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A death panel for Citi

September 15, 2009

It’s way too soon for the federal government to contemplate reducing its considerable equity stake in Citigroup.

If anything, now’s the time for the feds to finally get tough with the troubled giant and establish a firm deadline for forcing Citi to shrink itself.

What better way to mark the anniversary of Lehman Brothers’ chaotic collapse and the birth of bailout nation than with a presidential directive giving Citi one year to reduce its $1.8 trillion balance sheet by half?

Harsh? Yes, but that’s the point. To restore the principle of moral hazard, the managers of giant banks need to know that there must be some consequences for their reckless actions.

Any “too big to fail” bank that gets bailed out shouldn’t be able to simply walk away to live another day as if nothing has happened.

Now don’t get me wrong. The bailout of the banking system was necessary to prevent a global financial meltdown. Propping up Citi with a $45 billion cash infusion and a federal guarantee on $300 billion in toxic assets prevented an out-of-control collapse of the mammoth bank that would have made Lehman’s bankruptcy look like a case in small-claims court.

But Wall Street historian Charles Geisst says Citi “hasn’t paid much of a price” for its many misdeeds — including SIVs, CDOs and subprime mortgages, not to mention reckless credit card and auto loans. And I suspect a lot of the populist anger over the bailout stems from the view that the banks have gotten away with murder.

There’s been a lot of silly talk during the healthcare debate about “death panels” that would supposedly decide which elderly citizens should or should not get medical treatment. It’s simply not true.

But I have no problem if the Obama administration wants to establish death panels for the too-big-to-fail financial institutions that exist only because of the taxpayers’ largess. And Citi would be the perfect test case.

If it can’t find a way to shrink its balance sheet — either through asset sales to vulture investment funds, dispositions to other institutions or spinoffs to shareholders — it should go before a government banking death panel.

Earlier this year, Treasury made a big mistake in letting 10 big banks, including Goldman Sachs and JPMorgan Chase, pay back $70 billion in bailout money. In doing so, the federal government lost all control over these banks, which could again threaten the world financial system with their imprudent actions.

So President Obama now has to come to lower Manhattan to more or less plead with the titans of Wall Street to change their ways and not return to the excesses that led to the financial crisis. The Obama administration would be in a much stronger position to push for financial regulatory reforms if the government still had its meat hooks in the banks’ hides.

But Obama and Treasury Secretary Timothy Geithner are afraid of giving the appearance they are micro-managing the banks or fueling cries of “socialism” from the peanut gallery.

So they are moving quickly to reduce the government’s footprint in the banking system and even trumpeting the fact that taxpayers are making a profit on the bailout money that has been returned.

Yet Obama is missing the point: The right wingers opposing him will oppose him no matter what he does. What the president should worry about is winning the support of the rest of the nation worried that the banks that caused this mess are getting off too easy.

A good way for Obama to win over the vast majority of Americans to his side would be to make an example of Citi. His message to Wall Street going forward should be: If you mess up, we’re going to break you up.

Comments

Mr Goldstein,
You are right that “a lot of the populist anger over the bailout stems from the view that the banks have gotten away with murder.”
But your article seems to share the populistic ignorance.
Citi has to be sized down for systemic reasons, not for moral ones.
Citi shareholders did not get away with anything, much less murder. Their shares became almost worthless -rightly so- and if the bank has any value now, it belongs mostly to the new shareholders who put fresh money after the collapse. (including the US Government)
Old shareholders were dilluted -again, rightly so- but why should they deserve any additional punishment?
Moral principle was rather well respected. Lets not fall into promoting lynch mobs.

Posted by Amateur | Report as abusive
 

Good points.

The mandated Boards should be punished, not shareholders ? Maybe the shareholding should be analysed first before jumping to conclusions ?

For all of these banks, if the stocks were to be passed/spun off, surely that would dilute the values even further ?

Another point – Jeffrey Friedman, Editor, Critical Review, yesterday highlighted populist ignorance: Three Myths about the Crisis: Bonuses, Irrationality, and Capitalism. I agree with it except an off-the-wall thought, maybe sovereign governments and their advisors have misled voters about real inflation or the calculation thereof. That, to me, would explain almost all the domino effects. Maybe the CPI calculations were manipulated for political reasons. Maybe there is still inflation and not stagflation or deflation ?

Posted by Casper | Report as abusive
 

…make that hyper-inflation that is being reduced by market forces to high inflation.

Posted by Casper | Report as abusive
 

Right on the spot.
Politicians stress the banks’ guilt, to hide their own:
The biggest culprit of the crisis is too cheap money, produced by politicians, to hold activity up, to help keep the incumbent in power.
Banks are just an instrument; it is like a killer blaming the gun.
Well for Mr. Friedman, but why on earth does Mr. Goldstein, in Reuters, spread the populist propaganda?
“Three Myths about the Crisis: Bonuses, Irrationality, and Capitalism”

Posted by Amateur | Report as abusive
 

I’ve read Jeffrey Friedman’s article and the comments from http://causesofthecrisis.blogspot.com/20 09/09/three-myths-about-crisis-bonuses.h tml

Quoting from Friedman’s article:
“None of these capitalists were irrational; all were self-interested; yet they had different perceptions of how to pursue their self-interest, based on different perceptions of risk.”

One Anonymous wrote as comment:
“Private gains and public losses are rational for individuals but are they for society?”

It seems to me that Friedman’s article has an
assumption (not explicitly stated) that:
” A person who acts out of self-interest in business and investment decisions is a rational person; sometimes, rational people make mistakes.”

I think that’s a stance in Ethics:
“A corollary to Rand’s endorsement of self-interest is her rejection of the ethical doctrine of altruism [...]”
[ Wikipedia on Objectivism] .

After some reflection, I does seem to me that Friedman’s article discounts altruistic motives, which would be consistent with Individualist Ethics.

Posted by David Bernier | Report as abusive
 

Now we are talking David, you gave me a fright there, thought it was a new female currency for South Africa, the Rand, (ZAR),

maybe we should just elaborate, i.e. Ayn Rand, Russian defector, author of my favourites: ‘We the Living, Fountain Head, Atlas Shrugged’. Commie turned Cappie went Happie ?

Posted by Casper | Report as abusive
 

Casper,

Jeffrey Friedman describes himself as a “minimal statist” . From reading some of what he wrote, I think he believes in some form of “free markets”. I wish to mention ethics positions (or “morals”), because (as an extreme case) what
was rational or “good” for Mother Teresa and what’s rational or “good” for free marketeers are very different. David

Posted by David Bernier | Report as abusive
 

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