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 Fedâ€™s near tripling of its balance sheet â€“ mostly
involving extending credit to banks like Citi â€“ would get banks lending to each
other much less households and firms. If only Lehmanâ€™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 donâ€™t know if they know what to do.
Citigroup is selling its
crown jewel â€“ 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 Bernankeâ€™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 whatâ€¦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 Citiâ€™s predicament was in
Bernankeâ€™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 donâ€™t understand why the US government can inject (lend, give, donate) $45bln
into Citi and not own it â€“ every common share. UK government bought GBP20bln in RBSâ€™ 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 shareholderâ€¦fully backed by Uncle Sam. The only explanation for this insanity is ideologyâ€¦taboo against
the government owning common stock and board control over a â€śprivateâ€ť
firmâ€¦admission that capitalism is finished. Get over it. Do what
the Swedish government did â€“ 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 â€“ it ainâ€™t
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 â€“ there are not enough of everything else like GSEs, FHLBâ€™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 â€śgoodâ€ť
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.
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