European Tribune - Community, Politics & Progress.

When "too big to fail" fails

by Jerome a Paris
Mon Nov 24th, 2008 at 06:36:21 AM EST

Citigroup gets $20bn bail-out
The US government rode to the rescue of Citigroup, entering an agreement to backstop up to $306bn in problematic assets and injecting $20bn in capital to restore confidence in a bank that defines the term “too big to fail”.

Beyond the misleading headline (the commitment of public money is potentially $277 billion beyond the $20 billion equity injection), this is a perfect demonstration that "too big to fail" institutions are a Clear and Present Danger to our economies . Their size means that they can take reckless risks and, with absolute certainty, dump the losses on the taxpayer. This cannot be seen as acceptable by any reasonable person, and it should thus be prevented. There are two routes to do that:

a break-up, to reduce the size of the resulting entities to "not too big to fail" - with ongoing limits in that respect, and a commitment to let the resulting entities go bankrupt if their situation so warrants;

stringent regulations limiting the kinds of activities they can enter, the risks they can take, and the remuneration structure of employees;

This, of course, can only apply going forward, but the current bailout should include punishment for those that brought us to the current situation: it is unbelievable that any part of the senior management of Citi is still in place, and it just as unacceptable that the taxpayer equity purchases are in the form of non-voting shares getting 8% (Buffet got a 10% return, plus warrants, for its investment in Goldman Sachs; the UK government got 12% for its own equity injections in UK banks, and Barclays agreed to pay 14% to Qatari investors to avoid public money).

Deregulation of finance in the past decade is already the most expensive mistake ever, including for bank shareholders, and has only massively enriched management, a few other bank executives, and those who hatched the reckless schemes those executives committed vast sums of bank money to. It's time to stop the fiction that "markets" are more efficient in that sector.

. Home
. About
. Contact
. New User Guide
. FAQ
. ET Editorial Guidelines
. Search
. Search (Google)

Username:
Password:

. Make a new account
. Reset password

When "too big to fail" fails | 24 comments (24 topical, 0 editorial, 0 hidden)

Re: when "too big to fail" fails (4.00 / 5)

European Tribune - when "too big to fail" fails

This, of course, can only apply going forward, but the current bailout should include punishment for those that brought us to the current situation:

Such as Robert Rubin being appointed to Obama's Council of Economic Advisors.

Hey, Grandma Moses started late!

by LEP (rafifoon@yahoo.com) on Mon Nov 24th, 2008 at 06:43:00 AM EST

Re: when "too big to fail" fails (4.00 / 2)

or the Economist et al. pontificating against car industry bailouts because that's a waste of taxpayer money and sends the wrong signals...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 07:00:02 AM EST
[ Parent ]

Re: when "too big to fail" fails (none / 1)

They're happy to see us get bogged down with a failure of the Big Three. If the Big Three go, that's one massive distraction from stuff we want to do. That's why I'm for a bailout, even if it just means kicking the can down the road and figuring something out later. Otherwise Detroit's endless line of bullshit is going to cost us when we should be dealing with health care and energy.

WHEEEEEEEEEEEEEEEEEEEEE!!

by Drew J Jones (myfriends@thisispancakes.com) on Mon Nov 24th, 2008 at 08:27:49 AM EST
[ Parent ]

Plus (4.00 / 3)

the snowball effects from a bankruptcy of one of the Big 3 do make them qualify for the "too big to fail" category as well. It would have a massive impact locally, it would destroy one of the last remaining bases of power of unions, and, oddly enough, it would probably create an additional deadly shockwave in the financial world given that GM and Ford CDss are amongst the most traded and voluminous...

Plus, a bailout under the "putting an end to 'too big to fail'" rule could help push the sector in the right direction energy-wise.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 08:36:35 AM EST
[ Parent ]

Re: Plus (4.00 / 3)

The whole "too big to fail" thing has become ridiculous. If we were governed by people who weren't retarded, and who had enough integrity to make those judgment calls, it'd be one thing. But we're not. We're governed by Junior and the GTP, who aren't burdened by brains or integrity.

Clearly the lesson to draw from this, if you're the head of a company, is to turn yourself into a bank and fuck up as much as you possibly can, preferably in a way that threatens to bring down the whole system. Only the Bushies could govern in a way that turns incentives to such scenarios. It reads like a really bad Marxist novel.

WHEEEEEEEEEEEEEEEEEEEEE!!

by Drew J Jones (myfriends@thisispancakes.com) on Mon Nov 24th, 2008 at 09:01:45 AM EST
[ Parent ]

It's collateral damage (4.00 / 2)

of the fact that honor and integrity have no monetary value (at least not in the time range that the Street cares about).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 09:23:31 AM EST
[ Parent ]

Re: when "too big to fail" fails (none / 1)

Indeed. How about we do the bipartisan thing? Take Brent Scowcroft, dump Bob Rubin.

WHEEEEEEEEEEEEEEEEEEEEE!!

by Drew J Jones (myfriends@thisispancakes.com) on Mon Nov 24th, 2008 at 08:34:06 AM EST
[ Parent ]

Re: When "too big to fail" fails (4.00 / 4)

Citi of over-leveraging
"Sharing" Citigroup's losses above $29bn, as agreed in the US bailout plan for the group finalised Sunday night, doesn't sound too promising for US taxpayers.
What's worse is that the amount may not be enough.
For a start, the $27bn being injected in the form of preferred shares will do little to stem further losses, which come out of common equity (discussed at length, here and here). To send further chills down taxpayers' spines, see this calculation from Rolfe Winkler at Option ARMageddon:
[table]
That's frightening for a couple of reasons. Firstly, as Winkler notes, it means the bank has $56 of assets for every $1 of common equity. -- or a leverage ratio (assets/equity) of 56. With leverage of 56, if the value of those assets were to fall 2 per cent (not so unlikely in the current writedown-prone environment), then common stockholders are wiped out. This tallies roughly with FBR's argument last week for the need of $1,000bn in tangible common equity to absorb losses stemming from what is essentially an over-leveraged financial system.
Secondly, the calculation doesn't include Citi's off-balance sheet assets -- which amount to something like a whopping $385bn according to FBR.

A leverage of 56 means that it takes only a 2% drop in the average value of your assets to have the equity wiped out.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 07:33:48 AM EST

Re: When "too big to fail" fails (none / 1)

And the 2% has already occured. It's just not in the books yet.

"The womb that spawned that thing is fertile yet"

by Cyrille (cyrillev domain yahoo.fr) on Mon Nov 24th, 2008 at 08:35:55 AM EST
[ Parent ]

Actually, it's occurred 3 times (4.00 / 2)

already at least:

the first one, the banks swallowed, last year. The second brought them to their knees and this is the hole being plugged not by governments around the world; the third is coming now as the economy stops and will be deadly.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 09:24:47 AM EST
[ Parent ]

Re: When "too big to fail" fails (4.00 / 3)

Citi, combined with the continued refusal by the GWB administration to take voting shares and serious punitive steps in response is just has to be mind numbingly depressing to citizens of the USA who have any idea of the consequences of these decisions. That is certainly the case for me. 57 to 1 debt to equity! Provided that the share price doesn't fall further.

London Banker's question comes back to mind.

What happens to the global markets when the deleveraging stops? What happens when there are no more global margin calls on the surviving hedge funds? Will anyone want to buy dollars when they don't need them to repay dollar debt?

It seems to me that the USA will be thrown back upon its own resources, as, absent dollar debt, there will be a decided distaste for dollars. But that may be largely irrelevant, as the debts will far exceed any reasonable ability to pay, and that will be a world wide effect. The only up-side is that the scale of the problem will be so great by the time Obama takes office there will be no alternative to a controlled repudiation of much of this debt, aka national bankruptcy. Else his administration will be known as the time when IMF economic policies designed for hapless 3rd world debtors came to rule in the USA--indefinitely.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (ARGeezer at eurotrib.com) on Mon Nov 24th, 2008 at 11:31:38 AM EST
[ Parent ]

Re: When "too big to fail" fails (none / 0)

But $25bn for the automakers is too much.

WHEEEEEEEEEEEEEEEEEEEEE!!

by Drew J Jones (myfriends@thisispancakes.com) on Mon Nov 24th, 2008 at 08:07:29 AM EST

Of course (none / 1)

they have too many overcompensated workers, supposedly.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 08:20:14 AM EST
[ Parent ]

Re: Of course (4.00 / 2)

Even with the executives, though: Funny thing, nobody asks about private jets when the investment houses are involved.

WHEEEEEEEEEEEEEEEEEEEEE!!

by Drew J Jones (myfriends@thisispancakes.com) on Mon Nov 24th, 2008 at 08:21:43 AM EST
[ Parent ]

Yves Smith at naked capitalism (4.00 / 3)

wrote a nice post about the "image" of finance today.

Finance Has Lost Sight of Its Role
...
Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do
...
There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated.
...
Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued?
...
And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.

by Detlef (Detlef1961_at_yahoo_dot_de) on Mon Nov 24th, 2008 at 11:41:05 AM EST
[ Parent ]

Re: Yves Smith at naked capitalism (none / 0)

Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do

Yes!!!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Mon Nov 24th, 2008 at 01:16:01 PM EST
[ Parent ]

Now on dKos (none / 0)

http://www.dailykos.com/storyonly/2008/11/24/82834/525/428/665725

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 08:33:39 AM EST

Monopoly (4.00 / 5)

Even with all the hand wringing by the pundit class (see Krugman, for example) there has been no shift in the fundamental view of how societies should be run.

All we see are suggestions that we should go from an under regulated "free market" to a more regulated one. The basic assumption, that market capitalism is the only possible economic system, is never addressed.

Capitalism, by its very nature, tends toward monopoly or oligopoly. Even Adam Smith understood and warned against this. It can't be eliminated, or even protected against effectively. The concentration of firms leads to a concentration of wealth which leads to these firms having excessive political influence. The influence leads to protective legislation designed to further limit competition. This is fatal to a true democracy.

One can go back to the days of the Manchester textile firms, or to the railroad boom in the US in the late 19th Century, or to the present concentration in oil, media and pharmaceuticals to see that nothing changes, even after cycles of populism and "trust busters".

Now that the world is also facing over population and resource shortages, the appropriateness of a capitalist model, which depends upon constant growth and the exploiting of natural resources, cannot continue. The lack of discussion of alternatives will be seen in the future as another instance of "why didn't anyone see this coming?"

To beat my own drum again:
After Capitalism, What?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Nov 24th, 2008 at 09:24:34 AM EST

Re: Monopoly (none / 1)

Capitalism may well be the best system we know of in times of rapid growth -particularly if starting from a point where most people have very little to lose. It sure is ill suited to times of stable or declining output.

So, since eternal rapid growth cannot happen, there needs to be another system.

"The womb that spawned that thing is fertile yet"

by Cyrille (cyrillev domain yahoo.fr) on Mon Nov 24th, 2008 at 09:56:04 AM EST
[ Parent ]

Re: Monopoly (4.00 / 2)

Actually I think capitalism is only suited to conditions where raw materials are essentially "unlimited".

Capitalism works by having many firms fail which is a huge waste of resources. This is Schumpeter's "creative destruction", which may yield better products and firms through competition, but does not factor in the waste that occurs during the process.

Some 250 million computers are discarded each year, for example. Now there have been improvements that occurred at a rapid rate because of the turbulence in this field. Compare this to the days when IBM had a monopoly on mainframes and new models came out once a decade.

So I'm not suggesting holding back innovation, but the present system has gone too far. That's why we need to have so free ranging discussions and get away from the mindset which only allows for a "market-based" economy.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Nov 24th, 2008 at 10:16:22 AM EST
[ Parent ]

Re: Monopoly (none / 1)

Well, yes, you are right, I should have worded it.
But to me, rapid growth pretty much requires that resources are essentially unlimited.

Take a colony of bacteria. Capitalism is fine for the very start of the colony. Long before reaching the edges of the Petri dish, it must change.

"The womb that spawned that thing is fertile yet"

by Cyrille (cyrillev domain yahoo.fr) on Mon Nov 24th, 2008 at 10:33:08 AM EST
[ Parent ]

Weee (none / 1)

Citigroup shares are up 57% this morning. The market overall is up by 4%, despite a new record fall in house prices...

How long will it last?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon Nov 24th, 2008 at 10:32:37 AM EST

Re: Weee (4.00 / 2)

Pessimistically, till 3:00 PM EST.
Optimistically, till the Monday after Thanksgiving.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (ARGeezer at eurotrib.com) on Mon Nov 24th, 2008 at 11:36:41 AM EST
[ Parent ]

This is a craps game where the dice are not (none / 0)

merely loaded, but can be made to change their spots.

Diebold spots, so to speak.

But then, who is in the game besides fools and sharks? The sharks know who they are. If YOU don't know, guess what . . .

The Fates are kind.

by Gaianne on Tue Nov 25th, 2008 at 07:53:50 AM EST
[ Parent ]

When "too big to fail" fails | 24 comments (24 topical, 0 editorial, 0 hidden)

Go to: [ European Tribune Homepage : Top of page : Top of comments ]