the government here seems to be coming up with ever-more-obscure forms of capital which it can inject into the banks.
It seems to me that all the seemingly inexplicable twists and turns of the banking bailouts can be reduced to this one sentence. For the next round, I'm proposing a new instrument to be known as the "Squibble", which will have an unknown and unknowable face value based on a secret random numbers table, a payout schedule to be determined by spinning a big wheel installed in the company's headquarter lobby for that purpose, and a structure to be arbitrated under the financial laws of a country picked at random every quarter. This will prevent anyone from definitely stating that the banks are undercapitalized. It will also provide financial journalists with some much-needed entertainement.
I think that Andrew Leonard at Salon has it right when he theorizes that the idea is to get people used to the idea of "nationalization" of Citi (how is that different from what happened to IndyMac?) in order to prevent a market panic.
http://www.salon.com/tech/htww/2009/02/23/citigroup_treasury_kabuki_dance/index.html
What do you think of Tyler Cowen's item the other day on Citibank nationalization?
http://www.marginalrevolution.com/marginalrevolution/2009/02/banks-vs-bank-holding-companies.html
Basically, that if you nationalized Citibank, Citigroup is also dead and needs to be nationalized. And that it's just too large for the government to run, and too connected to everyone else to be allowed to fail.
A lot of this fooling around, multiple plans with very little transparency or predictability, makes sense if the administration has no good solution and knows there is no good solution. They are just playing for time and hoping the economy turns some kind of corner.
On the other hand, wouldn't it spoil the game if you substituted comprehensible instruments for incomprehensible assets? The whole point seems to be avoiding setting an actual price on anything. That would almost certainly make us feel bad.
If anyone here has private capital or can get a lot of private capital. Start a bank, don't make too bad loans, and you will make a lot of money right now. Because so many businesses are pushing the money button right now you could charge so much. Oh there is so much to be made right now and the current crop screwed up so much they just can't do it. Seriously if I had enough cash I'd start the paperwork and by June I'd be doing business.
too many bad loans.
So, how does it make sense to convert the government's preferred shares to common shares at a common share price so high that the government ends up with only somewhere between 25 and 40 percent of the common shares? Why shouldn't the common shares of Citigroup be diluted in proportion to the amount of money the government has put in? Or is the government keeping some of the preferred shares?
@ben
And by July you would be competing against undead preprivatized banks and be driven into the ground competing against their seemingly unlimited access to near free money.
Your new bank wouldn't be considered "too big to fail" and therefore would.
I like how the excerpt of the announcement that Salmons tries to parse has a 20th-grade comprehension level. That's consistent with a JD and an LLM in corporate finance.
Seems to me a lot of what the administration's been doing is consistent with lacking any solid idea of what to do. They don't want to admit that, and want to keep their options open until events change or someone comes up with a real plan.
If there were a way to appropriate the enormous sum of money needed to fill the hole of losses, and not have that fact become common knowledge, it would have been done by now. The public either finally recognises a vast loss as their paper assets are allowed to deflate to their inherent value, or the government must come up with at least $3 trillion (and almost certainly more) from somewhere to make them whole (not possible in a real value sense).
Salmon's excerpt makes no sense. How would converting from preferred to common give the institutions more capital? They would already have received the capital through the purchase of preferred equity. The conversion would just convert it's type (and give the government voting rights...)
Also, the last sentence seems to state that the shares are callable by the institutions themselves rather than the owners.
Jayson-
Ahh the fear of the government muppet bank. Really? Those banks you just mentioned are going to be forced, forced mind you, to do many unbank things. Like pay off the massive debt load that makes them insolvent now. You think they're competing? They're hiding, all that "free money" whats free about it? Congressional approval or even if all Geithner had to do was give the word, do you think they'd get that money if there emerged a few viable alternatives? Congress and Geithner would shake your hand while slicing their throat. And everybody else would be happy because the "crisis has ended".
You'll know when the crisis has ended when a bunch of people go to jail.
Bank deposits are only about a third of Citigroup's liabilities. The government has placed a guarantee on interbank lending and money market funds, so their commercial paper and debts to other banks would have to be left alone. Per the Federal Reserve, the sum of interbank lending a financial commercial paper outstanding for all firms is somewhere around $1.3 trillion; Citigroup's liabilities would be some fraction of that (20%?) There is (I believe, a modest sum (10 figures) of FDIC guaranteed bonds outstanding). It seems to me that there are a large pool of residual stakeholders (bondholders, &c) to render into equity holders. Dr. Zingales has been promoting such a plan for months. Why do you suppose nothing has been prepared?
It does seem fascinating that the government should be so bent on taking a system that was brought down by ever-more-complex and untransparent financial instruments nobody understands, and shoring it up with with ever-more-complex and untransparent forms of money that nobody understands.
It sounds as if the government is expected to convert about $30 billion of preferred shares at around $3.75 per common share, and sovereign wealth funds and others would similarly convert another $30 billion so the government ends up with less than fifty percent of the common shares. Is this a good deal for the government? Does it accomplish enough?
BAILOUT SURFIN U.S.A.
(Surfin U.S.A., the Beachboys)
WilliamBanzai7 and the Bailout Boys
Singalong link: http://www.youtube.com/watch?v=k1FaflUn4Co
Listen everyone there's a Bailout ocean
Across the U.S.A.
Greedy bankers n CEOs are surfin'
Like its gold rush Californ-i-a
You'd seem 'em wearing their Hermes ties
Bespoke brogues too
A big flashy French jet will do
BAILOUT U.S.A.
You'd catch 'em bailout surfin' at CITI
(Inside outside U.S.A.)
AIG's bottomless line
(Inside outside U.S.A.)
Detroit City and Charlotte
(Inside outside U.S.A.)
Why won't someone draw a line
(Inside outside U.S.A.)
All over East Side Manhattan
(Inside outside U.S.A.)
Goin down the faux capitalist way
(Inside outside)
Everybody's gone bailout surfin'
BAILOUT U.S.A.
We'll all be planning out a TARP get away
We're gonna take real soon
We're waxing down our slippery surfboards
We can't wait for Dr Doom
We'll all be gone for the summer
We're on a Ponzi safari to stay
Tell the shareholders and taxpayers we're bailout surfin'
BAILOUT U.S.A.
Everybody's gone bailout surfin'
BAILOUT U.S.A.
Everybody's gone bailout surfin'
BAILOUT U.S.A