The new deal with Citi is that US taxpayers have invested $20 billion , plus we have guaranteed up to $306 billion in residential and commercial real estate and related securities. So, the Government has an equity stake in another ruined bank and is on the hook for $306B more.
Why are we investing more money in an instituion that has shown such absolutely foolish and short-sighted behavior? Just this Sunday, the New York Times published another increment in the unfolding saga of imprudent (nonexistent) risk management at Citi.
At least Citi is forced to lower the dividend (but not eliminate it). We can hope that some pressure is put on management to use the capital infusion to make loans, to keep the financial system working. Of course, that hope is predicated on the assumption that the best way out of the crisis is to get banks to make more loans. Wasn't that the problem to begin with?
The Government's aim is supposedly to bring stability to the overall financial system. In an era of networked information, why are we trying to fix a complex financial system with such blunt measures as multi-billion dollar bailouts of lending institutions? This is like trying to repair your iPod with a sledgehammer.
Sources:
Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup
http://www.federalreserve.gov/newsevents/press/bcreg/20081123a.htm
Citigroup Saw No Red Flags Even as It Made Bolder Bets
By Eric Dash and Julie Creswell
http://www.nytimes.com/2008/11/23/business/23citi.html?_r=2&adxnnl=1&oref=slogin&ref=business&adxnnlx=1227553311-J4zSCQ6bXQ0PSrAM3tFLgQ
Showing posts with label risk. Show all posts
Showing posts with label risk. Show all posts
Monday, November 24, 2008
Sunday, November 23, 2008
Rescue of Citigroup -- More Turbulence in the System
Bad news impacts markets, and so does uncertainty. If you do not know the rules of the market, or who the major players are going to be, you cannot form prudent estimates of the future of the market.
According to the latest report from the NY Times, it is too early to tell exactly how the bailout of Citigroup will be structured, but some level of assumption of troubled Citi assets will apparently be involved. Didn't Secretary Paulson decide that such purchases were not the best way to expend funds from the TARP? The source of the funds has reportedly not yet been decided, but the principle is the same.
If the Citi deal results in a general approach that can be applied to other institutions, that might help to remove some of the uncertainty, but in the face of such policy turbulence it will be hard to build confidence.
Source: http://www.nytimes.com/2008/11/24/business/24citibank.html?_r=1&ref=business
According to the latest report from the NY Times, it is too early to tell exactly how the bailout of Citigroup will be structured, but some level of assumption of troubled Citi assets will apparently be involved. Didn't Secretary Paulson decide that such purchases were not the best way to expend funds from the TARP? The source of the funds has reportedly not yet been decided, but the principle is the same.
If the Citi deal results in a general approach that can be applied to other institutions, that might help to remove some of the uncertainty, but in the face of such policy turbulence it will be hard to build confidence.
Source: http://www.nytimes.com/2008/11/24/business/24citibank.html?_r=1&ref=business
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