"Banks vs. bank holding companies
I continue to see many bloggers suggesting that bank nationalization is a fait accompli and that anyone who isn't on board right now is in denial. It is far less common that bloggers give serious consideration to the difference between a bank and a bank holding company. In fact I usually don't see that critical distinction mentioned at all.
If the government nationalized (or "pre-privatized"...whatever) Citibank, Citicorp would go bankrupt and we would be back at a Lehman Brothers scenario again. So the government would have to take over Citicorp too. That goes way, way beyond anything the Swedes did or for that matter it goes well beyond WaMu. Shall I turn the mike over to Wikipedia?
Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate Travelers Group on April 7, 1998. Citigroup Inc. has the world's largest financial services network, spanning 107 countries with approximately 12,000 offices worldwide. The company employs approximately 300,000 staff around the world, and holds over 200 million customer accounts in more than 100 countries. It is the world's largest bank by revenues as of 2008.
You can read about Travelers Group here.
Thinking through the implications of said nationalization for the counterparty positions of a bank holding company, or its role in the commercial paper market, is mind-boggling. Neither the FDIC (which generally does an OK job) nor any other government agency is in any way prepared for this kind of management task. It has very little to do with standard FDIC procedures. All I hear about is "bank" this, "bank" that, etc. but again little or no talk of the bank holding company.
Of course this is only a problem for the five or six biggest financial institutions but those are precisely the issue at hand.
On nationalization, Bernanke is very much on the ball. He said this:
Federal Reserve Chairman Ben Bernanke said this week, is “that you tend to lose the franchise value, that the counterparties and others don’t want to deal with you because they don’t know your future.”
I usually don't like to speak so negatively, but it's the advocates of nationalization who are in denial. There is a belief that Obama, Bernanke, and/or Geithner are somehow spineless or in the pocket of the banking lobby. The sadder truth is that they understand just how ill-prepared the U.S. government, or the Fed, would be to run such an enterprise.
I do understand that if all the water runs out of the sink, as it may, nationalization will come in some form or another, however disastrous that may be. But the desire to postpone it until the last possible moment, and the desire to pursue even a small chance of avoiding nationalization, are signs of wisdom, not cowardice.
When you read about nationalization, and see only the word "bank," and not "bank holding company," be very afraid of the advice on tap.
Addendum: Here is a different but related piece on banks vs. bank holding companies.
Posted by Tyler Cowen on February 21, 2009 at 07:43 AM in Economics | Permalink
Me:This is amazing. Many of us have been urging a version of the Swedish plan since September. At that time, I had no idea if or how many banks might have to be seized. No one was giddily crying for nationalization as an end in itself or for the hell of it. The point was to put in place a modus operandi that could seize the major banks if it were to be necessary. That's what Sweden did. The argument was that is was a plan, model, map, that could help us maneuver through this crisis, just as the Swedish Plan was influenced by the RTC. The alternatives, doing nothing, for those of us worried about Fisher's Debt-Deflation, seemed a poor choice, as did a hybrid government/banking sector plan, which would have any number of serious problems. To see if those of us who were worried about the Hybrid Model were even near correct, simply read the GAO report on TARP.
We will obviously need to adapt the Swedish Plan to our needs. No one was claiming that we have to follow their plan blindly. That would be silly. We also saw that simply using normal FDIC swooping procedures might not work in the case of the big banks, which is why you either had to create a particular FDIC entity for these big banks or, better yet, set up a separate procedure from them. In other words, a version of the Swedish Plan.
I'm already taking up to much space, but you're also ignoring the criticisms of the alternatives, which I believe have been spot on. In seeing the flaws of TARP in its various guises beforehand, we also feel that our fears of a costly and messy response have largely come true, although they have done some good.
Finally, this report via Real Time Economics makes some good points:
http://www.clevelandfed.org/Research/commentary/2009/0209.cfm?DCS.pr=20090212
Posted by: Don the libertarian Democrat at Feb 21, 2009 12:02:15 PM
And, possibly not posted:
(For more Reuters DEALTALKs, click [DEALTALK/])
By Paritosh Bansal
NEW YORK, Jan 12 (Reuters) - Citigroup Inc (C.N) may explore further asset sales after divesting its Smith Barney retail brokerage unit to Morgan Stanley (MS.N), but the banking giant is likely to have a tough time finding buyers.
Chief Executive Vikram Pandit is trying to shed hundreds of billions of dollars of assets and reduce risk after Citigroup suffered $20.3 billion of losses in the year ended Sept. 30. The bank is expected to post another loss for the 2008 fourth quarter when it reports results this month.
Citigroup has considered selling its Banamex Mexican banking unit and Primerica Financial Services, people close to the matter have said. The Wall Street Journal reported on Monday that CitiFinancial, international retail-brokerage operations and the private-label credit-card businesses may also be put on the block. The bank declined to comment.
But Citigroup may not find it easy to sell other assets, and like insurer American International Group Inc (AIG.N), it could run into problems disposing of units amid the financial crisis, investment bankers said. Few would-be buyers have enough cash, stocks are down, financing is not easily available, and the quality of financial assets is often suspect.
"They may quietly explore what's available. I just don't think that they can do very many deals in the near-term," said Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners. "But over the next couple of years, they will sell a lot of those businesses, and so will AIG."
CONSUMER CREDIT
Citigroup tried to sell life insurance unit Primerica over the summer, but its plans were set back as the financial crisis took over.
Selling consumer lending businesses such as private label credit cards and CitiFinancial, which provides loans for home improvement, debt consolidation and tuition, is also likely to prove difficult in an economic downturn as consumers suffer.
In September, General Electric Co (GE.N) shelved plans to sell its $30 billion U.S. private-label credit card business, saying it was a challenging time to find someone who wanted to take responsibility for more than $30 billion of assets.
"Anything that has credit sensitivity to it, like a credit card business in this market -- Citi will be crazy to try to sell something like that," a financial services investment banker said.
"There are no strategic buyers, no financial buyers. There's no leverage," the banker said. "You are going to sell an asset that has consumer credit risk to it? Good luck."
AT WHAT PRICE?
Still, as it faces pressure to put its house in order, Citigroup may want to try, and some of its assets could lure potential buyers. But the bank will then have to deal with the problem of negotiating a good price.
"Someone's going to be interested in them at a certain price -- maybe an unappealing price to Citi's shareholders," another financial services investment banker said. "They may not get the prices they want, but you can sell things."
In some cases, uncertainty about asset quality can be addressed by a deal's structuring.
The agreement for the sale of Chevy Chase Bank to Capital One Financial Corp (COF.N) has a clause that would have Capital One pay more if the acquired bank's assets perform better than expected.
So questions about the quality of Citigroup's private-label credit card portfolio in a declining economy, for instance, could potentially be addressed by structuring a transaction where payments are made over time, with the amount depending on defaults, the banker said.
"Whether Citigroup will be better off accepting prices today or deferring sales remains to be seen," Sonenshine said. "In both cases, AIG and Citi, we are looking at the slow but inevitable disaggregation of overextended financial services companies that have demonstrated an inability to manage risk."( NB ) (Additional reporting by Dan Wilchins; editing by John Wallace) (For more M&A news and our DealZone blog, go to www.reuters.com/deals) "
The point is that we are paying to keep them alive until they can sell these businesses. We know what a Holding Company is.Listen to Liddy:
http://www.pbs.org/nbr/site/onair/gharib/081110_gharib/
"GHARIB: Mr. Liddy, make a case why American taxpayers should feel good about this latest rescue plan.
LIDDY: The taxpayer in this case is being very well cared for. People use this term bailout and it's got kind of a negative implication. But the reality is on the equity that we're getting from the Federal government, we're going to pay $4 billion a year to the taxpayer for that. The debt carries a full market rate of interest. Right now we'll have about $20 billion outstanding, $21 billion. It carries interest at 5 or 6 percent. That's a billion too. The government is going to have an interest in upside in the two asset entities that were two financing entities that we're setting up. The taxpayer is being well cared for and well provided here.
GHARIB: You have a lot of financial issues that you have to deal with over the next couple of months and years. How are you going to pay off these billions of dollars of government loans?
LIDDY: We're going do it by selling some our very best assets. This company has been built over about a 99 year period of time. We have some assets around the globe that are the envy of the world. They couldn't be duplicated. They couldn't be recreated today. The proceeds from those asset sales will pay down that $60 billion. And if we do really well maybe even give us enough money left over that we can call some of the preferred stock.
GHARIB: How difficult is it to find buyers in this down economy?
LIDDY: We probably have 75 to 100 companies that are seriously looking at various of our companies. These are very complicated businesses. In many cases they operate in multiple countries or in multiple positions around the United States. So getting everything just right is really important to us. I think we will be successful in this endeavor. "
Why you think that a government agency couldn't do better than these idiots is beyond me. Talk about rewarding incompetence.In any case, you must believe that this is a good strategy. At least then listen to the opinion of some people with some credentials. That's all I ask:
http://www.ocnus.net/artman2/publish/Business_1/Geithner_s_AIG_Strategy.shtml
Geithner’s AIG Strategy
By Pietro Veronesi, Luigi Zingales, City Journal 19/2/09
Feb 19, 2009 - 9:21:59 AM
"Judging by Geithner’s past behavior as chairman of the Federal Reserve Bank of New York—where he helped lead bailout deals for Bear Stearns, Citigroup, and others last year—it’s likely that the Treasury will try to attract investors by using government guarantees to cap their possible losses. On the face of it, this seems like a smart way for the government to stop the financial industry’s meltdown without incurring astronomical costs. By covering some potential losses, the thinking goes, the government can calm investors’ fears and lure them back into buying mortgage-related and similar securities from banks. If the government guarantee is large enough, investors can even pay for the securities at close to the value on the banks’ books—sparing banks the burden of recognizing additional losses, which could push many of them into official insolvency. Last but not least, the plan minimizes the amount of money that the government must request from Congress.
To understand the problems lurking beneath this idea, though, let’s analyze a similar deal: the guarantee that the federal government provided to Citigroup in November 2008. For a $306 billion pool of Citigroup assets “consisting of loans and securities backed by residential real estate and commercial real estate,†the government committed to providing something like an insurance policy with a deductible. Citigroup would absorb the first $39.5 billion of losses on the loans and other securities, with the government picking up 90 percent of the additional losses and Citigroup just 10 percent. The government ingeniously divided its responsibility among the Treasury (the first $5 billion), the Federal Deposit Insurance Corporation (the next $10 billion), and the Federal Reserve (all the rest). In this way, the Treasury committed only $5 billion of the finite TARP bailout money to the deal.
The real value of the guarantee (and thus its potential cost to taxpayers) should include not only the TARP funds but also these other commitments—and it is massive. We estimate that if the government were held to the same accounting standards as private companies, the expected liability it would have to report for the Citigroup guarantee would be $66 billion. Nobody knows the true value of the volatile loans and securities underlying the deal—meaning that nobody knows the true extent of potential losses. And even the $66 billion estimate assumes that the assets comprise an average pool of residential-backed securities. Since Citigroup has a strong incentive to put the worst, most overpriced assets in the pool, the government’s actual liability could easily be $78 billion or more.
Geithner’s plan suggests that the government might be applying similar sleight of hand to the entire financial system. We estimate that to restore the solvency of the top 10 banks to their pre-crisis level, the banking system needs at least $4.5 trillion in purchases of its toxic securities. (That’s why former Treasury secretary Henry Paulson abandoned the Bush administration’s idea simply to buy up all the toxic assets—he knew that the government couldn’t afford it.) Based on the Citigroup example, we calculate that Geithner would have to commit $75 billion of TARP money to attract enough private capital for the plan. But just as with the Citigroup case, that initial commitment wouldn’t tell the whole story. Under proper accounting standards, and taking the entire government’s commitments into consideration, the strategy would actually impose a cost of around $1.2 trillion on taxpayers."
Check out this as well:
http://faculty.chicagobooth.edu/luigi.zingales/research/papers/from_awful_to_merely_bad.pdf
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