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Nov 25, 2008 - It followed the same pattern we have become familiar with. Market rumors about Citigroup, America’s second largest bank, send stock prices tumbling. I’ve been saying Citi was basically insolvent for nearly a year now. Funny how all these MBAs and market wizards couldn’t figure that out until last week. But we saw the same old game of charades. Citi continued posing as a solid financial institution, releasing the same hackneyed statements that its capital position was “sound.” Then we got another weekend emergency meeting. (Yeah, bad things have been happening on quiet Sunday mornings ever since Pearl Harbor.) The home team comes out on Monday, 11/24/08, with another full court press to announce a “sweeping” new bailout plan for this supposedly solid banking giant. There’s a quick “injection” of another $20 billion, just another fix to get those insolvency jitters under control a while. The Bank is like a hopeless addict now, a debt junkie with a multi-billion dollar habit every month. The government has now pledged to backstop an estimated $306 billion in potential losses on Citi’s books. So I guess now we know how they plan to spend the $300 billion they begged from the Gulf States last week. AFP reported “The United States has asked four oil-rich Gulf states for close to $300 billion dollars to help it curb the global financial meltdown... Quoting ‘highly informed’ sources, the (Kuwait) daily said Washington has asked Saudi Arabia for $120 billion dollars, the United Arab Emirates for $70 billion dollars, Qatar for $60 billion dollars and was seeking $40 billion dollars from Kuwait.” I guess they knew Citi was going to need a cool $300 billion to avoid pulling a World Trade Center style collapse on us in the months ahead. It’s stock was already going the way of GM, Ford and Chrysler, soon to be cheaper than a cup of Starbucks white mocha. The N.Y. Times presented a quick rundown on Citi’s balance sheet: “David Hendler, an analyst at CreditSights, pointed out that Citigroup’s other assets included $91 billion in credit card receivables, $272 billion in non-United States consumer loans, $163 billion in corporate loans and a net $104 billion in assorted derivatives. Those assets, he wrote, ‘are not immune to weakness in the overall economy.’ ” Ya think? You can start worrying about those credit card loans right now. Ditto for corporate loans, and consumers overseas will be in no better shape than their American cousins. Yes, I’d definitely say these so called ‘assets’ are on shaky ground. So what have Citi and some of the other big banks been doing lately? Are they finally chastised, tightening their belts, getting back to sound business practices? Hardly. They’ve been issuing new securities placing bets on how many assets will be recovered from troubled companies like GM and MBIA. In effect, they’ve been securitizing the work of the vultures about to start feeding on the fallen corpses of these companies, and betting on the outcome. They’ve been doling out billions in bonus money. You get bonuses by driving your bank to insolvency and government bailout? This isn’t the only multi-billion dollar dance in the news of late. Business week reported: “The Federal Reserve said Tuesday it will buy up to $600 billion in mortgage-backed assets in another attempt to deal with the financial crisis. The Fed said it will purchase up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. It also will purchase another $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors. The $600 billion effort on mortgages came as the Fed also unveiled a new program to help unfreeze the market that backs consumer debt such as credit cards, auto loans and student loans. The program on consumer debt will lend up to $200 billion to the holders of securities backed by various types of consumer loans.” Well, you can sure see where priorities lie in all of this. The Defense department couldn’t wrangle money to upgrade our hummers or provide our troops with adequate body armor. But in the blink of a digital eye, the Fed comes up with trillions to save the big bankers and financial institutions--assuming you consider all these bank failures and bankrupt institutions “saved” now. These numbers get tossed around so cavalierly that we don’t even stop to think that each of these half trillion slices of the bailout pie was equal to what we spent for the war in Iraq! In researching his book Bailout Nation, Barry Ritholtz and Jim Bianco of Bianco Research put our current crisis into historical perspective. Adjusted for inflation, here’s what some major historical cash outlays cost: • Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion We have now allocated over twice that amount to bail out Wall Street fat cats and their corrupt banking business. This is absolutely amazing...astounding...mind boggling! Can you imagine any nation paying for all those wars and programs in a single year...twice? That’s the catch most people don’t understand. We can’t pay for the bailouts. The government is already broke, running up huge budget deficits each year. How do these fat cat rescues get funded then? The answer: by borrowing from overseas, selling treasury bonds or simply printing up the money. Here’s our current bail out tally.
So just consider: AIG got more money than the Marshall Plan... The TARP fund exceeds the amount we spent in over a decade of fighting in Vietnam... The bankers and investment houses have received more than we spent for the Louisiana Purchase or the entire moon landing program. In fact, our current bail outs now exceed the cost of fighting World War II--money allocated in just a few months time; money pledged that was not in our possession and did not even exist a few months ago. Yet it exists now...and what does that augur for the future value of the dollar? Starting to feel like someone just dropped a house on you with all this cheery news? Credit is as frozen as the Tin Man was in the Wizard of Oz, and all this “liquidity” doesn’t seem to be doing the job. The average small business, and typical consumer is still squealing “Oil can! Oil can!” but the money just goes to the banks. These little bailout monkeys have been ripping future prospects for the economy to shreds-- $700 billion here, and $600 billion over there, and $300 billion up there... By the time these geniuses get through we’ll all feel like the scarecrow, with our straw scattered all over the place by deflation and depression. Someone should throw a bucket of water on the Fed and shrivel that institution into smoke. Oh, what a world, what a world, what a world! You know what? When Banker Dorothy dragged Scarecrow Paulson, Tin Man Bernanke, and that Cowardly Lion Bush up that gold paved yellow brick road, we all got dragged along too. When does it stop? Everybody and their mother is lined up for a bailout these days. I saw a cute sign in a local shop window in town the other day, and we should hang it outside Uncle Sam’s payday window and put a stop to this nonsense. It read simply: NOBODY GETS IN TO SEE THE WIZARD. NOT NOBODY, NOT NO HOW! Folks, I don’t think any amount of wishing, or even a pair of red magic slippers will get us out of this one. There’s enough hot air from Paulson and the Fed to fill a big balloon, but we won’t get back to Kansas on that anytime soon either. Those dollars have to come from somewhere, and not even all the sheiks in Saudia Arabia could pony up that kind of cash. The government is going to have to make some huge treasury bond offerings to try and raise that money, and what if the Chinese and Japanese get smart and stop buying? All that leaves us with is the printing press. My guess is we have at least six months left where our dollars still hold their value, but eighteen months from now, watch out. The back side of this present deflation storm the Fed has been fighting is called hyper-inflation. No matter what the government or the Fed does now, Americans are going to wake up next year to the grim realization, if they don’t already know it, that this isn’t Kansas anymore. John Schettler |
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Just follow the yellow brick road. By Nov 13th the
tally, according to MSNBC was a cool $4.2 trillion, or $4284 billion, to be more precise. Mish Shedlock thinks it’s even worse. His tally is