From just one bank the US taxpayers might be on the hook to the tune of $1000 per person. For net taxpayers the potential cost might be several times that amount. This assumes a worst case for future Citi losses.
Before long, anxious investors may start wondering which banks will be vulnerable next. If confidence fades, other big lenders will probably seek deals like Citigroupís, in which the government has pledged to pick up potentially $290 billion in additional losses. Regulators drafted the plan with an eye to using it as a template for future bailouts.
But there's no guarantee that Citi won't come back with massive corporate loan losses or credit card losses. The people laid off in 2009 are going to default on more mortgages, car loans, credit card loans, and assorted personal loans.
There are other worries for Citigroupís big rivals. Almost overnight, Citigroup went from being the sick man of the industry to an institution with an edge over its competitors. The government is guaranteeing $250 billion of risky assets and pumping an additional $20 billion into the bank.
With the government behind it, Citigroup may now be able to borrow money in the capital markets at lower interest rates than its peers.
This reminds me of Ford's position on a GM and Chrysler bail-out. Basically Ford is saying they have enough cash that they won't go bankrupt in 2009. But if GM and Chrysler get lower interest rate loans then it is only fair if Ford gets them too. Ford has a point. Lower costs of capital for competitors put it at a competitive disadvantage. Well, Citi's bailout puts JP Morgan Chase, Wells Fargo, and Bank of America at a competitive disadvantage. If they all get bailed out that puts all the smaller banks at a competitive disadvantage. The less efficient players survive and the more efficient players lose market share. That's bad.
But one of the problems with allowing a really big bank to fail is that large numbers of companies have their checking accounts with them. Deposit insurance does not cover their deposits since the payroll checking accounts and other accounts end up running into the millions and beyond.Companies will suddenly start bouncing checks which will cause their suppliers cash flow problems and this will propagate.
On the other hand, if the banks all get bailed out that cuts the incentive for avoiding risky lending. Plus, it becomes really expensive for the taxpayers. The mispricing of risk is incredibly expensive. We all pay for it.
The big open question at this point: How many big credit losses lie in the future for Citi, BofA, JPMorgan, and other banks? Will credit cards, corporate loans, and other kinds of loans cause new rounds of massive losses? Also, how can the banks be regulated in a way that reduces the size of future too-big-to-fail bailouts?
The bankís downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.
Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bankís current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.
When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.
So Robert Rubin did a lot of the regulatory loosening that the Bush Administration is blamed for doing.
Remember how Barack Obama was supposed to be about change? Obama is appointing former proteges of Robert Rubin. Meet the new boss. Same as the old boss.
Geithner is a protege of Summers' and of former Clinton administration Treasury chief Robert E. Rubin.
Will Geithner demonstrate more sense at the Treasury than Rubin did at CitiGroup?
More fundamentally: Will the bankers and the regulators learn enough lasting lessons from this disaster to prevent it from happening again for a few decades?
Robert Rubin doesn't want to admit he is part of problem. More top people in the bailed out banks should be fired.
|Share |||By Randall Parker at 2008 November 28 10:15 PM Economics Financial Regulation|