Too big to fail

Government unveils bold plan to rescue Citigroup
By JEANNINE AVERSA, AP Economics Writer
24 Nov 2008
WASHINGTON – The government unveiled a bold plan Sunday to rescue Citigroup, injecting a fresh $20 billion into the troubled firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.
...
The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government also received an ownership stake.

As part of the plan, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

Forgive me if I don't get it.
The Big 3 automakers are begging for a $25Bn bridge loan, but Treasury is happy to guarantee losses up to $306Bn for Citi? In addition to a two-part $45Bn direct cash "infusion"???

Perhaps if the Big 3 downplayed their manufacturing role and positioned themselves simply as large financial institutions they'd have better luck.

What did Paulson do before W tapped him for Treasury?
Oh, yeah - he was a Wall Street financier (Goldman-Sachs)!
Guess it helps to have friends in high places.

Note: $25Bn + $20Bn + $306Bn = $351Bn... for Citigroup alone!!!
I thought Paulson was planning to leave $350Bn for Obama.
Oops!

For what it's worth: Milton Friedman was right. Markets DO self-correct. ... it's just that the self-correction can look an awful lot like an economic meltdown! ... no one said free-market capitalism was pretty.

A modest proposal: since we seem willing to provide a safety net to those institutions deemed "too big to fail", can we also impose regulations that will deliberately keep 'em from exploiting us during the "good times", once those return - little things like requirements for cash reserves might be nice. Yeah, I know - this would discourage investment.

Otherwise, next time... If you are not regulated, expect no charity - no matter how big you are.
Give 'em a choice: you don't want regulation? Okay. We allow you to fail. Really. No matter the impact.
You want a safety net? Okay. We get to define new rules for you.

Turns out, there are some conditions attendant to the rescue:

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

Importantly, the agreement calls on Citigroup to take steps to help distressed homeowners.

Well - it's a start... but I see nothing here suggesting any long-term regulation. Seems Citi'll be able to return to its profligate ways if they survive. Not the outcome I'd hope for.

If nothing else, it'd be nice to see a prohibition against lobbying Congress for the same 3 years as the dividend is restricted.

... and I almost forgot: $350Bn would support 7,000,000 median-income households for a year.

p.s. Now, explain to me again why Paulson can't see his way clear to using some of the $700Bn to provide a $25Bn bridge loan to the auto companies.