Hey Gov, Where’s MY Bailout?

I freely admit to being so inept at financial matters I haven’t even balanced my own checkbook since the 1990s. But after reviewing all the expert analysis and opinion I could find regarding the government’s latest $300 billion giveaway, I wonder if Citigroup’s management understands much more. Otherwise, how did they dig themselves such a deep hole?

From everything I’ve been reading, it looks like Citigroup irresponsibly overextended itself–a grievous error whose consequences have been shifted to the American taxpayers. I’m not suggesting the government should leave Citigroup to bankruptcy, but I do find it painfully ironic that the same lobbyists who convinced Congress to enforce personal responsibility for debts-incurred by tightening up the bankruptcy code in 2005 have now flipped the coin in their favor again. Hello kettle, you’re black.

So what’s this bailout mean? For one, it will be harder to justify rejecting Detroit’s cry for help, though it’s doubtful that would have happened anyway. Saving the auto industry with $25-50 billion looks a relative deal compared to what Citigroup will be getting. Lobbyists for the home-building industry are already begging for their own $250 billion handout.

According to Justin Rood at ABC, receiving hundreds of billions of bailout money does not mean Citigroup (or AIG and others) will be canceling hundreds of millions worth of sports sponsorships. Considering this reality, we really should get to re-name the home of the NY Mets “US Taxpayer Field” instead of the planned “Citi Field.”

It has actually been difficult to find anyone with anything good to say about this bailout package. The stock market has had a small rally this morning, but does anyone really expect that to last? Finance experts and economists across the board are taking fairly negative views of the latest news.

Read a round up of what they’re saying after the jump. If anyone can find an expert who thinks the Citigroup deal represents an unqualified success, please send the link to blab@unattributable.com.

Robert Reich, Clinton’s Secretary of Labor and a member of Obama’s economic advisory team, writes on his personal blog that the latest Citigroup bailout represents a score for corporate interests at the expense of the common taxpayer:

If you had any doubt at all about the primacy of Wall Street over Main Street; the utter lack of transparency behind the biggest government giveaway in history to financial executives, and their shareholders, directors, and creditors; and the intimate connections the lie between Administrations — both Republican and Democratic — and the heavyweights on Wall Street, your doubts should be laid to rest. Today it was decided the government will guarantee more than $300 billion of troubled mortgages and other assets of Citigroup under a federal plan to stabilize the lender after its stock fell 60 percent last week. The company will also will get a $20 billion cash infusion from the Treasury Department, adding to the $25 billion the bank received last month under the Troubled Asset Relief Program.

This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.

Meanwhile, more than a million workers in the automobile industry, along with six million mortgagees, and a millions of Americans who depend on small businesses and retailers for paychecks, are getting nothing at all.

Portfolio’s Felix Salmon agrees the average American is getting the shaft with this deal:

If you want an idea of just how bad Citigroup’s position was on Friday, just take a look at the term sheet of the deal announced on Sunday night. After the $309 billion of toxic assets have been ring-fenced, Citigroup will take the first $29 billion of losses. Citi will continue to take 10% of the losses after that, too, but the lion’s share of the second $5 billion of losses will be taken by Treasury, using TARP funds. In return for taking on that $5 billion of contingent losses, Treasury will receive $4 billion of preferred stock, paying 8% interest per year, up front.

In other words, the deal is essentially pricing in the expectation that Citi’s toxic assets are worth much less than Citi has valued them at — so much less, indeed, that Treasury (a/k/a the taxpayer) is probably going to have to pay out the full $5 billion, even after Citi has lost a further $30 billion over and above the write-downs it’s taken already.

Paul Krugman offers a very succint condemnation:

A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more. Amazing how much damage the lame ducks can do in the time remaining.

In the WSJ, Heidi Moore questions the generous terms of the bailout, writing that they violate government guidelines for interventions:

It is the kind of juicy, complication-free bailout that any Wall Street executives would die for. It also breaks a number of the guidelines the government set for such interventions. For instance, nowhere in Treasury’s statements or actions was there any discussion of “moral hazard,” the punishment of risk-taking that has come to be known as the Paulson Doctrine, even though Citigroup took more risk, in pure monetary terms, than did Lehman Brothers Holdings or Bear Stearns combined….

Interestingly, Washington lobbying is one investment on which Citigroup may actually be making money. The company spent a little more than $8 million on lobbying last year and $6 million in 2008. That’s a pretty good down payment on a $350 billion bailout.

Yves Smith writes on naked capitalism that she expects this bailout signals an inevitability that another one is coming for Detroit:

Note key element of the deal is that the Federal government will guarantee $300 billion of Citi assets, a much bigger number than had been leaked earlier, with a rather convoluted loss-sharing arrangement, but the bottom line is that Citi is at risk for at most $40 billion. Citi also gets a $20 billion equity injection, on slightly more onerous terms than the initial TARP investments, but still more favorable than Warren Buffett’s investment in Goldman. Oh, and it appears there will be NO management changes.

I do not see how GM can be denied a rescue now (not that that outcome is really in doubt, merely how much pain will be inflicted on management and the UAW).

The Economist views the Citigroup deal as a kind of precedent, and projects more bank bailouts will follow:

With markets for mortgage-related securities feeling renewed stress, the authorities have apparently now accepted the need to deal with the tinder of illiquid securities on banks’ books. America’s Treasury will face pressure to offer similar schemes to other banks, not least because singling out Citi for special treatment puts them at a competitive disadvantage. But it may yet have to go further still. The rescue does not take the assets off Citigroup’s balance-sheet in the same way that the Swiss transferred $60 billion in hard-to-sell securities from UBS to a fund owned by the central bank. A system-wide bad bank could well be the next stage in the effort to douse the flames.

John Jansen, who describes himself as a “30-year veteran of the bond market,” is bracing himself for the global reaction:

Tokyo is closed so there is no US Treasury trading this evening. We will have to wait for EUrope to arrive to get a reaction.

Stocks are higher. That also seems ludicrous. I do not care what they call this but Citibank is effectively acknowleding that they did not have the resources to survive alone without government assistance. I did not use the words bankrupt or insolvent.

I think that when participants think about this soberly they will be very disturbed and  I am saddened to say that the markets will line up one of the remaining survivors for a pre holiday turkey shoot. It has been the history of this rolling crisis since August 2007 that the worst outcome ensues. The market will seek another prey and relentlessly pursue it.

For Kevin Drum at Mother Jones, the terms of the bailout raise unsettling questions:

Up until a couple of days ago, Citigroup was insisting that they were very adequately capitalized, thankyouverymuch. But tonight they accepted $20 billion in fresh capital. So either (a) their position deteriorated a lot in the past 48 hours, (b) the government’s terms were so spectacularly generous that they figured they’d be stupid to turn it down, (c) Paulson insisted they take it even though they didn’t want it, or (d) they’ve been lying. Which do you think it is?