Update: Well this post is already obsolete, but we stand by our criticism. We tax payers should not subsidize Citigroup shareholders.
Tonight (November 23), The Wall Street Journal reports in Bailout Talks Accelerate for Ailing Citigroup that the government is negotiating to be the residual claimant of a separate entity that would house Citigroup’s worst assets and derivative bets.
Citigroup could lose up to $50,000,000,000, and then the government would absorb the losses. It is kind of like buying flood or hurricane insurance after the flood or hurricane. (Seems kind of silly and like a massive subsidization of a lot of bad decisions.)
If that’s the case, wouldn’t that guarantee make tax payers the residual claimants of the entire entity?
Let’s rephrase our question in another way: in negotiations between (1) interested and profit-motivated Citigroup bankers and (2) less interested government appointees and federal civil servants with no claims on the assets, does the reader believe the expected losses–or, possibly the privately-known, undocumented, extant losses– will be greater or less than $50,000,000,000?
So, shouldn’t the tax payers own the entire entity?
Unfortunately, it’s not clear whether the government will get any equity share of the “good” bank.
Now the reader might argue that it would be difficult to lose $50,000,000,000 on $2,000,000,000,000 (that’s trillion) of assets; so, there’s really not much subsidizin’ goin’ on.
First, if that were the case, then there really wouldn’t be any need for a subsidy would there?
Second, it turns out that the $2,000,000,000,000 is a bit on the low side. Citigroup has more than $3,000,000,000,000 of assets when its off-balance sheet assets are included.
By the way, that increase of a $1,000,000,000,000? The article mentions that $667,000,000 of it are in mortgage-related securities. (They’re probably of the highest caliber because, you know, everyone tries to hide their most valuable assets in off-balance sheet accounts.)
We love the sentence: “Citigroup has tried repeatedly to rid itself of its exposure to those assets.” Do ya think?
We starting a new convention of writing all the trailing zeroes. We think it communicates the size of the stakes more clearly. Things like three-digit ”billions” and one-digit “trillions” are so abstract, but nine or twelve zeroes mean something. We do wish that the bureaucrats within the government and with firms would starting following suit.
As we wrote on Friday, if US tax payers are supposed to cover the downside, they should get the upside, too. This isn’t like deposit insurance, where there was a prior contract and exchange of premiums for protection. This is the subsidization of mistakes.
Guaranteeing the bad bank is bad industrial policy, and it would accelerate massive mergers (in attempts to become too big too fail) and exacerbate moral hazard as there would be no downside to failure.
We say: Nationalize Citi. Wipe out the ownership interest of all existing shareholders, except non-executive employees with restricted stock, and let them retain the same ownership interest in a new entity when it is privatized.
Do it as a lesson to other banks to find creative ways to improve the creditworthiness of their individual institutions. That’s preferable to pledging much of our nation’s current and future wealth to a small subset of its citizens, who happened to own bank stocks in 2008.
Without trying to be melodramatic, we ask: who’s children and grandchildren should pay for and subsidize Citi’s errors?
