Moon of Alabama Brecht quote
November 24, 2008

Rubin's Citigroup Bailout

The U.S. taxpayer will now take most losses on a $300 billion package of bad debt Citigroup is holding:

Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.

Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.

In the deal the government will get some likely worthless equity in Citigroup.

The question I don't see anybody touching is for what percentage of the notional value of the loans this deal was done. The deal terms (pdf) say:

Up to $306 bn in assets to be guaranteed (based on valuation agreed upon between institution and USG).

So who will set those values? Who will supervise those who set these values? There are billions of taxpayer dollars at risk in each percentage difference of these evaluations. Where is the reporting on that?

Instead we are subjected to such nonsense:

Government officials fear taking over Citigroup would create a precedent: Unlike AIG, Citigroup's balance sheet is relatively healthy, with relatively strong levels of capital particularly compared to most of its competitors.

Ahem, does the Citigroup official balance sheet matter at all?

In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren't reflected there. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books.

Citigroup is dead. There is no way the company can survive without a massive default. It will not be the only one. Others are lining up:

Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill and government officials to restart the asset-purchase program in recent weeks.

"The problem is that other banks would want to get in line" for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. "Is there enough money to do that?"

Only if you print it ...

And who is pulling the strings behind all this?

Inside Citigroup’s Park Avenue headquarters, the mood was tense. Through the weekend, Robert E. Rubin, the former Treasury secretary and an influential executive and director at Citigroup, held several discussions with Treasury Secretary Henry M. Paulson Jr.

Still hoping for change in the next administration?

It is testament to former Treasury Secretary Robert E. Rubin’s star power among many Democrats that as President-elect Barack Obama fills out his economic team, a virtual Rubin constellation is taking shape.  

The president-elect’s choices for his top economic advisers — Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director — are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin’s chief of staff in the Treasury Department who followed him to Citigroup, and James P. Rubin, Mr. Rubin’s son.

All three advisers — whom Mr. Obama will officially name on Monday and Tuesday — have been followers of the economic formula that came to be called Rubinomics: balanced budgets, free trade and financial deregulation, a combination that was credited with fueling the prosperity of the 1990s.

The correct version of the last sentence would have been: "a combination that was credited with fueling busts and bailouts of 2008, 2009 and 2010".

With this Citigroup bailout and the prospect of the incoming team of Wall Street gangsters, the chance of a default of the U.S. government on its debt are now higher than ever.

Posted by b on November 24, 2008 at 8:47 UTC | Permalink

Comments

Ahhh - tradition:

In the 1920s, a firm called First National City Bank started repackaging bad loans from Latin America and selling these to investors as safe securities. These investments collapsed in grand fashion after the 1929 stock market crash and eventually led to a new wave of securities regulation. National City Bank became Citibank, which in turn became a major unit of Citigroup.

Posted by: b | Nov 24 2008 9:30 utc | 1

Rubin has always been a prince in a princely line--an heir with the brains, charm, looks and confidence of a prince. And people in power have yet to accept the possibility that the man might be weak, and that he cannot bear to have his hands soiled by failure. And so they "enable" him, letting him continue in his princely ways. They convince themselves that he's wise, and that his courtiers are also wise. He has no apparent motive to act corruptly, and his hands are always clean.

But the man is not wise-- and how could it be otherwise, since life has never tested him?--and he throws his weight around when he wants to have his way. Whatever he touches turns into lead. Eventually. To be clean, in Rubin's case, is a matter of not being watched, of not being seen, of not being called to account.

Rubin, and only Rubin, was responsible for Summer's appointment as President of Harvard by the Harvard Corporation (which picked Summers over a far stronger candidate). When Summers nearly wrecked the College, Rubin refused to address the folly of the appointment. It's said that he dealt with the problem by skipping the monthly meetings of the Corporation (a committee of seven princely individuals). Only after the Faculty struck back really hard, in an organized fashion after a long and bitter fight, did Summers himself finally withdraw. Rubin was nowhere to be seen, and the College has only started to recover.

This approach to things--running things without running them, forcing decisions without being held accountable--is precisely the way Rubin handled his Citicorp position from the start, as an adviser without day-to-day responsibilities--one who could then claim, as things began to go sour, that only a hands-on adviser could have known that things might indeed be going sour.

People should run screaming from the room when Rubin walks in. As indeed they do, long after the damage is done.

Posted by: alabama | Nov 24 2008 10:23 utc | 2

Not surprising. Afterall, who made Citigroup possible? That's right...Mr. Rubin with his push to repeal Glass-Steagal. The man responsible for compiling Citigroup into what it is today has the signing pen as a memento to cherish the occasion. How ironic> Or, is it.

And, if you haven't heard, Obama is deferring the repeal of Bush's tax cuts for the top 5%. Now, it won't be until 2011 that the decision is made to repeal, or continue again. Nice.

Posted by: Obamageddon | Nov 24 2008 13:03 utc | 3

america is being taken further and further out to sea without a life jacket. when it's man overboard, the only ones hearing it are going to be saying "have a nice swim, suckers".

Posted by: stumblewire | Nov 24 2008 14:07 utc | 4

The Subprime Three -- Rubin, Summers & Greenspan

Kudos to Nelson Schwartz and Eric Dash of The New York Times for the Sunday business section cover-story on Robert Rubin. Their article puts into place another piece of the subprime puzzle. In addition to reporting on Rubin's seemingly conflicted behavior as a director of Citigroup (NYSE:C), the overview of Rubin's policy role in blocking federal oversight of the Over-the-Counter derivatives markets is a great contribution.

Schwartz & Dash describe how former Fed Chairman Alan Greenspan, former Treasury Secretary Larry Summers and Rubin coordinated to undermine efforts by CFTC Chairperson Brooksley Born to impose greater federal oversight of OTC derivatives markets. They report: "On at least one occasion, Mr. Rubin lined up with Mr. Summers as well as Mr. Greenspan to block a 1998 proposal by the Commodity Futures Trading Commission under Ms Born that would have effectively moved many derivatives out of the shadows and made them subject to regulation."

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=275

Posted by: | Nov 24 2008 14:07 utc | 5

Apologies, above post by me.

johnf

Posted by: johnf | Nov 24 2008 14:07 utc | 6

For me, the CFTC story goes back to the late '80's, when Phil Gramm and his wife Wendy beat back the efforts of the SEC to regulate the financial futures markets. This tells me that folks like the Gramms could, and did, write the script for folks like Rubin.

Posted by: alabama | Nov 24 2008 14:47 utc | 7

alabama - do you have any links to share re cftc story from the '80s? i've been reading hearing transcripts, etc from the '90s (and putting together a timeline) but have only a v. little from the '80s.

wrt to the financial futures markets - i only go back to H.R.707, the Futures Trading Practices Act of 1992. would appreciate any pointers you can give. i started this exercise to educate myself, but have found so much of general interest that i will post it as a resource for others to use.

many thanks from a longtime wiskeybar reader.

Posted by: selise | Nov 24 2008 15:26 utc | 8

Alas, selise, I have nothing on hand, but I'll look around. And I may be in error about the '80's, but if so, not by very much, because the fight went on for a good long while--H.R.707 being the final outcome.

Nicholas Brady led what I took at the time to be an attempt by Wall Street to subjugate the CFTC--after succeeding, or so he thought, at reasserting Wall Street's control over "emerging markets" by breaking up Michael Milken's "junk-bond" monopoly. Since the move on the futures market came after the move against Milken, 1990 might serve as your terminus a quo. I do seem to recall that the WSJ published something daily on this subject for almost a year.

Posted by: alabama | Nov 24 2008 19:39 utc | 9

alabama - thanks, i'll have to go to the library to have access to online wsj archives. just having a name (nicholas brady) to search on helps a lot. seems that this goes back much further and deeper than i knew.

Posted by: selise | Nov 24 2008 20:21 utc | 10

Does anyone else feel like these bailouts are rash and feeble? The government needs a long-term plan, rather than trying to jump-start matters. They need to set a goal and see their idea through successfully!

I think another vital note from this bailout is that we now see the magnitude of this recession. We all should take the necessary steps to recession-proof our lives. In order to do so, I think a realistic estimate of the amount of money we need to cut back on is relevant. Additionally, we all should have a clear vision of our altered future- many people are still living as if we’re in the .com boom of the 90’s! Here’s a great resource I found helpful when reorganizing my future: www.thevisionboardkit.com. This kit actually outlines how to create a vision of your goals and dreams and explains how to execute them with success.

Posted by: Ron Towns | Nov 24 2008 22:01 utc | 11

Ron @ #11--Only companies with actual products (and unionized workforces) need to have The Plan. Transparency is paramount.

Big Banker Boyz don't reveal Plans, if they have them. Can't let the competition know what up their sleeves. Opacity rules.

Posted by: jawbone | Nov 24 2008 22:28 utc | 12

A while ago Rick had a post on satire, stating he tended to take satire as serious at first sight. I find I am more and more tending in the opposite direction. I come across a purportedly serious newspiece, and I go, "Ha ha, it must be a joke. Satire."

This is not satire:

Citigroup - Fresh From Being Bailed Out of Derivatives Black Hole - Now Selling Yet Another Type of Derivative

Based on a Bloomberg piece:

Goldman... Citigroup ... and JPMorgan ..., which helped turn bets on company defaults into a $47 trillion market, are among banks offering wagers on the amount investors may recover from bonds after borrowers go bankrupt.

Credit-recovery swaps are trading on the debt of about 70 companies, including automaker General Motors Corp. and bond- insurer MBIA Inc. That’s up from 40 during the summer, according to Mikhail Foux, a strategist at Citigroup in New York.

Also known as recovery locks, the agreements are bought as insurance by sellers of credit-default swaps, such as banks, hedge funds and insurers.

“The market definitely has potential to grow,” Foux said.
(snip)


Not satire... Right?

Posted by: Alamet | Nov 25 2008 23:12 utc | 13

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