Citigroup Bailout: $20B, Total Cost So Far: $3.5T

Another One Bites the Dust

The news came out late on Sunday that Citigroup is getting a bailout from the Federal Reserve, amounting to $20 billion dollars. The $20 billion of new cash comes on top of a $25 billion infusion the bank received last month under the Troubled Asset Relief Program (TARP).

Citigroup's stock has lost about 80% of its value since the beginning of the year, and has dropped below 5$ last week for the first time since the mid-1990s. At the time of writing, the Federal Reserve just announced “it is to inject another $800bn into the US economy in a further effort to stabilize the financial system.” [article]

Even as most stocks rallied on the news that President-elect Obama had selected Timothy Geithner to be the next Treasury chief, Citigroup continued its fall. My gut tells me short-selling of Citigroups stock had something to do with this.

As discussed in my previous post [Secret $2T Fed Program], we must look at whose interests are best served by all of this. The reason Citigroup was not an attractive acquisition target to any of its competitors is because of its heavy baggage of about $306 billion in “risky assets” that it had on its books.

So if you’re J.P. Morgan for instance, and you buy up Citigroup for $20.5 billion (Citigroups market capitalization on Friday Nov. 21st, 2008), you are still taking a big risk with the $306 billion Citigroup has on its books. Even though Citigroup has $2 trillion in total assets [article], it is not liquid. This means that it would be very difficult to get cash for the $2 trillion in assets in the event that you need to start writing off the rotten ones. How do you get around this annoying $306 billion?

Pass it on to the Taxpayers

If I was a billionaire banker who owned stock in Federal Reserve and who was receiving a piece of the $3.5 trillion from my company (The Fed), this is what I would do:

1) I would short-sell the stock of Citigroup to the point that the company loses 60% of its market capitalization in 3 days: Citigroup was worth $51.8 billion on Friday Nov 14th, 2008. One week later, it was worth $20.5 billion. At the beginning of 2008, Citigroup was worth $160.4 billion. [Source: Google Finance]

2) I would then get my company, the Federal Reserve, to step in and lend Citigroup (who is also an owner of the Fed) $20 billion.

3) I would also get the Federal Reserve to “step in to protect Citigroup from losses on $306 billion of troubled U.S. home loans, commercial mortgages, subprime bonds and low-grade corporate loans.”

4) Now Citigroup is a much more attractive candidate for a merger or acquisition because the Federal Reserve is guaranteeing all of its “toxic assets” through taxpayer dollars.

“There will surely be ongoing chatter about a breakup of Citi once the dust settles,” analysts at Royal Bank of Scotland Group Plc. [article] Which one of the remaining banks will be the one doing the acquisition after the next “big one” falls?

A Little Perspective Please

So let’s start thinking about everything that’s been happening for the last few weeks:

Size of Citigroup bailout (so far & that we know of) = $45B
GDP of Sudan = $46.2B
GDP of Slovenia = $46.1B
GDP of Ecuador = $45.8B
Source: [wikipedia]

The reason I say "that we know of" is because of the secret $2 trillion Federal Reserve program which I covered in my last post. Since we do not know how much each bank got through that program, we are left with a minimum of $45B for Citigroup.

What's really disturbing is Citigroup’s bailout is roughly the same as the GDP of each of these three countries. Pause. Take a minute to think about and process this information. It is staggering to say the least.

Here is something else for you to pause and think about: $2 trillion, then $700 billion and now $800 billion. People are tossing around these huge numbers for bailing out banks and corporations, but I don’t think anyone has stopped for a second to realize how big the figures we are talking about really are.

99% of which is for banks

Do you have any idea how much money that is and what you could do with this amount of money?

As of 2008, half of the worlds population lives off less than 2$ per day. The world population as of 2008 is 6.72 billion. [wikipedia] So at 2$ per day, to feed half of the world for one day it costs $6.72 billion (50% x 6.72 billion people x 2$ per day). For one year, it costs $2.5 trillion. This still leaves about $1 trillion. Assuming it costs $500,000 to build a school, and $1 million to build a hospital, you could build over 650,000 schools and hospitals around the world.

To recap: $3,500,000,000,000 could be used to feed half the world for one full year AND build 650,000 hospitals and schools. Instead, all of this is going to the people who caused this whole financial crisis to begin with. And the taxpayers will be left with the bill at the end of the day.

What is Happening in our World?

When did banks become more important than the well being of society and human beings? More importantly, when did people stop thinking about these kinds of things and asking themselves important questions about the kind of society we live in?

All the information is right in front of us; all we need to do is wake up and start paying attention. Don’t let the system feed your mind, use your mind to think for yourself.

My hats off to the rulers of the banking establishments, you have pulled off the biggest heist anyone could ever have imagined in their wildest dreams...


Further readings:

Reuters - Citigroup Gets Massive Government Bailout

International Herald Tribune - U.S. approves plan to help Citigroup deal with losses

Bloomberg - Citigroup Gets U.S. Rescue From Losses, Cash Infusion

What Secret $2T Federal Reserve Program?

The Lawsuit

After having read an article on Bloomberg about the Fed running a secret $2 trillion program of lending to banks and corporations, a program which is unrelated to the $700 billion TARP project, I thought it was important to bring this little known fact to life [Bloomberg article, Bloomberg TV]. In fact, I have had difficulty finding any major press outlet covering this except Bloomberg, who has requested details of the Fed lending under the U.S. Freedom of Information Act and has filed a lawsuit against the Fed. Thank god for the wonderful world of blogging, because this story has mostly been ignored by the mainstream media. Bloomberg is suing because The Fed has so far refused to divulge any information about the program, except to acknowledge its existence.

I suspect however that the Fed will win this lawsuit under the pretext that it is for the 'public interest' not to reveal exact figures of loan amounts, and who these loans went to. An interesting point raised by BestSyndication is that: "When the Fed was created there were worries that the central bank would be used to provide funds to member banks, like JPMorgan Chase, to purchase assets during economic busts.”


Maximize Profits for Shareholders

When you think about it, it makes sense that the Fed let Lehman Brothers sink on September 15th. It was acting in its own best interest, namely the interests of 51% or over of its investors. This is in line with any other corporation or bank in the capitalist system. The major stockholders of the Fed are the major banking institutions of America.

You can check on the Feds website, the owners of the Federal Reserve is not the government, but the “member banks” [Overview of Federal Reserve, p.12]. The member banks receive a 6% annual dividend for being stock owners. The government merely appoints its board of directors and the chairman (Bernanke). Exactly who owns how much of the Fed is kept secret, but if we assume that its workings are in line with the rest of the banking world, the likely scenario is that ownership is based on market capitalization or the net worth of member banks. So the story goes something like this:

1- The Fed secretly starts lending $2 trillion to its owners.
2- The Fed lets Lehman Brothers and thus the markets collapse.
3- The Fed owners go bargain hunting by buying up competitors for pennies on the dollar and thus consolidating their positions in the market (using the $2 trillion + $700 billion provided by the Fed).

This intuitively makes perfect sense, because that is how our markets work. Lesson number one in business and economics is that a company exists in order to maximize the profits of its shareholders. They are just doing what any other bank or corporation would do to maximize profits. And when you think about it, you can’t really blame the Fed or its stockholders (i.e. the banks) for the financial catastrophe that is currently happening. It is happening and it will pass when the best interests of those who control the money supply are served.


Who Will be Next?

As I mentioned in the previous post, everyone knows that GM has been severely struggling in the past few weeks and is basically begging the Fed and the government for money to continue operations. No money has been committed just yet. But GM posted a $15.5 billion third quarter loss [article]. In one quarter! How much money does the Fed need to lend them to stay afloat if they are burning money at that rate? And is GM going to be able to repay the Fed these huge sums of money with interest? Unlikely.

Again, here we see that the best interests of the shareholders of the Fed are served by letting GM go bankrupt. One of two scenarios will then happen. GM will either be allowed to restructure under bankruptcy protection, essentially allowing the company to annul most of its debt obligations, and start new ones with the Fed; or it will be seized by the government like Washington Mutual and Lehman, and its pieces sold off.

The Fed would of course lend Ford and Chrysler money to buy up pieces of GM at bargain prices. If GM collapses, it will act as a second Lehman, collapsing the already fragile markets further. The major banks will then again step in and start buying up companies and competitors for discount prices. Even Paulson said that “bank mergers may be best for the economy.” [article]


Bank Acquisitions and Failures so Far

To put things into perspective, here is a list of bank acquisitions in the US since the beginning of 2008:

04-01-2008 – Bear Sterns acquired by J.P. Morgan Chase - $2.2B
09-01-2008 – Countrywide Financial acquired by Bank of America - $4B
09-14-2008 – Merrill Lynch acquired by Bank of America - $44B
09-16-2008 – American International Group acquired by the Federal Reserve $85B
09-17-2008 & 09-26-2008 – Parts of Lehman Brothers sold off to Barcklays plc and Nomura Holdings
09-26-2008 – Washington Mutual acquired by J.P. Morgan Chase - $1.9B
10-03-2008 – Wachovia acquired by Wells Fargo - $15B
10-13-2008 – Sovereign Bank is acquired by Banco Santander SA (Spain) - $1.9B
10-24-2008 – National City Bank is acquired by PNC Financial Services - $5.58B
10-24-2008 – Commerce Bancorp is acquired by TD Bank (Canada) - $8.5B

Full list of global acquisitions and failures [wikipedia]

We might soon have to add CitiGroup to this list [article]. The company’s stock has lost 50% of its value in the last three days, and Bloomberg reports that Citigroup may get a government rescue. Or the Fed might allow the Bank of America or J.P. Morgan to buy it. Goldman Sachs has already refused [article], so we’ll have to wait and see.

I might be wrong about which company will be left to go bankrupt, but the idea is there. Whether its GM, Lehman, Chrysler, Citigroup or GE it makes no difference. The end result is what matters, and that is expansion of profits for the stakeholders.


So What Now?

The root of the problem is not the banks or the Federal Reserve, but rather the system which has allowed and even promoted this kind of activity. And I think that we are unlikely to emerge through financial crisis unless some fundamental problems within this system are resolved.

There is so much debt out there right now, that I am worried for when the interest payments on all of the outstanding debt becomes so big that the majority of borrowers entire income is spent just for the interest portion of the loan, and nothing for the principal portion. This is kind of what is happening now, but I expect that a lifeline might be thrown to the global markets to sustain it through one more bubble.

The only solution to this problem from a banks perspective is if paper money is eliminated altogether, and digital currencies become the standard for payment. Then the reserve requirements would become meaningless because money would be created through computers and backed by nothing, not even cotton paper.

The people already have very little control over money, but if this were to happen, we would have no control over our money what-so-ever. And the people with the power to push a few keys on their computer and give you a loan or issue you a payment will also be your masters. It will take a crisis of some sort for the people to accept removal of paper currency and a move to digital currency, and I really hope that the current financial crisis isn’t it…

Please see this video: Bloomberg TV - Transparency at the Fed

Further readings:

Bloomberg - Fed Defies Transparency Aim in Refusal to Disclose

Bailout Sleuth
(Good Blog which discusses some alternative apsects to the financial crisis)

Best Syndication - Bloomberg Sues Fed Under Freedom of Information Act

Russia Today - Fed refuses to disclose who got loans

LA Times Blog - Bloomberg sues to get list of banks borrowing from the Fed

Bloomberg - Citigroup May Get Government Rescue, Investors Say

Reuters -Goldman Cool to Citi Deal Even With Government Aid

GM Bailout? A Little Bit Too Late

GM, Chrysler and Ford are drowning. This is not really news, as it has been in the works since last year. GM has frantically been trying to re-organize its business to move towards more 'fuel efficient' models and reduce production of the gas-guzzling SUVs.

How ironic then that it was actually GM which came up with the first major breakthrough in the electric car technology, but decided to scrap the idea because it was afraid for its long-term profit potential. In my view, GM should be allowed to suffer for being in bed with the oil industry, and looking at its long term profit potential instead of thinking about the well being of the planet and its customers. I am not going to say any more here, except go watch Who Killed the Electric Car on Google Video and see for yourself. Narrated by: Martin Sheen.

More on the following topic in the next post: I think GM will be allowed to collapse and its remaining parts will be sold off to Ford and Chrysler for bargain prices. This will occur because it is the only possible way to save at least a good portion of the US auto-industry. The government will have to choose between a lame bailout program for all three major US auto manufacturers, or letting the biggest sink allowing its competitors to buy up assets at firesale prices. This will increase their own market capitalization and growth, and during the up-cycle of the economy, the true value of the assets acquired through inexpensive acquisitions will increase Ford's and Chrysler's net worth. Ultimately almost all, if not all of GM's 'lost value' will be re-distributed into the market.

This just makes economic sense all around, and anyone arguing saving GM to save the US economy does not understand the fundamental principle of capitalism: maximize profits for the shareholders. In this case, the shareholders of the US Government (the majority of the people), of the Fed (the banks) and of Ford and Chrysler. When the overall 'benefit' is weighed for all the shareholders, versus the benefits for GMs shareholders, I think it is quite clear that "for the greater good", GM will be allowed to fall. Yes, there is a lot of jobs which will directly and indirectly be affected by this, but once the industry completes its consolidation (much like the banking industry), most of these jobs will come back during the "growth" stage of the economic cycle.


You know, it amazes me how often people forget that our economy is a "cyclical" one, whether by design or by nature. Even though the economy is currently grinding to a halt, it always ends up making a comeback and even surpassing its previous value. And the reason is that those who run the economy (i.e. the banks and the corporations) have the most to lose should the system collapse. And they will NOT allow it to collapse. Granted the current crisis is more grave than any previous one since the Great Depression, but again, the people with the wealth have the most to lose by a total systemic collapse of the markets. Their assets, bonds, stocks, paper and digital money would be worthless, so they will not allow this to happen.

The big banks are aware of everything I am discussing here, and they are prepared to play ball. Reuters reported this week that both Goldman Sachs and J.P. Morgan downgraded their ratings for GM. They are getting ready for the collapse and so should you. It will trigger many job-losses and an overall sell-off of stocks from all industries. I really hope that I am wrong about it being GM, and that a smaller company will be chosen to go bankrupt, but I think that they may not have much of a choice...

Readings:

Time - Is General Motors Worth Saving?

Bloomberg - Obama Pushes for $50 Billion for Automakers, Oversight Czar

NYTimes - G.M.’s Troubles Stir Question of Bankruptcy vs. a Bailout

Reuters - RESEARCH ALERT-JP Morgan Downgrades GM

Reuters - Goldman Suspends GM Rating, Sees $22 billion Bailout

Another Dose of Global Interest Rate Cuts

This is a quick post to note that today, the Federal Reserve cut rates by 0.5%, which brings the all-in rate down to 1%. The Fed followed a move by the Chinese Central Bank which itself cut its rate to 6.66% from 6.93%.

Several other countries are expected to follow, with Norway already announcing a 0.5% cut down to 4.75%.

Stock markets around the world rallied yesterday on the expectation that central banks were planning these moves.

Not much more to say here, the upcoming post on fractional reserve banking will be much more thorough and in-depth, and will address the issue which I will leave off on:

The world is debt-strained, countries are drowning in debt (think Iceland and Pakistan) and corporations cannot borrow any more because they are over-leveraged as is. Investors are having a hard time trusting corporations and banks, and now the central banks walk in and offer more debt to solve the problem.

The good news here is that debt in the US now costs 1% (to banks and corporations of course). The bad news is, if things get worse from here, how many more rate cuts can the Federal Reserve support?


More readings:

Bloomberg - Fed Cuts Rate to 1% to Avert Prolonged Recession

Reuters - U.S., China Kick Off Global Round of Rate Cuts

BBC - US Interest Rates Slashed to 1%

Wall Street Journal - Fed Cuts Rates by Half Point Amid Economic Deterioration

The Banking Establishment: Crooks or Geniouses?

The stock markets took a real beating last week. As my predictive power has been proven to be 0, I will not be trying to make any guesses as to the direction the markets will take this week.

Suffice to say, things are not looking good. Even after all of the cash injections world governments have committed to, investors are still weary of putting their money into investments which they are not sure about. And rightly so. After all, the past few weeks have shown how over-leveraged (i.e. debt straddled) our corporations and banking institutions really are.

I think its about high time we got a bit more into the technical aspects of the financial meltdown. First, I think we are all aware of the fact that the US and 'industrialized' world economies are based on debt. Through fractional reserve banking, the US and its allies have run up tremendous amounts of debt growing their economies since the establishment of banking.

In order to understand how the process of making money works, i suggest that you view one of the two recommended documentaries at the end of this post. In a nutshell, the government gives the Federal Reserve bonds in exchange for the paper currency. The Fed then controls the money supply (and inflation) through the buying and selling of bonds on the open market. But all new money starts off as an exchange for bonds, so money itself is always 'owed' with interest. Therefore the debt is always increasing regardless of the governments budgetary surpluses or deficits.

However, that's not the end of the story. The paper money in use today is what is referred to as fiat money. For a period between Bretton Woods and 1971, the worlds currencies were pegged to gold (the gold standard), meaning, the paper money at least had some sort of intrinsic value. At that time, each currency was pegged to the dollar, and the dollar was re-deemable for gold. Please click on the pre-1971 $100 dollar image below and note that in the top left corner, it is written 'redeemable in gold'. As of 1971, Nixon unilaterally cancelled the Bretton Woods system and US dollars were no longer convertible to gold. The US dollar then became the defacto 'safe' currency. The IMF and World Bank function in US dollars and base their loans on fractional reserve banking.

So from 1971 forward, the US dollars value was based on the amount of money in circulation. Put in another way, the 'legal tender' value was determined by the physical amount of paper currency that was available. In essence, when more of the money was printed, the money already in circulation by definition had to decrease in value. An alternate way to look at this is that the price of goods HAD to increase due to the increased amount of money. So instead of looking at inflation as an increase in the price of goods, you should look at it instead as a decrease in the value of the dollar.

In simple economic terms, the law of supply and demand states that as supply increases (and demand remains steady), the price must inevitably decrease. Alternately, if supply is steady and demand increases, the price inevitably increases. Pick which way you choose to look at it, but either way, inflation is a tax that has been worked into the monetary system. It is inflation which lowers the value of our money. And if there was some sort of peg on which to base the value of the currency, inflation would be almost if not completely eliminated.

Given that the current market situation is the result of huge amounts of debt, it is extremely unlikely that the powers that be would decide at this point to peg the currency to gold again. I think they simply don't have the gold reserves necessary to accomplish something of this magnitude. However, the proposed solution is to fix the debt problem by issuing more debt. Well, I think that anyone can understand that this simply will not work. Giving a drug addict more drugs to get rid of the 'fix' is not really solving the problem, it is only delaying the solution. I think that it is inevitable that this house of cards will crumble at some point if a serious solution is not proposed.

Now, I know I am not the smartest guy in the world. In fact I only have a bachelors degree in finance, no masters and no doctorate. Therefore, I know that the establishment knows all of this as well as I do, and probably a lot more. So the question that arises is: why sustain this system which will surely result in economic catastrophe? Ultimately, this will end up costing those who have money the most, as their money will be worthless. So why?

Great video about the banking industry and the Federal Reserve: Money, Banking and the Federal Reserve.

Another great video: Money as Debt


Other interesting readings:

Global Research - Financial Meltdown: The Greatest Transfer of Wealth in History
(Amazing article which discusses several of the aspects I mention in this post)

Wall Street Journal - Moody's CEO Warned Profit Push Posed a Risk to Quality of Ratings

Reuters - U.S. Has Plundered World Wealth With Dollar: China Paper

International Herald Tribune - G-7 Warns Against Strengthening Yen as Financial Turmoil Deepens

The World Economic Forum Fails to Stem Crisis

There is a very interesting article on Bloomberg today about the World Economic Forum (WEF), which meets annually in Davos, Switzerland. The article discusses why the forum did not predict that the worlds debt was going to collapse on itself.

The WEF is composed and funded by 1000 global member corporations with revenues exceeding $5B. Naturally, a who's who of important global bank and corporate leaders, alongside their political front men and celebrity ego strokers, have been meeting every year for the past 27 years to discuss global issues and attempt to propose solutions.

There is something discomforting about the fact that these 'important' people meet every year to discuss our future under the pretense of solving 'global' problems. If that was truly the case, and the WEF was an effective forum for solving global issues, then why was this financial catastrophe currently gripping the world (an several others before it) not identified and dealt with at the appropriate time?

It seems to me these meetings are more about the attendees getting together and stroking their own egos (after all, they are the top global leaders, politicians and celebrities) than it is about helping people like you and me.

The World Economic Forums slogan is "committed to improving the State of the World". Quite clearly though, they are doing a lousy job as there have been multiple crises' and wars since the forum began in 1971.

On a positive note, at least the WEF identified Canadian banks as the soundest in the world. So at least my money is somewhat safe, even though our banks here in Canada have already started a push to pay their way out of the crisis through more debt. I and several of my friends have already received calls from our banks offering us lines of credit and increased credit card limits. I am still making the same amount of money as I was 3 months ago RBC!

Official World Economic Forum Website: http://www.weforum.org/


More Readings:

Bloomberg - Out of Control' Wall Street Chiefs Spurned Warnings at Davos

Business Week - Top Countries in Global Competitiveness

CTV - Canadian Banks the Soundest in the World: Report

Markets Rebounding, But For How Long?

So we're back to discussing the financial crisis today. I have returned to the office after a short Thanksgiving holiday (in Canada its earlier), and it seems that the stock market is having an identity crisis today.

Although the good news of all the cash injections and bailouts being offered to the banks seems to be sinking well with the markets, they still seem to be having some digestive difficulties with all of these governmental plans. Also, I don't see anyone in the press stopping to ask the obvious question: Where is all this money coming from?

It would apprear that the authorities (both governmental and economic) would have us believe that throwing money at the problem will result in a shoring up of market confidence. But is this really a long-term solution? Will giving more power and money to the banks really solve the problem?

Another interesting question to think about it why the US government (and many others around the world) are now speaking about buying equity in "healthy" banks. If the banks are "healthy" as they say, wouldn't it make more sense to buy equity positions in not-"healthy" banks, so as to avoid further bank collapses?

There is something fishy going on here. First with Henry Paulson, Gavyn Davies and now Neel Kashkari (the newly appointed head of TARP) all being former Golden Sachs heavyweights. Also, look at the nine banks the government will mostly invest in: Citigroup, Wells Fargo, JP Morgan Chase, Bank of America/Merrill Lynch, Morgan Stanley, Goldman Sachs (of course), New York Mellon Corp and State Street Corp. (The other smaller banks will get peanuts)

Then lets look at who was just chosen to administer the $700B U.S. Treasury plan: NY Mellon Corp. Coincidentally, they are also about to receive $3B as an 'equity' investment from the government. What a stroke of luck...

Third, look who was chosen to bail the banks out. Just look at Paulsons face. Does this look like someone who is looking after your interests?

To conclude, there is something more going on here than meets the eye. I will be putting together some posts on these nine banks in the coming weeks in the hopes of clearing up some of the inevitable confusion surrounding the free lunch the banks are about to get...

In the meantime, this website gives you a nice overview of how the US government spends its tax dollars: http://www.federalbudget.com/

Notice the interest payments for 2006 were $405 billion. Compare that to the TOTAL amount spent on education and transportation combined: $117 billion. And this was in 2006!


More readings for the day:

Bloomberg - Paulson Plans to Invest in Thousands of U.S. Banks
(Ironically, the name of this article changed between earlier this afternoon and now. Basically this article discusses the equity injections into the banking system by the US Treasury)

Bloomberg - BNY Mellon Chosen to Administer U.S. Treasury Plan
(This article discusses the appointment of BNY Mellon as the Treasuries Treasurer...Ironic...)

Reuters - Buy Out Bosses Meet in Dubai
(Now what in the world could these guys be doing right now?)

Reuters - Even as Markets Rally, Executive Fear Bear Trap
(Finally, a decent article on the financial crisis)

International Herald Tribune - U.S. Investing $250B in banks
(Good article with a few additional details)

International Herald Tribune - After Early Rally, Wall Street Loses Steam
(Loses steam today, and by tomorrow or Thursday, we should be sliding again. There aren't enough pro-banking laws that were passed yet...)

BBC - Timeline of Global Credit Crunch
(Good stuff from the BBC, showing a timeline of events dating back to April 2007)