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Thursday January 15, 2009 - 17:21:15 GMT
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Forex Blog Bernanke Call for More Bank Capital from TARP...Citi Tanks

Bernanke Call for More Bank Capital from TARP...Citi Tanks


If only subprime was contained.  If only the economy would avoid a recession.  If only the consumer would stop being so negative.  If only banks would use TARP DrainO fund to get back to the business of lending.  If only Congress would get it that a trillion dollar fiscal stimuli and budget deficits are necessary.  If only Fed’s near tripling of its balance sheet – mostly involving extending credit to banks like Citi – would get banks lending to each other much less households and firms.  If only Lehman’s Fuld accepted the low, now high, offers for his firm.  If only AIG Financial Products was not a regulatory Ponzi scheme that made Madoff envious.  If only.


My point is everything thrown at the crisis and the crisis is still here and not going away.  Who said the US is no Japan when it comes to losing a decade of growth and prosperity?  Our officials know what to do we are told.  Well the truth is they don’t know if they know what to do.


Citigroup is selling its crown jewel – Smith Barney.  This is a sign of a bank in trouble and the collapse in the share price since the story broke is no coincidence.  Indeed Bernanke’s LSE speech seemed to be aimed at convincing Congress to approve the second TARP tranche and the Obama administration to use some of it to guess what…recapitalize banks and buy toxic assets (remember that was the original intention and Bernanke testified on why investing capital directly into the banks would not work).  Surely Citi’s predicament was in Bernanke’s mind when he spoke Tuesday.  Indeed not knowing if more TARP money can go to banks to boost capital amid mounting writedowns explains why Smith Barney is being sold.  Citicards is probably next. 


I am not a bank analyst and surely not an equity analyst.  However, I simply don’t understand why the US government can inject (lend, give, donate) $45bln into Citi and not own it – every common share.   UK government bought GBP20bln in RBS’ rights offer (capital raising effort) in late November and it got 59% of the bank and is calling the shots (it is selling a major stake in a Chinese bank).  Preferred stock is not ownership.  If Bernanke wants other banks to take Citi as a counterparty for anything beyond a few days or weeks, then it would help to have the market know that the USA is the majority shareholder…fully backed by Uncle Sam.  The only explanation for this insanity is ideology…taboo against the government owning common stock and board control over a “private” firm…admission that capitalism is finished.  Get over it.  Do what the Swedish government did – take them over and sell the worthy bits and hold onto the bad bits until asset prices recover and get on with the business of lending.  Waiting for private capital is pointless – it ain’t coming. 


Sadly unlimited liquidity is answer to insolvency and this is the story of the policy response over the last nearly year and a half.   


The Fed will not be able to adequately restore credit creation outside the current vacancy left by the largest banks – there are not enough of everything else like GSEs, FHLB’s, healthy and small regional banks, and consumer and small business finance firms.  A nationalized banking system is the only short-tern option to replace the broken private banking system.  If ideology remains in the way, then we should all prepare for a lost decade where roads to everywhere get built and every neighborhood gets a library and unemployment benefits get extended to several years. 


If Citi is watching its consumer credit assets get destroyed at 7.2% unemployment rate, the “good” banks will be looking pretty stretched when the unemployment rate hits 10%.  The sooner a Nordic response is implemented the sooner banks can play a role in the recovery and the lost decade can become the lost five years.


David Gilmore


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