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

Obama, Are You Asking For a Critique Already?

It didn't take very long to start critiquing Obama but after having read a Reuters article about his potential picks for the next Treasury Secretary, I felt I needed to comment. This is not to say that Obama yet deserves to be criticized, but I am already seeing the Washington bureaucracy and established order at work in his potential Treasury Secretaries.

Indeed, Obama's selection for this and other important roles in his administration will speak volumes about the approach he will take as president, and will give us a clue as to the man behind the 'cult figure.' Realistically speaking, how much decision making can one man (the president) really make? He will be relying on his inner circle to help him run the country, so his inner circle had better be up to par.

With the Treasury Secretary receiving all these new powers through the passage of the $700B bailout package, it was always obvious to me that it was not going to be Paulson excercising them, but his successor. So we should closely be watching who Obama is going to appoint in this crucial and increasingly important position. In my opinion, this should be someone with little ties to banks and corporations.

In fact, it should be a proven consumer advocate (i.e. someone who has consistently fought for the little guys) but that also has somewhat of a banking background, so that he can understand the mess and complexity of the issues that the banks and corporations have gotten us into. That way he would at least be in a position to propose intelligent and socially beneficial solutions to some of the problems facing the financial world today and tomorrow. I know I am probably being unrealistic in this expectation, but I try to be an optimist!

Lets take a look at the potential Trasury Secretaries one at a time:

1) Timothy Geithner, President of the Federal Reserve Bank of New York [profile]. A small amount of research into the US central banking system, i.e. the Federal Reserve, will show you that the most powerful, and essentially decision making branch, is the New York Fed. So my money is on Geithner taking the position for several reasons (please see the Muckety article below). This is not good news though. If you understand anything about how this system has been structured since 1913, you will realize that putting Geithner is just a continuation of the old debt-for-money scam and will do little to help 'Main Street', as the political elite have started calling it lately.

Greithner is closely affiliated to the Council on Foreign Relations and is chairman of the G-10’s Committee on Payment and Settlement Systems of the Bank for International Settlements. See his profile on the NY Fed website.

There is a great article about Tim Greither and some of his connections at news.muckety.com.


2) Former Treasury Secretary Lawrence Summers [profile]. Do I really need to say anything here? An old Treasury Secretary from the Clinton era, he has worked extensively in the Treasury. I very much doubt this will be Obama's pick so lets move to the next candidate on the list.


3) Former Federal Reserve Chairman Paul Volcker [profile]. Another member of the 'boys club.' He already served as Fed Chairman before Alan Greenspan. He has worked at both the New York Federal Reserve and the US Treasury, and is a powerhouse when it comes to political/corporate/banking connections. Definitely the second most likely candidate. The only reason I think he is unlikely to be chosen is because he flies in the face of Obamas 'Change' philosophy seeing as he is a well-established player in the game. Geithner is a lot more likely because he is young and is equivalently connected to the same crowd.

So in these three main choices, Obama is already starting to show his true colors, albeit wrapped in a much more politically attractive package. At the end of the day, will he be more loyal to the people who bankrolled him to the White House, or those that voted for him?

The following image illustrates who Obamas top campaign contributors were in the 2008 election campaign. I imagine a few people from these organizations will be filling positions in his new cabinet, especially from Goldman. Click on the image for more information.

I don't have an intelligent alternative suggestion, but I am open to hearing other people's ideas for who the next Treasury Secretary should be. Any ideas?


More readings:

Reuters - Obama considers Geithner, Summers for Treasury

Bloomberg - Summers, Emanuel Candidates for Obama Administration

International Herald Tribune - Obama Prepares to Name Key Team

Financial Post - Obama Must Pick Economic A-team

Obama Leads Democrats to Impressive Victory

I know that I am a fierce critic of everything government and corporation oriented. But even I have moments where I stop to admire people who have achieved something, even if they are sitting on the other side of the fence, or playing for the opposite side.

I must say that Obama's victory and subsequent speech inspired even me who is a total opponent of the American two-party system. Obama almost made me into a believer, so I can only imagine how he has moved and inspired all those who have been fighting for his presidency for the past 21 months. What a speech! Very powerful words and full of promises; it was the climax of a brilliantly organized and well fought campaign. Even McCain was admiring Obama in his concession speech.

Obama Victory Speech on You Tube

McCain Victory Speech on You Tube

In this post, I will say nothing critical or insulting about Obama or the US government. I really want to believe that Obama is not just blowing steam, but that he will really change the US and consequently the world in a good way. From foreign policy to corporatocracy, he has made a lot of big promises, and I really hope, for all of us, that he will deliver on these campaign promises.

Obama was absolutely right about one thing in his speech last night - The work does not stop here. The work never stops! Those people who worked so hard at bringing him to the White House, are now going to have to work twice as hard to make sure he is not corrupted by the system which he is about to enter. The position of president has been marginalized, and it will be very tough for Obama to break through all the Washington bureacracy and red-tape to get any major accomplishments. But I'll stay optimistic; expect the worst, but wish for the best.

The old Chinese curse had it right: "May you live in interesting times..."

Result Recaps, click on the image to see it in big (Images courtesy of CNN):

Election victory in the News:

NYTimes - After a Decisive Victory, Obama Chooses Transition Team as Challenges Loom

Reuters - After Historic Win, Obama Looks to Future

CNN - Obama's Victory Caps Struggles of Previous Generations

BBC - World Leaders Hail Obama Triumph

International Herald Tribune - Campaign Done, Obama Pulls His Team Together

NewsWeek - Hey, Mr. President-Elect, Got a Minute ... or 10?

MSNBC - Obama turns to building his administration

Election Excitement is Contagious In 2008

I have to say that this US Election-Mania is contagious. I have been glued to the BBC webcast ever since I got back from work. Although I know Obama is going to win, the mass excitement and hysteria surrounding this election has finally reached its zenith. So I am doing a quick post to show where the candidates stand in terms of states, just for future reference purposes.

I must admire the media for doing such a fine job of hyping this event up to the point where I almost believe that people actually have a choice here. Here is the electoral map with its projected winners. The yellow states are the ones which will likely determine this election.

Go Ron Paul!

Obama Will Take The Prize

It's the night before the election. And the pollsters have already dug a grave for John McCain. If you take a look at the most recent polls, you will see that Obama is leading McCain with a minimum of 6 points and a maximum of 13 points, depending on who you believe. But the commentators are trying to throw a monkey wrench into the equation by saying that people are 'unpredictable' and that they might change their mind once they get to voting. Please click on the following image to see the pre-election poll results from three major pollsters. Images courtesy of the BBC.

I don't think these people have stopped for a moment to admire the brilliant campaign Obama has been running. Ever since the primaries of the Democratic Party, Obama's campaign machine has been exceptionally well greased and has been pushing forward through all sorts of obstacles. They have made Obama into a cult figure, and have actually managed to convince a lot of people that he will bring about the "Change you can believe in."

As much as I would like to believe that, the fact that Obama's major political contributors are a who's who of the important banks and corporations, I find it very hard to believe that Obama is looking out for the people. In fact, there has been chatter of an "event" that the next US president is going to have to face as he enters the White House. Both Joe Biden and Colin Powell have mentioned this event, and Powell is an Obama supporter, while Biden is Obama's running mate. For more information on this, please check out this You Tube Video.

Obama is a perfect symbol of change, evolution; out with old, in with the new. He has to win, if the American people are to "have a hope for a better future." At least that's the image being created for Obama by the mainstream media.

So on that note I leave you. I am only going to recommend one article today, but an article that I definitely think is worth reading...

Global Research - A Second 9/11: An Integral Part of US Military Doctrine