Allison Kilkenny: Unreported

U.S. Is Said to Agree to Raise Stake in Citigroup

Posted in Barack Obama, Economy, politics by allisonkilkenny on February 27, 2009

New York Times

saupload_277_cartoon_bank_bailout_hurwitt_small_overThe Treasury Department reached a deal late Thursday to take a stake of 30 to 40 percent in Citigroup as part of a third bailout of the embattled bank, according to several people close to the deal.

Vikram S. Pandit, the chief executive, will remain at the helm, but Citigroup will have to shake up its board so that it has a majority of independent directors, a move that federal regulators had already been pursuing.

Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock.

It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.

The Treasury Department will match the private investors’ conversions dollar-for-dollar. That accounts for uncertainty in how big the government’s stake will be.

Citigroup and Treasury officials reached an agreement late Thursday night, but final details were still being worked out. The deal is expected to be announced Friday.

A Treasury spokeswoman did not return a phone call seeking comment. A Citigroup spokesman declined to comment.

The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup, but will probably come under intense pressure to take a much larger role in shaping the bank’s direction. Taxpayers, after pumping more than $45 billion into the bank, have become Citigroup’s single largest shareholder. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.

The move is one of the most drastic steps federal officials have taken to prevent the collapse of an institution deemed “too big too fail,” as its downfall could send shockwaves through the global markets. The government also took a major ownership stake in the American International Group, and seized control of Fannie Mae and Freddie Mac in September. So far, none of those deals have turned out well.

The Obama administration has tried to keep the banks in private hands and tried to stamp out talk of nationalization. But Citigroup’s plunging share price and its deteriorating financial condition made it almost inevitable the government would have to convert its stake.

The deal is expected to serve as a model for other financial institutions. Other major banks could find themselves in a similar position in the coming weeks if a new “stress test” that examines their ability to cope with rising losses shows they do not have sufficient capital, or the right amount of common stock, to appease regulators. Administration officials say they will convert the government’s existing preferred stock investments into common shares and, if necessary, make additional investments to stabilize the banks.

The Citigroup deal tries to address a potential shortfall of common stock, which investors and regulators now demand. Details remain murky, but the government has agreed to convert its investment at a price of as much as $5 a share, more than twice the value of Citigroup’s $2.46 closing share price on Thursday. That means the government’s stake could rise to as much as 40 percent, from 8 percent, giving taxpayers more risk, but more potential for profit if the company recovers.

Still it will severely dilute Citigroup’s existing shareholders. Those shareholders include longtime investors like Saudi Prince Walid bin Talal and Sanford I. Weill, its former chairman, and many large asset management and pension funds that manage money for ordinary investors.

Citigroup has been pursuing a similar conversion plan with several big preferred stock investors, including several government investment funds like the Abu Dhabi Investment Authority and the Kuwait Investment Authority, as part of a broader financial restructuring.

By retiring the debt and issuing new shares of common stock, Citigroup can bolster it common equity position. So far, no preferred shareholders have agreed to swap their shares. And without the government alongside them, it is an even tougher sell because of fear their positions might be wiped out.

Citigroup officials hope the government’s additional support bolsters confidence and helps revive the company’s sunken stock price. The deal also frees up some several billion a year in additional capital because it no longer has to pay out the dividend to preferred stockholders.

But it does little to address the bank’s underlying problem: Citigroup may not have the earnings power to weather the tsunami of consumer losses expected over the next several quarters. That is because tens of billions of toxic mortgage-related assets remain stuck on its balance sheet. Until they are removed, few private investors will be willing to pour new capital into the bank.

Banking on the Brink

Posted in Economy by allisonkilkenny on February 23, 2009

Paul Krugman

Comrade Greenspan wants us to seize the economy’s commanding heights.

O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders.

Let’s be concrete here. There’s a reasonable chance — not a certainty — that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn’t remotely large enough to cover those potential losses.

Arguably, the only reason they haven’t already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they’re zombie banks, unable to supply the credit the economy needs.

To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.

But here’s the thing: the funds needed to bring these banks fully back to life would greatly exceed what they’re currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it’s basically putting up all the money, the government should get ownership in return.

Still, isn’t nationalization un-American? No, it’s as American as apple pie.

Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank’s bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that’s exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.

And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”

The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.

What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.

Comrade Greenspan: Seize The Banks!

Posted in Economy by allisonkilkenny on February 18, 2009

FT.com

alan-greenspanThe US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

Mr Greenspan’s comments came as President Barack Obama signed into law the $787bn fiscal stimulus in Denver, Colorado. Mr Obama will announce on Wednesday a$50bn programme for home foreclosure relief in Phoenix, Arizona. Meanwhile, the White House was working last night on the latest phase of the bailout for two of the big three US carmakers.

In his speech after signing the stimulus, which he called the “most sweeping recovery package in our history”, Mr Obama set out a vertiginous timetable of federal decisions in the coming weeks that included fixing the US banking system, submission next week of the 2009 budget and a bipartisan White House meeting to address longer-term fiscal discipline.

“We need to end a culture where we ignore problems until they become full-blown crises,” said Mr Obama. “Today does not mark the end of our economic troubles… but it does mark the beginning of the end.”