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February 24, 2009
Billmon: Citi to Uncle Sam: For You We Make Special Deal

So swapping $45 billion in preferred stock yielding 8% for $4 billion in common stock yielding a penny a share is "protecting the taxpayers"?

Billmon: Citi to Uncle Sam: For You We Make Special Deal

Citibank, with the help of the democratic senators it bought, wants lots of money for nothing. It is bankrupt and will go down. But Reid and others want to spend taxpayer money to push the inevitable a few month out.

It is not only the U.S. taxpayer Citi wants to screw. Singapur holds a bunch of preferred Citi stock too

Citi is driving the move. It approached regulators yesterday with a plan for the government to convert some of its US$45 billion (S$69 billion) in preferred shares into up to 40 per cent of common equity, according to news reports.

…
It is now scrambling to stitch together a life-saving deal by asking holders of preferred shares – including the Government of Singapore Investment Corporation (GIC) – to take more direct stakes.

GIC holds convertible preferred shares in Citi that it bought for US$6.88 billion in January last year. It can convert these into ordinary stock, but at a price likely to be more than 10 times Citi's current price. Until then, the preferred shares pay dividends every quarter at a rate of 7 per cent a year for as long as GIC wants to hold them.

Citi hopes to persuade GIC and other preferred stock holders, such as the Abu Dhabi Investment Authority and the Kuwait Investment Authority, to convert some of their stakes into common equity, according to news reports yesterday.

This would give the bank more capital and help it avoid drawing on another government lifeline, a move that would revive fears of nationalisation. If the government nationalises a bank, its common shares become virtually worthless.

There will be a lot of angry background talks between the involved governments.

What would happen if the U.S. takes Citibank into receivership and effectively wipes out the wealth of foreign taxpayers? Could that lead to real international crises which then might develop into something worse?

I fear that.

Posted by b on February 24, 2009 at 13:09 UTC | Permalink
Comments

What would happen if the U.S. takes Citibank into receivership and effectively wipes out the wealth of foreign taxpayers?

To my limited understanding, the purpose of the “stress tests” is to make clear that it is not Uncle Sam who is wiping out the wealth of the foreign taxpayers –
The wealth of the shareholders is ALREADY wiped out. This is why none of the big banks will lend to each other – each knows they are already bankrupt, and surmise that the same is true of their counterparties.
It is the greed and fraud of the banksters who have already done so – that is to say, the banks are already worth less than nothing because of the collapse of the tangled web of CDOs, SIVs, CDSs, SNAFUs, etc. etc. and so on that they have piled high and deep.
Obviously the banksters hope they can con the taxpayers into paying for all of it. Only the people – the people, yes, whoever they are (WE are?) – can prevent the government, which is already bought and paid for, from doing this.
Is Obama opportunistic enough to turn against his Wall St. backers if there’s a large enough tide against them? Or is he “an honest politician” – “one who stays bought”? I hope the former – a really good politician cannot be bought, only rented.

Posted by: mistah charley, ph.d. | Feb 24 2009 13:44 utc | 1

To my limited understanding, the purpose of the “stress tests” is to make clear that it is not Uncle Sam who is wiping out the wealth of the foreign taxpayers –
The wealth of the shareholders is ALREADY wiped out. This is why none of the big banks will lend to each other – each knows they are already bankrupt, and surmise that the same is true of their counterparties.

Bingo!

Posted by: Jeremiah | Feb 24 2009 14:31 utc | 2

@mistah charley – I agree. But that will not the perception of the foreign holders who have been prodded by Washington to by those preferred share.
Their (wrong) understanding was that Washington would defend their holdings.
If Washington ‘defaults’ on that, treasuries might be the next thing the foreigners will think.
The foreign government people who have done these investments will also be held responsible by their own people and will naturally try to blame Washington and might even need to brake relations and worse to keep their standing.
It is all about perception …

Posted by: b | Feb 24 2009 15:22 utc | 3

These mega banks are well aware that one another’s assets are only enormous stacks of paper. All of their Chinese, Japanese, and Arab investors know this as well.
But no one is going to call these tremendous stacks of paper “stacks of paper” before every rube in America has a chance to buy them first, whether they want to or not, and for as close to face value as can be arranged.
For heavy investors this mess can still be turned around, to a remarkable degree, through political means. They have the entire four year term of President Obama to work on this. No need to rush the project, or ruin everyone’s chances by being the first to grab the cash and bolt for the exits.
A proper con job takes steely nerve, and steady patience.
As long as the bankers and politicians continue to get up in the morning, shave and perfume themselves, put on thousand dollar suits, and face the cameras without cracking up, these losses can be to that degree.
It’s hard not to wink, or smirk, or let a little giggle of amazement and mirth slip out from under all that gravitas, but by God these people pull it off, day after day.

Posted by: Antifa | Feb 24 2009 15:24 utc | 4

Stacks of paper? Are there actually pieces of paper somewhere, like there used to be bars of gold? I thought it was all just ones and zeros on a handful of mainframes.

Posted by: catlady | Feb 24 2009 15:55 utc | 5

Hard to argue with Antifa (secret screenwriter!)
However, I believe global and/or European capital is stronger than even US capital, and it (global cap) will not permit its investments to be turned into worthless common shares. Particularly China has the leverage to force US policy in these areas.
On the other hand, the global picture is grim enough that nationalist “screw your neighbor” are bound to appear eventually.

Posted by: seneca | Feb 24 2009 15:57 utc | 6

In Counterpunch there is an article by Professor Hudson regarding the present interpretation of “free” market that is a gem. It cannot be abstracted it has to be read whole.

Posted by: jlcg | Feb 24 2009 16:17 utc | 7

Is this the article you mean?

Posted by: jawbone | Feb 24 2009 17:12 utc | 8

The US will never pay off all that debt.
Several US prezs have said Debt don’t Mattah. Outloud or in private.
Obama is the latest.
The question is:
Can Obama-Team and Goldman S Turbo Tim (Geithner, Paulson before him) stop the US from crashing?
Can they prop up the banks ? Who owe piles to foreign entities who wouldn’t like to be defaulted on? As Billmon pointed out, Singapore, I was thinking KSA, China…
What if the whole banking system is a scam, à la Madoff? What if all the illegal money, *more* than 10% or world money movement -they pay cash in movies only- has been sloshing thru this system, paying vague interest and dividends here and there, and now has to be covered up, hidden? Just a thought.
How then to unwind it? Or, as Obama wishes (and Bush before him) to revive it?
Nationalization is scary, as it implies an opening of the books. Or maybe not, if corps and Gvmt. are melded.
I have no overall view.

Posted by: Tangerine | Feb 24 2009 17:16 utc | 9

See this post from Jesse, 23 feb. 09, click on, examine, the four graphs.
quote:
In effect, one might say that the Fed has begun to assume a central planning role for the economy that decides, with specifics, who fails and who survives to succeed. What is troubling in particular is that so far the Fed has retained the prerogative to do this without disclosure of the specifics even to Congress.
link

Posted by: Tangerine | Feb 24 2009 17:29 utc | 10

@8
No, it is not that article. It is called the Language of Looting and published on February 23.

Posted by: jlcg | Feb 24 2009 17:38 utc | 11

Hold on to that paper for a few years (along with your Beanie Babies and Elvis commemerative plates):
Link

Posted by: biklett | Feb 24 2009 18:32 utc | 12

As rank amateur I’ve heard it said often enough that I do believe nationalization (or receivership) wipes out common shareholders. However, the shares of Citi and BofA are close to $0 already, so if that’s the threat to foreign investors, the only way they’ll be made whole is to revive the stock market again. Good luck!
The real weakness of the big banks is the amount of toxic debt they are suspected of holding (and haven’t disclosed yet). Nationalization and the “stress test” are ways of identifying those bad debts and then segmenting them off into a “bad bank” which the taxpayer will own. This is how the big banks will be preserved as private entities, and it will take awhile. I presume the European banks will have to go through the same process, and in effect the global public will end up owning all the worthless paper.

Posted by: seneca | Feb 24 2009 22:25 utc | 13

capitalism hits the fan

Posted by: remembereringgiap | Feb 24 2009 22:56 utc | 14

Then there’s Paul Craig Roberts’ latest at Counterpunch: How the Econony Was Lost (Doomed By Myths of Free Trade). Somebody may have already posted this on another thread, but it fits this thread, too.

The US government should never have used billions of taxpayers’ dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of “troubled” assets that threaten financial markets.
The billions of taxpayers’ dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.

Sounds familiar, yes?

Posted by: catlady | Feb 24 2009 23:30 utc | 15

Biklett @12: I thought you meant this paper, lest I start using it as tinder to burn the furniture.
The scripophily site is pretty cool, though. I didn’t see baseball trading cards, though.

Posted by: catlady | Feb 24 2009 23:39 utc | 16

“The wealth of the shareholders is ALREADY wiped out. This is why none of the big banks will lend to each other – each knows they are already bankrupt, and surmise that the same is true of their counterparties.”
This is beginning to remind me of the Soviet era joke about how that economy worked: “We pretend to work and they pretend to pay us.” Everything, not just the accounting, is based on lies now.
Granted, the system has always been based on deception, but now it’s not just about the lies the capitalists and their hired guns tell the people — it’s about the lies they’ve been telling each other.

Posted by: Peter Principle | Feb 25 2009 2:21 utc | 17

PP)17 China Direct today tells how RFID’s in retail stores instantly transmit point of sale and product ID to main database instantly transmitted over to China where workstation computers “build” virtual inventory cargoes in simulated 747-400 hulls,
then when a model is full, the computers automatically place the inventory orders
with the Chinese manufacturers, and take care of the trade office paperwork, as the
Chinese workers JIT their product off to the airport, pre-wrapped. Then high in the air over the Pacific, the entire shipment is parceled out into individual store destination pallets that are picked up by truck carriers from the freight warehouse delivered to individual retailers already barcoded, invoiced, RFID’d and paid for.
3 days, purchase sale to item restocked, by one American store clerk at $8.50/hr. The business model of the dairy bar. Moooo.
That explains open boxes with returns. There’s no way to stop the pipeline for returns. That explains Circuit City. January returns undercutting new inventory.
Imagine sitting around your rice pagoda, waiting for a call-up to go JIT some shit, all they’re telling you is, I don’t know, check back when they have Spring Break.
It’s not just banks, it’s everything. Capitalism achieved it’s electronic orgasm.
Now it’s time to pay the call girl, and she demands a lot for that JIT hand job.
This is the part in the movie where the Titanic is at a dead stop and the sea is rushing in through an unstoppable gash in its hull. Please find a lifeboat station, unless you’re a State worker, then the Helicopter Bens will take you off directly.
The ship’s investors are all snug in New York, praying for a clean insurance claim.

Posted by: Free Donna | Feb 25 2009 7:00 utc | 18

Hmm I must admit I’m enjoying the easy contempt with which some amerikans are treating the people of Kuwait and Singapore, both here and at Kos.
Although it seems a fairly typical example of the amerikan empire at work, it actually contains the seeds of the empire’s destruction.
When the ordure first hit the ventilator big at the start of 08, shrub rung up the leaders of two small but per capita wealthy nations (one actually managing to sequester a tiny fraction of the returns from oil which USuk failed to grab first or second time round for some mad Bechtel project, the other by dint of self sacrifice, self discipline and sheer hard work spanning three generations) and twisted the small nations leaders arm into ‘helping out a friend’ by persuading the nations’ sovereign wealth funds to provide some medium term investment in a bank that was in trouble short term but would ‘weather the storm’ eventually.
Those leaders would have spoken to their financial advisors and economists who if they shared the opinion of the rest of the financial community that had been steadfastly repulsing all blandishments to tip money in Citibank, would have said, “that the bank was a dead duck”.
So shrub or someone acting in his name must have offered some pretty solid guarantees that these small nations pension funds for their teachers, doctors and other salaried government employees was safe.
Even more ironclad say than Bush 1’s promise to Gorbachev that amerika wouldn’t drag former soviet satellites into Nato, since that act of treachery had already become notorious throughout the globe as an example of amerikan presidential perfidy.
At the very least since perfidy would be in the minds of Singapore and Kuwait’s leaders, it is certain that as senate majority leader of the dem half of the amerikan empire party at the time, that Harry Reid would have been party to at least some of the negotiations which discussed likely outcomes when a new prez came to power in little more than a year. Therefore his public attempts to seem like he wants to prop up Citibank or at the very least bail out Singapore and Kuwait shareholdings are predictable if not persuasive.
What is less certain is how far a slimeball like Reid will go in this effort, his legions of pollsters would have kept him informed of the amerikan public’s increasing antipathy towards bailing out amerikan bank shareholders let alone a bunch of foreign and unwhite bank owners who will be portrayed in the amerikan media as greedy shirt-lifting sheiks and slimy asian dog-eaters, rather than the ordinary shit kickers hoping to have a couple of days between the time they quit work and the time they die, in a modicum of comfort, which they are.
I suspect that Reid’s efforts will ‘fail’ and he will approach the leaders of these two tiny nations with his head hung in mock humiliation and a voice clouded with sorrow as he informs him that despite his best efforts “nothing can be done”. If either tiny nation leader has the temerity to point out that just 13 short months ago Reid was promising “everything would be done” Reid will undoubtedly reveal the ugly contempt that he and most amerikans hold non-amerikans in while he reveals his disdain for the leader for getting so personally involved in such matters that the leader has become ‘shrill’ which as we all know is a most uncivilised and unwhite thing for anyone, much less a leader, to be.
Of course it is the plethora of small but influential in various other ways nations, that are the backbone of support for the amerikan empire. It is the hundred or so of these small easily ‘lent on’ or bribed countries which amerika has used time and time again in the past 60 years to carry the vote through every international forum one could think of. Sure the medium sized states eventually come on board too, but only because they have done the numbers and recognised that being on the side of the winner is generally the place to be.
This is why I am enjoying the easy contempt which so many ignorant amerikans are dismissing the claims of Kuwaiti and Singaporean shareholders, they literally don’t know what they do. When Bush 1 Clinton and Bush 2 acted as though no such undertaking had been given to the Soviet Union, there wasn’t much of a reaction from other international leaders. The sophisticated medium sized nations didn’t show surprise at this crude example of real politik and there wasn’t sufficient commonality between russia and the hundred or so ‘shit-kicker countries’ for many of them to feel empathy for russia’s situation.
However that is not the case here, leaders of the hundred or so will all be watching to see what happens next because there aren’t many more loyal supporters of the amerikan empire and its foreign policy than Kuwait and Singapore. If they can be so disdainfully cast to one side then nothing the empire ‘promises’ means anything any more and it truly is on it’s last legs.
Probably the best parallel would be the feeling within a 1960’s urban amerikan community if the mob run numbers operation failed to pay out on a number. Apart from the usual community activists (say Fidel Castro and Hugo Chavez) not much will be said publicly for fear of violent retribution, but it will be a cold day in hell before anyone willingly takes a number, much less performs any act of friendship again.
Meanwhile back in Beijing the promoters of “now is the time to go it alone” will have had a big leg-up over the cautious conservatism of China’s mainstream advisors to the Golden Dragon syndicate.

Posted by: Debs is dead | Feb 25 2009 20:51 utc | 19

It’s ridiculous to fantasize that the initial SWF investments required highest-level cajolery and armtwisting. GIC put maybe 2% of assets in a convertible paying out the risk-free rate +500 bps with USD at their very cheapest. Everybody saw Prince Alwaleed get away with it last time Citi ran off a cliff. They honestly thought it was a decent deal. Same with KIA. Foreign investors fuck up like that all the time. That is because they lack local investors’ perspective on pervasive malfeasance and corruption. Solid guarantees… perhaps you are thinking of an episode in one of the many fine Tom Clancy novels that explain all about America and the world.

Posted by: …—… | Feb 26 2009 4:16 utc | 20

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