!). The Administration, Citi, and general market information are providing modified limited hang-outs. Various leaks are providing plausible deniability. Someone may protest that he is not a crook. High-def TV may show in exquisite detail beads of sweat on some malfeasor's frenulum.

The time is out of joint. Is Barack Obama thinking Hamlet's next line:

"O cursed spite, that ever I was born to set it right!"?

Leaks and plans (forget about a plan to present a plan) are useless at best.

The dislocated financial joint must be set right.

Right away.

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