US Considers a 40% Ownership of Citigroup, Diluting the Common Shares

Citigroup is the prime candidate for receivership.

The only reason to continue this charade, other than to inspire us with confidence in the opaque duplicity of this Administration, is to preserve the shareholders who would almost certainly be wiped out, and the bondholders who would get a high and tight haircut, in the kind of restructuring that Citigroup requires as an insolvent institution.

Larry Summers and Tim Geithner are promoting this crony capitalist approach to preserve the wealth of a few at the expense of the many.

Wall Street Journal
U.S. Eyes Large Stake in Citi
By David Enrich and Monica Langley
February 23, 2009

Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of Shares

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions. The potential move at Citigroup would give the government its biggest ownership of a financial-services company since the September bailout of insurer American International Group Inc., which left taxpayers with an 80% stake.

The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

Bank of America Corp. said Sunday that it isn't discussing a larger ownership stake for the government. "There are no talks right now over that issue," said Bank of America spokesman Robert Stickler. "We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it...."

Why Is There No Reform?

First the reform of the financial system, and then the stimulus can find a footing. The existing level of debt obligations are too large and unproductive of cash flows to service.

The debt must be written down and the currency devalued to increase the wages of debt payers relative to them. This is an unacceptable alternative at the moment because politically the debt holders and the big money center banks are running the system. The parallels to Japan are remarkable, where the inability to realize their losses caused an entire country to lose its way for a decade.

Until we break up the big money center banks into their parts, and write off their debt obligations, we are pouring money into a Wall Street sinkhole of corruption. This will involve the reinstatement of Glass-Steagalls.

"The United States should emerge from the economic crisis with a two-part financial system that places tighter restrictions on banks, says former Federal Reserve chairman Paul Volcker.

To prevent another banking crisis from undermining the economy, the U.S. financial system must turn back the clock to a time when commercial banks were the core of the credit system, said Mr. Volcker...

The system that Mr. Volcker envisions "looks more like the Canadian system than it does like the American system," he told a Toronto audience last night..."

And there will be no recovery, only increasing pain, until we break the pattern.

“The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice…

…amounts to swapping taxpayers’ ‘cash for trash,’ Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. ‘You shouldn't chase good money after bad. We’re talking about a national debt that’s very hard to manage.'" Joseph Stiglitz

What is the reason then that we are following a path that will fail? Are those who know what is happening afraid to admit it, to tell the truth? Is it simple looting until the harsh medicine is taken? Is it the cowardice of the Democrats? Is it the obstructionism of old line thinkers like Larry Summers and Tim Geithner?

It is most probable that there are still just too many of those who say, "Why can't things just go on as they have done before?" The awareness that the game has changed will penetrate the public consciousness slowly.

It's over. We cannot keep trying to rebuild the unsustainable, because eventually the great forces of probability will crush us and destroy us, all that we have.

But until the people are ready for change, to accept that reforms are necessary, the Administration must tread lightly. As de Tocqueville said, "The most dangerous moment for bad government is when it begins to reform."

Only time will tell. Until then you know what to do.

P.S. An early responder said, "I presume that you mean buying gold" about 'you know what to do.' And then they laid out the reasons and ways in which the government would confiscate it.

Sorry to have been cryptic, and its my fault. Let me give you the more straightforward answer that I gave to them.

"Actually it's "need little, want less, and love more" which is at the bottom of he blog.

But if it does become the kind of government that blatantly confiscates wealth through whatever means, where will you hide? First they came for gold...

Ok don't buy gold. What you will buy? Whatever wealth you do have will be taken eventually. There are no bystanders if a government turns to lawlessness.

Better to get your head screwed on straight now and realize it is not about gold, it is not about the right investments, it is about freedom."

Lloyd's Bank May Fail, Be Nationalized

This is Lloyd's Bank, one of Britain's largest, but it is not the same as Lloyd's of London, now known as Lloyd's International, the famous insurance firm.


Government may have to take full control of Lloyds
By James Kirkup
6:16PM GMT 13 Feb 2009

Ministers have been warned they will be forced to take full control of Lloyds Banking Group after its shares fell by a third amid huge losses.

Britain's biggest high street bank shocked the City by announcing almost £11 billion of losses last year, more than twice what banking analysts had expected.

The Government already holds a 43 per cent stake in Lloyds after injecting £17 billion into the bank last year.

The bank's shares closed down 32.5 per cent last night. The fall leaves taxpayers with a paper loss of nearly £10 billion on the government's investment.

Lloyds Banking Group was formed by the merger of Lloyds TSB and HBOS last year. In a government-brokered deal, Lloyds agreed to rescue the stricken HBOS after it came close to collapse.

That deal came under fresh scrutiny as it emerged that most of the enlarged bank's losses - some £7 billion - came from HBOS's lending business.

The HBOS loss is more than twice what the bank itself had forecast for 2008 and raised questions about Lloyds' financial health after the merger.

Eric Daniels, the Lloyds chief executive this week admitted to MPs that his bank had done only a fraction of normal "due diligence" analysis of HBOS before agreeing to buy it.

The loss also sparked predictions that the state will eventually have to buy the bank outright.

George Osborne, the Tory shadow chancellor, expressed fears for Lloyds' survival.

He said: "The scale of the losses at HBOS are staggering and now risk dragging down Lloyds too. The taxpayer money pumped in through the first bailout in October is all but wiped out by these losses."

Vince Cable, the Liberal Democrat Treasury spokesman, said Lloyds may no longer be viable as private company.

He said: "It looks increasingly as if Lloyds is being dragged under by the dead weight of HBOS. It looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalization."

Mr Daniels insisted that his bank's long term prospects remain healthy.

He said: "Whilst we recognise that the short term outlook is more challenging Lloyds Banking Group has the largest UK financial services franchise with excellent long-term earnings potential."

When Will the Wall Street Money Center Banks Be Nationalized?

"Most of the big banks need to be put into some form of bankruptcy and recapitalized, and I think everybody understands that." Ken Rogoff

The major US money center banks will be nationalized. The only questions are when and how.

When is difficult. Rumours abound. A common rumour is for a bank holiday sometime around the President's day holiday in the US on February 16, or later in February.

This may be too early, but no matter. It is coming.

Its the how that is more interesting in terms of meaningful speculation and the impact on any intended recovery.

How will we nationalize the banks? How far will nationalization have to go?

With regard to nationalization the bank toadies and spin doctors say things like "Would you want the government running the banks?" Well, we think this is the usual deceptive rhetoric we get these days instead of serious discussion and hard news.

In a nationalization it is highly unlikely that the government will want to 'run the banks,' although it is hard to see how they could do a job that would be much worse than the overpaid princes of Wall Street who now stand exposed as having ruined the national economy through incredible dereliction of any standard of sound and responsible management.

Rather, there is a range the process which will be called nationalization.

If we hold the current course at some point the government will place enough capital and hold enough preferred stock in the banks to effectively own them, but passively. The problem with that is the mismanagement and losses will continue to deepen, and the government (public) will own the acid core of thirty years of white collar crime, burning a hole in the fabric of the national economy and monetary system.

It will be a financial Vietnam, with Larry Summers playing Robert McNamara and Obama as LBJ. It will be a cascade of corruption and deception and will tear the country apart.

At the other end of the nationalization spectrum, he government will 'take over' the bad banks as they did in the S&L crisis, and restructure them.

There are between five to ten banks in the country that are hopelessly insolvent through mismanagement bordering on fraud. At the moment they are sucking up capital at a ferocious rate through bailouts, and crowding out constructive uses of capital.

They cannot precipitously fail, but they can and should be taken into receivership by the FDIC, their books opened, their assets sold, debts written off, and the remains either buried peacefully or allowed to emerge as new banks with different management if there is enough left to make it respectable.

Who will lend? The regional banks. They are the bulwark of the banking system. It is in the money center banks where the contagion continually spawns.

To attempt to maintain the status quo is no longer possible, no matter how much money and influence and political power that the ten Wall Street banks may wield in Washington.

The shareholders will be effectively zeroed out as they should, the bondholders handed a steep haircut on the order of 40%, the creditors paid 70 cents on the dollar, if that.

Credit default swaps and other bets will be dealt with harshly. If a bank has a heavy interaction with a money center bank in Credit Default Swaps or other 'weapons of mass destruction' to the point where it places it insolvent guess what, it can join the restructuring club.

The depositors will be, MUST be, kept whole, to almost 100% on all private non-corporate deposits. Pensions must be kept whole above and beyond the limits of the Pension Benefit Guaranty Corporation.

If the Congress, and this Administration, continued to bend the fate of this country to the bankers of Wall Street there will come a time when the people will simply say 'enough.' Of this we no longer have any doubt. And the pain from that will be much greater than the short term pain we will receive in restructuring the system now.

And it will be painful. But necessary. We do not have a cold. We do not have the flu or the sniffles, a temporary setback. We have a serious gangrenous infection that must be dealt with before it takes down the body politic.

We can choose to linger, to waste away in our corruption as Japan has done. But we do not think that the US public will accept the chains of servitude gracefully. They are too heavily equipped with options, thanks to the foresight of the founding fathers.

If this seems to harsh, too black and white, too unthinkable, here is a recent interview from Ken Rogoff with BBC Hardtalk to help punctuate the seriousness of the situation.

The simple truth is we no longer have any choice, any options. We elected the Obama Administration to reform Washington and the economic and political system in this country.

Ok guys. Reform.

The deeper we go down this rabbit hole the more difficult it will be to return to the light of day.

You may wish to take the time to listen to Ken Rogoff in this BBC interview on Hardtalk. Mr. Rogoff is a noted economist who is completing an intense study of financial crises.

We obviously do not agree with everything Ken Rogoff says. That would be improbable.

He starts from the assumption that we have free trade in the world today and should maintain it, whereas we believe that free trade went out the window with the devaluation and pegging of the Chinese renminbi in the 1990's, if not before that with aggressive Asian mercantilism supported by US multinationals and Wal-Mart.

But other than that, it sounds like the standard fare served at Le Café Américain for the past two years at least, and it is a happy and humbling experience to see someone express similar ideas with such gravitas.

It is clearly stated, it is well thought, and it is absolutely essential. It is what a substantive news program looks and sounds like. We rarely get anything like it except on the Web and on Public Television.

Rogoff on BBC HardTalk

The Banks Are Making an Offer They Think that the People Cannot Refuse

Better we tie off the bleeding wound now, nationalize the banks, and start again with an honest financial system, than pay one more cent of blackmail tribute to this den of thieves.

They would use our own money to buy us.


Bloomberg
Stiglitz Criticizes Bad Bank Plan as Swapping ‘Cash for Trash’
By Simon Kennedy

Feb. 1 (Bloomberg) -- Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.

Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week.

That amounts to swapping taxpayers’ “cash for trash,” Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. “You shouldn’t chase good money after bad. We’re talking about a national debt that’s very hard to manage.”

Stiglitz, a professor at Columbia University in New York and a former adviser to President Bill Clinton, says the plan would leave taxpayers paying for years of excess lending by banks. It would also deprive the government of money that would have been better spent shoring up Social Security, he said.

Whether a bad bank would accelerate an end to the financial crisis split delegates attending the Davos talks. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said such an operation would help if “executed well.” Billionaire investor George Soros said in an interview that “it’s not the measure that would turn the situation around and enable banks to lend.”

Obama Plan

Obama said yesterday he’s readying a plan to unlock credit markets and lower mortgage rates. Under the initiative, the government would buy some tainted securities and insure the banks against losses on the rest.

“Soon my Treasury secretary, Timothy Geithner, will announce a new strategy for reviving our financial system that gets credit flowing to businesses and families,” Obama said in his weekly radio address.

Stiglitz drew criticism from panel participant Angel Gurria, head of the Organization for Economic Cooperation and Development, who says a bad bank is necessary for lending to resume.

“I agree about the moral, ethical fallout, but you’ve got to face the music and someone has to take the loss,” said Gurria, Mexico’s former finance minister. “It’s the only way to jumpstart the economy.” (Blackmail. Injustice. Infamy - Jesse)

Bank losses worldwide from toxic U.S.-originated assets may double to $2.2 trillion, the International Monetary Fund said in a report released Jan. 28.

John Monks, general secretary of the European Trade Union Confederation, told the same audience that governments are getting “close to straining the patience of the public and voters” by repeatedly extending lifelines to banks.

Philippines President Gloria Arroyo urged Obama to make a quick decision on his plan.

“We want Americans to do something,” she said at the session, which was called “Rebooting the Global Economy.” “We can discuss what to do but the worst thing is to do nothing.”