Even Scarier In The Transcript

The NY Times offers this troubling account of a "This Week" appearance by Sen. Shelby:

John McCain and Richard C. Shelby, two high-profile Republican senators, said on Sunday that the government should allow a number of the biggest American banks to fail.

“Close them down, get them out of business,” Mr. Shelby, the senior Republican on the Banking Committee, told ABC’s “This Week With George Stephanopoulos.” “If they’re dead, they ought to be buried.”

While the Alabama senator did not say which banks to shutter, he suggested that Citigroup might be on that list, saying the bank has “always been a problem child.”

I am not sure what "fail" means here - surely Shelby expects the FDIC, i.e., the US Government, to take over the big banks, but then what?  Here is the transcript:

STEPHANOPOULOS: Well -- well, we’ve seen Secretary Geithner and the president say that now we’re going to take a middle-ground approach. They’ve out the beginnings of their plan on the banks. You don’t approve of that?

SHELBY: I don’t think it’ll work. I think that they’ve got to close some big banks. They don’t want to do it. We’re -- we’re going down the same road Japan was going down.

STEPHANOPOULOS: So you’re in the same place -- I had Senator Lindsey Graham on the problem a couple of weeks ago. He said we’re going to have to close, nationalize some of the big banks.

SHELBY: I don’t want to nationalize them. I think we need to close them...

(CROSSTALK)

STEPHANOPOULOS: So when you say “close,” what do you mean by them?

SHELBY: Close -- close them down, get them out of business. If they’re dead, they ought to be buried. We bury the small banks; we’ve got to bury some big ones and send a strong message to the market. And I believe that people will start investing in banks. People aren’t...

STEPHANOPOULOS: So you’re talking Citigroup?

SHELBY: Well, whatever. Citi’s always been a problem child.

We "bury" the small banks?  Normally FDIC orchestrates a sale to some other bank; see WaMu for example.  How and to whom they would sell Citigroup is an enduring mystery.

So what would it mean to "bury" Citi?  Pay off all the depositors?  Call all the existing loans?  Fire all current employees?  Surely that is too daft for Sen. Shelby's contemplation.  Selling off chunks of Citi to other banks seems unrealistic as well.  And speaking of chunks, how did that Lehman bankruptcy work out?

Oh, boy - Shelby is the ranking Republican on the Banking Committee and he is talking nonsense.  Not helpful.

BUT HE'S CONSISTENT:  Shelby at a town hall meeting:

Shelby said many banks in the country are still sound, including many smaller, local banks. He said it is megabanks that have jeopardized the economy by unsound and greedy loan practices such as bundling loans that were unsound to begin with into investment packages, then reselling these "toxic" packages to other investors.

Can't give stress test unless there's a pulse

"They talk about givin'em stress tests," Shelby said, referring to plans to determine whether banks have adequate capital and limited bad debt so as to be able to pass bailout capital into the economy in the form of loans - before receiving infusions of bailout money. "You can't give a stress test to something that doesn't have a pulse.

"Some of those big banks are the walking dead," Shelby said, referring to the magnitude of bad debt they hold. "We need to merge'em or close'em."

Thanks to Deb in NC.

NOT WILLIE SUTTON'S HEIR:  I expect to see a story about a bank robber so dumb he tried to stick up a Citbank branch.  Ba dum.

[END OF MORAL HAZARD]

Comments

[bad]

I hate the Dem leadership on the hill but have no confidence in Republican leadership either.

DC is Yucca Mt ahead of the deadline.

[Charlie (Colorado)]

The more I listen to them, the more convinced I am that the qualification for the Banking Committee is that you know nothing to speak of about economics, accounting, or banking, and that there is in addition a two-digit upper limit on IQ.

[Charlie (Colorado)]

I think the actual answer is that Shelby doesn't actually know what he means, he just thinks "shut them down" sounds good.

[Thomas Esmond Knox]

My information is that Lehman is hiring in Australia.

[Rick Ballard]

"How and to whom they would sell Citigroup is an enduring mystery."

It sure is. Turbo better have a warehouse full of defibrillators available when he administers his "stress test" (please note that the term is disappearing from view). If he ran honest Basel II, Tier I tests on all the majors, which would pass? The EU is in even worse shape and there is no bank in the submerging economies that is faring any better than the EU banks.

Maybe Basel II and FASB 157 go in a nice box in the back of the closet for five years while this sorts itself out? A five year long "Night of the Living Dead" may seem unbearable but there are regionals and locals which are capable of supplanting the moribund over time.

[Old Lurker]

Charlie got the job requirements about right.

[Fresh Air]

Philosophically, I agree with Shelby. But you do need to embalm these cadavers slowly. Speaking of cadavers, is Bill Seidman still around? He ran the Savings & Loan Mortuary for a few years...

[RichatUF]

Rick-

You did notice that Obama is going to be in Europe when those tests are completed (and when GM and Chysler deliever their burial arrangments). With Dodd asking for 500 billion for the FDIC, I wonder if the Treasury is working on a "secret plan" using Obama's Czars at the the NSC instead of going through the bureaucrats at Treasury.

[Rick Ballard]

Now the World Bank is rattling the beggar's cup for $270-700 billion. Perhaps Zero, given his admiration for his Chicom brethren, could ask them to fill in for the US for a couple of years?

[bad]

brietbart:

At a Senate Finance Committee hearing Thursday, Senator Tom Carper told Geithner, "obviously, you need help," eliciting from the treasury secretary that he saw his family "less than I would like."

Gibbs, Obama and now Geithner.....

[DebinNC]

More Shelby on the banks from several weeks ago.

[Thomas Collins]

Chaco and Rick, does anyone really know whether "shutting them down" (which to any rational mind means having the Feds temporarily take them over, selling off the businesses that investors will buy, paying off the depositors and leaving most of the bondholders and the equity holders "holding the bag") is more dangerous to the financial system than the current course? I know a lot of folks point to letting Lehman go under as a mistake, but I am skeptical that keeping Lehman afloat would have put us in a better situation today.

By the way, I realize that having the world financial system in Chapter 11 for five years (with the major central banks and finance ministers of the world in effect serving as the trustees), but not calling it bankruptcy, could work better the having a reverse auction and then pulling the plug on whatever firms can't make it after the reverse auction. Perhaps "don't ask, don't tell" in this case works better than "letting it all hang out." But I doubt it. When the amount of credit floating around the world is not supported by the productivity needed to generate the growth to service the debt (which seems to have been the case), a painful contraction is inevitable.

I realize that I may be giving the Senators too much credit by assuming that they know that "shutting them down" involves some sort of orderly liquidation process. But if they are that ignorant, we are in even bigger trouble than we think.

[Thomas Collins]

Chaco and Rick, does anyone really know whether "shutting them down" (which to any rational mind means having the Feds temporarily take them over, selling off the businesses that investors will buy, paying off the depositors and leaving most of the bondholders and the equity holders "holding the bag") is more dangerous to the financial system than the current course? I know a lot of folks point to letting Lehman go under as a mistake, but I am skeptical that keeping Lehman afloat would have put us in a better situation today.

By the way, I realize that having the world financial system in Chapter 11 for five years (with the major central banks and finance ministers of the world in effect serving as the trustees), but not calling it bankruptcy, could work better the having a reverse auction and then pulling the plug on whatever firms can't make it after the reverse auction. Perhaps "don't ask, don't tell" in this case works better than "letting it all hang out." But I doubt it. When the amount of credit floating around the world is not supported by the productivity needed to generate the growth to service the debt (which seems to have been the case), a painful contraction is inevitable.

I realize that I may be giving the Senators too much credit by assuming that they know that "shutting them down" involves some sort of orderly liquidation process. But if they are that ignorant, we are in even bigger trouble than we think.

[bad]

Bretbart: LUN

To help Geithner on international financial matters, Treasury has provisionally hired Ted Truman, an economist at the Peterson Institute of International Economics in Washington, according to a Treasury official.

Truman was Geithner's assistant at Treasury when he served as under secretary for international affairs in the late 1990s.

Was Truman "helping" Geithner during the Indonesia banking mess....

[Thomas Collins]

It seems as if when I press "Preview" and then "Post" under the New Typepad Order, my post comes out in double. Does anyone know how to avoid this (if this has already been discussed, I must have missed it).

By the way, I try not to be a "Good Old Days" type, but can anyone remind me what was wrong with the "Old Typepad Order," when everything was on one page and if one double posted it was because one really did post twice?

[jimmyk]

I'm willing to give Shelby the benefit of the doubt that at the very least he would have the FDIC pay off the depositors. That's a given. With that, I'm pretty sympathetic to what he's saying. It's the difference between a lot of pain in the short run vs. dragging this thing out for years as the Japanese did. But he does need to be clear about it. Vagueness helps to freeze up the markets.

[Rick Ballard]

TC,

I don't believe that anyone "knows" what liquidation would actually look like. If I look at potential damage to pension funds, I have to know how many sacks of CDS grenades they purchased along with their MBS deals. If Zombiegroup is posting up capital against their counterpart obligation on the MBS sold to CalPERS on one hand and not posting against the synthetic CDS which they peddled on the side then, as TM noted, the holder of the synthetic gets to stand in line with all the other unsecured creditors when USS Zombiegroup sinks beneath the waves while CalPERS counts up the booty.

I tend to think of Lehman as a gesture pour encourager les autres. A rather brutal method of focusing attention but probably necessary. The snail like speed with which the CDS market is being rationalized makes me as suspicious of the political aspect of this farce as the appointment of Mary Schapiro at the SEC. Putting a fox in charge of guarding the hen house is a less than inspirational move. Sort of like allowing Madoff to park his sorry butt in his penthouse rather than spending some quality time in Stoney Lonesome.

What is lost by allowing Zombiegroup to stumble along, losing the occasional finger or toe? Does Schumpeterian creative destruction have to occur through the defined process of bankruptcy or is an undefined process of attrition perform the same function? I don't have an answer to that one.

[RichatUF]

TC-

Bernanke addressed the point in his testimony last week that the government doesn't have the authority or staff to fully wind down large multinational financial institutions. The Fed has been shopping parts of AIG for a while and have only been able to sell of some smaller units for about a third of the asking price.

Citi is a tough case because not only is it intertwined on Wall Street but it is also intertwined on Main Street because of the number of credit cards it manages (among other things). *I think it is about 20% of total US revolving accounts are held by CitiCards, but I haven't found sources I'd fully trust for that number and am too lazy right now to look them up.*

The Lehman bankruptcy sent LIBOR rates to 6.5% and US Treasuries to zero-Skeptical Optimist commentary on money velocity.

[Fresh Air]

Rick--

I think it would be better to let the vultures pick over the carrion while there's still a decent meal to be had. It's a question of how you disassemble the wildebeast at this point. No private equity will come into the picture until a clear picture of the liabilities and assets can be established. Even Geithner doesn't know what that looks like. I'm guessing a Munch would look prettier, though perhaps no more colorful.

[bad]

ABC:

Editor's Note: Over the weekend, additional information led us to rework this article. We have restored the original wording as additional reporting reconfirms the information posted Friday night.

Gen. Odierno will maintain a two-Stryker Brigade presence through the rest of this year even though a replacement Stryker Brigade had been redirected to Afghansitan [sic]. The Pentagon's announcement Monday that the 4th Stryker BCT, 2nd Infantry Division will head to Iraq in the Fall means both brigades currently in Iraq will be replaced by Stryker Brigades. In shorthand, the 4th SBCT/2nd ID will replace the 1st SBCT/25th ID and the 3rd SBCT/2nd ID will the 56th National Guard Stryker Brigade.

No drawdown of Iraq troops till next year, apparently.

[Rick Ballard]

FA,

I would agree were it not for the unwholesome stench emanating from the proposed hedge fund participation in ill-defined "public-private" partnerships. It reeks of fascism and a political "pick the winner" party which makes the current mess look like a Boy Scout meeting.

[jimmyk]

RichatUF,
The Lehman bankruptcy sent LIBOR rates to 6.5% and US Treasuries to zero

Willem Buiter (LUN) cites John Taylor's study showing otherwise. I think people are too quick to cite Lehman as the basis for continuing bailouts.

Rick,
What is lost by allowing Zombiegroup to stumble along, losing the occasional finger or toe?

What's lost is that we could have years of financial paralysis as we watch Citi on its deathbed a la Franco, while no one knows what the rules of the game are. The uncertainty about what Geithner or Bernanke will scheme up next (and what price they will pay) only adds to the paralysis. And whatever they do basically involves taking taxpayer money and giving it to the bondholders of Citi and its counterparties. I don't see the justification.

[PD]

By the way, I try not to be a "Good Old Days" type, but can anyone remind me what was wrong with the "Old Typepad Order,"

The old way had the fatal shortcoming of working properly, so it had to be improved.

(Yes, yes, I know: There were still reasons back then to call it TyphusPad. Still, it was better then than now.)

[Rick Ballard]

Jimmyk,

I guess I can't see a quick restoration of the ABS/CDS paradigm regardless of the particular outcome for Citi. I'm also unsure as to why I should be in favor of a restoration of that paradigm.

It's not that I care a fig whether Citi lives or dies - I'd see it dead in half a heartbeat if I could just know where all the bags of grenades were buried in the minefield. If the price was Citi plus Goldman-Sachs - no problem. If the price is Citi, GS, JPM and WFC then I want to look at the hole card a couple of more times. If the price is George Soros owning any of those as a grinning public/private partner then no way.

[Thomas Collins]

Rick and RichatUF, you make the case to let Zombiegroup stumble along in a "don't ask, don't tell" worldwide Chapter 11 better than I can make the case to pull the plug. I just wish I had more confidence in our representatives (Bernanke and Geithner) on the worldwide trustees' board.

Perhaps adding to my consternation is that, as was referenced by TM in a prior post, one of Obama's folks, apparently in Obama's defense in the Gordon Brown debacle, has acknowledged that Obama is not up to the job. I can't wait to see what is said when Obama's folks are actually trying to undermine him.

[Fresh Air]

Damnit, Rick! I own GS stock. Now cut that out!

[Rick Ballard]

I think the probable outcome will resemble the BNP/Fortis deal. I just can't figure out who gets to play the Bride of Zombiestein.

They might arrange a forced marriage to GS. FA - you lucky devil, you'll have a piece of the spawn. You and Buffett.

[Jim Rhoads a/k/a vjnjagvet]

Is TCO really Sen. Shelby?

[Pofarmer]

What is lost by allowing Zombiegroup to stumble along, losing the occasional finger or toe?

Probably hundreds of billions of taxpayer dollars. Shut em down, split em up. We've made a major error letting these banks get "too big to fail." Let's not compound the error by allowing them to siphon taxpayer money indefinately.

[Jane]

Government cannot fixed our problems. They never could. Why do we constantly look to these people as if they know what they are doing?

The ultimate solution is to make government small - and then work to be responsible for yourself and help your neighbors and community where you can.

Our faith in government solutions will just lead to more problems and, more importantly, less freedom and liberty.

[RichatUF]

Rick-

Or even better-ACORN at the receiving end of Citi's mortgage books. Would you want those guys as your mortgage servicer? I guarantee that ACORN is going to be in the front ranks for that "public private partnership" trough.

I suppose once the rotting corpses are cleaned up, Obama Administration allies will be better off and the American people will still be uninformed, poorer, and taxed higher regardless of whether Citi comes up with its own burial plan, the Feds mop up the putrid flesh that falls off of it, or the Treasury Department (needing to raise staff and have a "bad bank") decides to take the whole thing over.

jimmky-

The fed funds rate was cut by a point during the intervening period for that spread to blow out. LIBOR:ON spiked to 6.45% on the Lehman bankruptcy then spiked again about two weeks later with the collapse of WaMu, Wachovia, B&B (British), Fortis (Belgium). The fed moved the Fed Funds rate from 2.25 to 1.25 in that intervening period (ie LIBOR was going up and the FFR was going down making that spread wider as time went on-for thirty days the last day in the average would have been the Lehman bankruptcy at its record high).

[JM Hanes]

Could someone translate "Zombiegroup" so this layman can follow along? Are we talking Citigroup -- or some sort of undead financial groupies?

[Rick Ballard]

JMH,

Zombiegroup is Citigroup - better dead or already dead according to Sen . Shelby.

OTOH - ZombieMotors is GM, which McCain judges as dead as well.

[glasater]

Drudge--I believe--had a head line not that long ago that Treasury was thinking of loaning money to hedge funds to clean up the derivatives.
The thought of Soros anywhere in that equation will make me bezerk.

Thomas Collins~

I don't know which browser you use but I do not have the double post problem in Safari--even with using preview.

[mel]

Rick-

Fortis, a Belgian/Netherlands combine, was equally bailed out by both countries after eating ABN Amro, which they couldn't afford. The leverage they ran up for their share of the purchase, exposed Belgium, if Fortis failed, to a sum equal to two times their annual. GDP.

Where you arrived at your conclusions I have no sense of the data flow. I have asked for your links before, and I ask you again, please give me a point to find your references.

If you were an employee of Citi, and know how the Tribeca cabal works, then you would be commenting in a more informed manner. So far, you're not, I know, because I was.

Time for dinner.

[bad]

Breitbart:

PYONGYANG/BEIJING, March 9 (AP) - (Kyodo)—North Korea warned Monday that any move to intercept what it calls a satellite launch and what other countries suspect may be a missile test-firing would result in a counterstrike against the countries trying to stop it.
"We will retaliate (over) any act of intercepting our satellite for peaceful purposes with prompt counterstrikes by the most powerful military means," the official Korean Central News Agency quoted a spokesman of the General Staff of the Korean People's Army as saying.

If countries such as the United States, Japan or South Korea try to intercept the launch, the North Korean military will carry out "a just retaliatory strike operation not only against all the interceptor means involved but against the strongholds" of the countries, it said.

"Shooting our satellite for peaceful purposes will precisely mean a war," it added.

North Korea earlier announced it is preparing to put a communications satellite into space, but outside observers suspect it may in fact be a test-firing of a long-range ballistic missile.

Drudge has this in huge red letters.

[Thomas Collins]

I hope Barry's national security aides don't interrupt his nap over the NoKo threat.

[clarice]

I wish TM would offer up what he considers the best solution.

[Jim Rhoads a/k/a vjnjagvet]

bad:

D'ya think this is what Biden meant by testing the boy wonder?

[RichatUF]

What's lost is that we could have years of financial paralysis as we watch Citi on its deathbed a la Franco, while no one knows what the rules of the game are.

We are going to end up with years of financial paralysis anyway. Citi, in what ever form it takes, is going to take years to wind down.

In the mean time, the GOP can point to Zombiegroup as a corrupt failure of the Obama Administration and the Democrat Congress and come up with solutions to turn the ship of state around.

[bmcburney]

TM,

I can't help it. I think I agree with Shelby.

Once every ten years or so, Citibank implodes and has to be rescued by the Federal Government. When this occurs it is justified by the argument that Citibank is just too big to fail. Everytime this happens the rescue allows it to become bigger and its management to become stupider.

If it is now insolvent, Citibank should be taken over by the FDIC. As many parts of Citibank and its assets as can find buyers should be sold and the money used to pay depositors off. This process will undoubtably be expensive but it is less expensive then the alternative.

[jimmyk]

If the price was Citi plus Goldman-Sachs - no problem. If the price is Citi, GS, JPM and WFC then I want to look at the hole card a couple of more times.

Even if one takes that view, then help Citi's counterparties rather than keep Citi on life support out of some vague fear of what might happen. There's a better case for their innocence than for Citi's. If we're really only concerned about the collateral damage (no pun intended), then address that directly.

[bad]

Jim, I'm trying not to think about it at all given the decision makers in DC. That 3am call thing and all.....

[Extraneus]

If banks are exempt from bankruptcy, then maybe they should just be nationalized. It makes no sense otherwise.

Can we have a list of which businesses are at risk of bankruptcy and which aren't? Obviously, my plumber needs to remain solvent or else. Not so my bank? How about my grocery store? Car dealership? Steel mill? Alternative energy boondogle?

In the dictionary.com definition of bankruptcy, it says:

Having been legally declared financially insolvent.

So it all comes down to avoiding the legal proceeding.

[matt]

The Japanese had a similar banking sector crisis in the early 90's and kept a number of banks on life support for years. The result was a 10 year recession. I think this is what McCain and Shelby are looking at. That plan pumped billions into the economy with no real result. At the same time, the Japanese enacted huge public works projects, which also had little effect.

I think perhaps McCain and Shelby are looking further back to previous US recessions and depressions, which were sharp and short. Unfortunately, with a global economy the pins fall a lot faster now and the effect emanates throughout the world.

Bank failures in Eastern Europse will affect Western Europe, who hold their paper, which will affect the US. This is irregardless of what we do with our economy. We can only mitigate the effect. If our banks are holding lots of overseas debt, which they are, this will place further pressure on their balance sheets.

There has to be consolidation, and sooner rather than later. The markets are still frozen, and businesses are grinding to a halt.

[Jane]

So it all comes down to avoiding the legal proceeding.

Yeah which is dumb because the legal proceeding takes all the obligations and dissolves them for the most part.

IF GM declares bankruptcy it can get out of all those pesky labor contracts.

[mel]

Citi, right now, is in a joint venture to spin off Salomon Smith Barney and combine Morgan Stanley's brokerage groups. Who's going to staff it, is the real question. I hate using this phrase, but it applies, "everybody knows" Citi got too big for its own good. That's a firm that has over 300,000 employees, do you kick them ALL to the street? I don't think so. You develop an orderly transition, selling assets, creating interesting joint ventures for groups that would have failed if left on their own, after which, they continue to make money, for their clients, for the business and taxes for government. That would be the normal solution. All these cries for nationalization would, in essence, be creating the banking arm of the DMV. Lots of helpful government employees, just waiting for you, yes YOU!, to come in the door to ask them to help you. Oh, and if you own stock? Ask for the certificates, they'll make nice placemats.

bad, why does he never respond when I ask him this stuff? And shows up after I've crashed?

[tp]

My guess is that they will sell Citi's deposits and guarantee the assets to one of the private equity funds that will be fronting for Prince Alaweed, the Kuwaitis, the Singaporeans and the US Treasury. They will wipe out most of the rest of the $15 billion market cap. This is exactly what the FDIC would do to a bank in Podunk, IA except they would not guarantee the assets. Those assets the acquirer didn't want would normally go to the FDIC to sell off. Instead, the new owners will do it. It is a better outcome than what happened to Lehman. Wall Street just butchered that carcass. The question is, which private equity fund?

[tp]

My guess is that all of these institutions will go private of the next few years--one way or the other.

[Extraneus]

IF GM declares bankruptcy it can get out of all those pesky labor contracts.

Well there's a reason not to allow it right there. Maybe all businesses with labor contracts should be immune to bankruptcy because, after all, they have labor contracts. Let's just nationalize them.

And while we're at it, all businesses with pension funds might be better off nationalized because, after all, those funds could be vulnerable to the vagaries of the market, and that wouldn't be fair to the workers.

And now that I think of it, a lot of people had 401k plans, and those should probably be nationalized, too, because it's just not right for everyday working people to be at the mercy of evil Wall Street financiers.

Does the slippery slope argument apply to banks or not?

[bad]

Mel, someone else agrees with me on the issue of govt making "worthiness" choices.

DC Examiner editorial regarding decreases in charitable deductions:

Obama’s Office of Management and Budget director Peter Orszag ludicrously claimed that charities would not suffer because the president generously set aside $100 million in the recently passed “stimulus bill” to support non-profit entities. In other words, Obama and federal bureaucrats, not individual Americans, will be choosing which charities are worthy of receiving such support. That’s another dangerous expansion of government control by an administration that continually seems to hunger for more.

Sorry about the question guy...

[mel]

Extraneus-

Now you got MY drift.

And I haven't been sleeping because of it.

That's a big pile o' money just settin' there, ain't it?

[mel]

tp-

The joint venture is to separate Citi (the bank), form Citi (just what have you been doing in there mister) the other stuff. Eventually, they'll slowly whittle it down to a good bank/bad bank, but that takes time.

And the shorts are running the show, unfortunately.

[mel]

bad-

That's precisely the issue I was, I thought, talking about.

Well, we're going to find out how quickly power corrupts, aren't we.

Good time to be a lobbyist, I would imagine. Me? I couldn't afford my water bill, after all those showers. I would need a free room, or something.

ba-dum- chisss. (I got a million of 'em).

[Jim Rhoads a/k/a vjnjagvet]

Before we can go to Jane's Island, we have to form a Government Recognized Organization ("GCO") to get us some of that free money. First one who sees the proposed regulations in the Federal Register make sure we get it on Rick's to do list to distribute to all.

With all of the experience and erudition on JMO, it should be a piece of cake to get a piece of the pie. [mixed cliches intentional].

[mel]

JR-

Are you a grant writer? That would be a big start.

After that, we need an easily misread acronym, like ACURN or something.

I know we can't afford the campaign contributions this venture would require.

[Rick Ballard]

mel,

Probably due to the utter incoherence of your questions. Perhaps you could explain for everyone what "Where you arrived at your conclusions I have no sense of the data flow." means in simple English.

I draw most of my conclusions from reading the light chatter contained in SEC filings not having access to gossip on the trading floor.

Jimmyk,

I think I made it clear that it's only the collateral damage which is interesting to me. When Lehman went down, Citi had around 40,000 open transactions with them. It netted to "no significant negative impact" (not a precise quote) and if there were some assurance that would be true for all of Citi's collateral players, then let 'er rip. I would note that the terms of CDS may put the FDIC on the hook for a bit more than one might think. They had $780 B in deposits as of September 30. Remember, Lehman brought 8 cents on the dollar at the CDS auction. Citi may bring a bit more but I can't begin to speculate as to how much. That $500 B bump in the FDIC authorization isn't receiving appropriate scrutiny at all.

[Stephanie]

What does one trillion dollars look like?

LUN

[Eyas]

JESUS! What is wrong with you people?

I've been waiting to hear this from someone, ... anyone, in Congress since this whole mess began last year.

By "close them down", any sane person would believe that he meant to allow them to fail and declare BANKRUPTCY! Exactly what should have happenned to banks, AIG, Auto-makers, and mortgagors -- rather than bail them out.

Are you people actually IN FAVOR OF MORE BAILOUTS?!!??! If so, I beg you to send the government ALL of YOUR OWN fucking money to fund the bailouts, and leave my money out of this.

HOLY CRAP!

[Jim Rhoads a/k/a vjnjagvet]

Eyes and TCO are IIIIIIIIdentical. With all due credit to the prosecutor in My Cousin Vinnie.

[bad]

That $500 B bump in the FDIC authorization isn't receiving appropriate scrutiny at all.

There is so much stuff happening all at one time. We have few real journalists out there, and the damage inflicted on our economy is a distraction from the political manueverings and the political manueverings are a distraction from the economic consequences of policy decisions. Classic misdirection.

Feels a little bit like scattershot...

[kim]

Naw, Jim, then it would have been Whole Wheat Crap Sandwich, instead of HOLY CRAP.
=============================

[mike]

I think Shelby is "Right on the Money!" Of course depostitors moneys would and should be guarnteed by the FDIC, but the banks operations should be sold to other banks, etc. and those that are not viable should of course Fail!

As far as bad loans, etc., we are just prolonging the enevitable!

Pay me now or pay me later, Later always being much more painful!

[RichatUF]

I thought that Citibank (the branch and deposit base) was a seperate entity inside Citigroup and that there are large swaths of the company the FDIC wouldn't have the authority to seize.

Even if one takes that view, then help Citi's counterparties rather than keep Citi on life support out of some vague fear of what might happen.

Isn't that what the Fed and Treasury are doing for AIG?

[Eyas]

Thomas Collins,
"(which to any rational mind means having the Feds temporarily take them over,..."

Really? why? Is there something wrong/broken with Chapter 11 Bankruptcy? The rest of your quote in parentheses (below) suggests the procedure under BANKRUPTCY, not nationalization.

"... selling off the businesses that investors will buy, paying off the depositors and leaving most of the bondholders and the equity holders "holding the bag""

Gott in Himmel!! Leave the owners of a company "holding the bag" for the failure of THEIR company?!?! Say it isn't so! How Unfair.

To the extent that this whole recession/ depression/financial disaster is actually the fault of Congress FORCING banks to make otherwise risky loans and then guaranteeing those loans -- thus removing risk, so that the banks had only reward, .. then it IS unfair to the owners/shareholders. But it's a lot MORE fair than asking ME and MY GRANDCHILDREN to "hold the bag" for this failure.

Why don't you go get another mortgage on YOUR house, give that money to help RE-bail-out the banks ... and leave MY money out of this.

[Rick Ballard]

Rich,

I was looking at aconsolidated balance sheet. I would note that only $215 B of deposits are here in the US. I wonder if the furriners are out of luck with the FDIC?

I dug up a piece on Citi's CDS exposure from January. The writer was short C and got clobbered a few times in comments for 'talking his book'. The concept of "netting CDS risk to zero" is fun to consider but I lean towards 93-97% as being more probable. Now, if I just knew what the notional value of the total outstanding contracts were, I could guess at the probable loss.

[jimmyk]

Isn't that what the Fed and Treasury are doing for AIG?

Sort of. But they are still keeping AIG alive, with the help of your money, thinking they can thereby turn straw into gold. We've seen how well that's worked. I've lost count of how many rescues there have been now.

I'm not advocating bailing out the counterparties either, I'm just saying that's preferable to one injection of taxpayer dollars after another into Citi/AIG.

[mel]

Rick-

I, earlier, asked for links to supplement your opinions on your assessments of what you call MBS's and CDS's. You said that it had been "gone over and decided", but no links, which is what I requested. Not to dispute your opinions, but to understand them. I still don't. Insulting me by claiming I get my information from "floor gossip" just accentuates a hunch on my part that you're settling on your opinions first, then finding the data that fits. I have frequently mentioned here that I am no longer on the trading floor. There a men and women on the trading floors who must make split-second, informed, decisions, otherwise millions can be lost in seconds. I've seen it happen, and fortunately, my errors were less than half a million over my more than twenty years there. I've asked for data here. I've asked to take it off-site to discuss this privately. Tonight, I asked again, pointedly. You declined all the other opportunities. Yet tonight, you choose to insult me by impugning my sources of knowledge and then brandish your expertise by dropping a Yahoo site on me as, I presume, one of your sources.

The rest, you may choose to read or not.

If you're going to rely on SEC filings (use EDGAR in .pdf mode), you should realize that off-the-books SIV's aren't reported to the SEC. They involve hedge funds, state pension funds, right down to credit unions, whom none have faced many results from not having to mark any losses on their books. I know what bank fraud is, and I know theft when I see it.

If you knew what was done in the name of profits at Citi, you would be screaming for Chuck Prince's and Sandy Weill's heads on pikes. They took people's salaries, and then paid them in restricted stock, taxes for all of it paid in cash, of course. Jamie Dimon designed this gem by the way. The number of JP Morgan employees to private contractors working for same keeps that number artificially low, something Peter Drucker foresaw.

The uses of ABS's (not just MBS's, so let's expand the asset class to its true terms, FYI), the CDS's sold around them is just a pinprick to the total miasma that is that market. The AIG model for CDS's is the monstrous aspect to the whole financial crack up in that they assumed that CDS's are a short dated insurance product, when they are a long dated option contract. They blew themselves up. Only they put the whole of the EU banking system on the tab. I could fill in an entire column, and have in the past, on this.

There's no need for any animosity between us. I was wondering why you chose not to respond to my bleg about CNBC. I suppose you've answered, disappointing. All I have asked is to try and understand your perspective, not to be insulted.

I'm turning in, and will look for your response tomorrow.

Good night all.

[bad]

Sweet Dreams Mel

[Rick Ballard]

Mel,

My response is that I've never, ever said it has been "gone over and decided" period. The discussion of MBS/CDS ocurred in September over a period of about a week. It's in the archives.

As to your comment re Citi's SIV exposure, their December 31, 2007 10K says:

CAI’S STRUCTURED INVESTMENT VEHICLES (SIVs)
On December 13, 2007, Citigroup announced its decision to commit, not legally required, to provide a support facility that would resolve uncertainties regarding senior debt repayment facing the Citi-advised Structured Investment Vehicles (SIVs). As a result of the Company’s commitment, Citigroup included the SIVs’ assets and liabilities in its Consolidated Balance Sheet as of December 31, 2007. This resulted in an increase of assets of $59 billion. On February 12, 2008, Citigroup finalized the terms of the support facility, which takes the form of a commitment to provide mezzanine capital to the SIV vehicles in the event the market value of their capital notes
approaches zero.

I'm reasonably cautious about separating fact and opinion and I'm reasonably quick to provide citations to back up factual assertions. Whether one goes to EDGAR through Yahoo or direct is rather immaterial - just as a series of assertions made without reference to any checkable citation is rather immaterial.

[Stephanie]

Brit Hume on The "Cry Baby's" Bear Market or The "Cry Fire in a Crowded Theater" Bear Market

HUME: It's kind of a bear market within a bear market. The market was already down tremendously over the previous year, and I think most people entered this period of the new Obama administration thinking that it probably was bottoming out and that he would give by his very presence and by what he would offer real hope and that it would at least change the psychology a bit. It has changed the psychology, it seems, for the worse and I think he does bear responsibility for that, and the impression that he has managed to leave is that he's too busy with massive new spending and a scatter shot stimulus bill which was reckless and breathless new initiatives. On top of that you have this budget with all these breathtaking new initiatives to reorder our lives in a multitude of ways.

In the meantime, first order of business, the unfinished business of the previous administration. First order of business for the new administration, the financial crisis, the credit crisis. And, so far, no plan of any discernible shape of dealing with that. A couple of pieces in place as Governor Kaine pointed out. But that's what the market is looking for. It hasn't come. It's very hard. But, that's the big problem.

Any bets Fox is stiffed in the presser tomorrow?

LUN

[Pofarmer]

The AIG model for CDS's is the monstrous aspect to the whole financial crack up in that they assumed that CDS's are a short dated insurance product, when they are a long dated option contract.

Would this change if CDS weren't also traded? If they were treated like an insurance policy instead of some kind of investment vehicle?

[ben]

I disagree Shelby is talking nonsense. As other have posted, he is merely saying we should let these banks fail. "Bury" is just another word for bankruptcy. Happens all the time in the banking industry, just not normally with big banks like Citi...

[Roy Mustang]

Hell yes, let Citibank fail. This will let banks that didn't participate in the CRA induced subprime crap take over Citibank's businesss. How in the world is that a bad thing?

[Rick Ballard]

"If they were treated like an insurance policy instead of some kind of investment vehicle?"

If they were limited to insurable interest it would reduce Citi's exposure from the upper limit (all notional) of $37 trillion (per the article cited) to around $3 trillion (what Citi acknowledges). The difference at a 4% loss rate is $1.2 trillion against about $120 billion.

I don't believe that Congress will pass an "against public policy" law voiding existing contracts for a number of reasons, primary among them, the potential damage to EU and Asian banks. It's a tough nut and the "cut 'em loose" crowd should work on an understanding of potential FDIC exposure involved. Something triggered that $500 billion bump and it wasn't the possibility of just a $120 billion hit.

Burying the corpse of Zombiegroup might well be worth it but I'd like a written estimate for the funeral before we dig the grave.

[RichatUF]

Roy-

CRA's rot streches far and wide because all institutions covered by the FDIC get caught in the dragnet.

[RichatUF]

Rick-

Found this OCC bulletin which has a long discussion and derivatives positions of the biggest banks. The credit table is p.33.

[Tom]

For the love of God, we need term limits!

[RichatUF]

jimmyk-

The reason why the Fed and Treasury has to revisit the Citi and AIG deals (I think it is 4 each) is that conditions in the US and Europe have worsened more quickly making both have to take much greater losses in Q4. I posted AIG's 08Q2 conference call a few threads back which had plently of lowlights on their derivatives performance. Bernanke's testimony last week was pretty good as well.

I'm not advocating bailing out the counterparties either...

It does come down to systemic risk, and the problems at AIG have moved beyond financial and banking and into the realm of international politics (although I have little confidence that the current Administration will get either right), which is a poor basis for economics, but here we are. Not every country is as homogenous and harmonious as Iceland.

[Jim Rhoads a/k/a vjnjagvet]

Since 9/11, W put the lion's share of his interest and political capital into assuring the nation was as ready as it could be to repel terror attacks on its population and that it would be successful in that endeavor. On any number of occasions he made these intentions clear, and was willing to take the heat from a number of directions for selecting that course of action.

Our new president, unfortunately, has decided not to prioritize his attention as starkly as his predecessor.

I would not fault BHO if he devoted (say) 65 percent of his time on putting a stop to the stock market slide, the precipitous increase in unemployment, and the plight of the economy in general. The balance of his attention could then be directed towards other pressing issues such as Afghanistan, Iraq, healthcare or education.

But I don't see a definitive prioritization based on his view of the importance of the issues facing him. Instead, it seems to me like he is trying to solve all problems at once. I am unaware of any executive who has been successful using this method of organization.

If anyone has illustrations of successful application of BHO's executive style, I sure would be interested in reading about it.

[JM Hanes]

Thanks Rick. Now I wonder if someone who knows all the esoterica can think of any reason I might associate Citibank with Brazil. Was there maybe some fiasco in Sao Paulo in the long ago?

[Extraneus]

I don't see a definitive prioritization based on his view of the importance of the issues facing him.

I do. I just think it's wrong to assume he's trying to "solve" the "problems" we're worried about. As a great man once said, those problems are giving him the opportunity to do the things he couldn't otherwise do -- to solve the real problems as he sees them, most of which relate to freedom and capitalism.

It's also wrong to assume incompetence, and more logical to ascribe his seemingly unhelpful actions as part of a plan.

[kim]

Another RCP article points out the power that red diaper baby Axelrod wields.

The coming theme for the Republicans is the deception and lies that have been told to the American people. Only 5% have to be convinced that they've been hornswoggled and another 30% will wonder. It's a slam dunk, because so many lies have been told. Global warming will be among the most visceral of these effects, because of the depth of the deception, and because temperature is not a subjective thing.
========================================

[kim]

Jeff Jacoby's article yesterday at RCP about global cooling contrasts the truth very nicely with the media message we've all heard.

Some of these journalists are beginning to stir in their sleep.
================================

[bad]

Check out this WSJ article on the carbon tax. Red vs blue state politics here.

LUN

[kim]

WSJ won't load for me. Vindal K. Dar wrote a wonderful article last June about the carbon conceit that pointed out that the phony CO2=AGW paradigm is most strongly held by the Northeastern and Western liberal elite. There was much useful global economic geography in the article, too. He wrote it for a Houston energy industry journal, but it was re-published through Right Side News. Probably you can find it googling. It was excellent.
===================================

[Pofarmer]

For the love of God, we need term limits!

I'll vote for that. I'd also like to add a moratorium on lawyers running for office, as well as anyone with an Ivy league education. The beauracracy could use a bug bomb, too.

[Pofarmer]

The reason why the Fed and Treasury has to revisit the Citi and AIG deals (I think it is 4 each) is that conditions in the US and Europe have worsened more quickly making both have to take much greater losses in Q4.

Doesn't that speak directly to these mortgage cram downs?

[kim]

Mebbe, but it also speaks to the instinctive fear of capital for Obamanomics.
=============================================

[Rick Ballard]

Rich,

Thanks for that link to the OCC. It recapitulates the $3T number for registered trades by C but leaves me scratching my head concerning where AIG's positions might be found.

I found the ABS/CDO obituary to be mildly amusing. It's true that not many new ones are being born but the tail on the old "dead" ones is still whipping back and forth. It won't stop twitching for another four years.

I agree with your comments concerning AIG and systemic risk relating to international politics. I don't mind Brown going over the falls but Merkel and Sarkozy have a certain utility that their successors may lack. Especially successors who come to power after an economic collapse.

[Sue]

Posted by: Jane | March 08, 2009 at 08:31 PM

There was a time in our history when the scariest words in the English language were: Hi, I'm from the government and I'm here to help.

[DebinNC]

I don't understand how BO is able to just delegate the banking crisis to I really don't know who, since Treasury seems clueless. Where does the buck stop re the banking crisis? BO didn't mention it at all in his weekly address Saturday. Didn't the Obamas head off to Camp David for the weekend? I didn't see pics of BO et al working feverishly on bank salvage. He's still voting present and getting away with it.

[RichatUF]

Rick-

AIG's positions as of their August 08 conference call. They might have something more recent at their website.

Oh would you look at that the markets have turned negative so Obama must have just gotten into the office (those Sunday night benders can be a killer). Seems that the Obama Administration getting Buffett in front of a camera to talk up the market didn't quite work out.

[Rick Ballard]

Rich,

Buffett's comments on inflation were interesting. Treasury is beginning it's biggest week ever in new issues and I'm really wondering how the 10 year auction will come off. The Fed/Treasury 'buy agencies, sell Treasuries' shell game won't cover the entire new issue inventory. I wonder when we'll hear 'buy Treasury bonds as a patriotic duty'?

[DebinNC]

Over at Politico's The Arena, the question posed is whether Obama is "muddling through" rescuing the banking system. Dean Baker, Co-Dir. of Center for Econ. Policy Research says no one other than 10M crazed Republicans blame the crisis on Obama now, but in six months they might. His suggestion:

The best way to get money into the economy quickly at this point would be to give employers a tax credit for increasing paid time off (e.g. paid family leave, paid sick days, paid vacations, or shorter standard workweeks).

If Congress passed a generous tax credit (e.g. up to 10 percent of work time or $2,500 a year) it would immediately give every employer in the country an incentive to cut workers' time, while keeping their pay constant. This would both boost the economy and employer more workers at every level of output.

If 50 million employers reduced work time by 10 percent, in principle this would create demand for another 5 million workers. This can be done in a way that is quick, bureaucracy free, and has minimal opportunities for waste and abuse. In other words, in Washington, it doesn't have a prayer.

Easy peasy, and 1M more jobs than BO promised to create or save.

[TCO]

Let the banks fail.

Free enterprise.

[TCO]

You bailout lovers have made a habit of confusing different assets and the nature of a bank. FDIC is only responsible for ensuring certain kinds of deposits. Citi is full of other kinds of shenanigans (derivative plays, trading house, etc.) These are seperate and seperable. The whole description of "banks" and FDIC and the like is just a game to get the counterparties of derivative speculation to have the surety that by law only goes to small bank account holders.

A classic case was when Goldman Sachs was allowed to redefine itself as a commercial bank...to its benefit and to the detriment of the FDIC.

Another classic case was with AIG, where the corporate office had played derivative games...but the underlying insurance companies were safe and separate. First the Fed pushed NY state to allow AIG to draw on sheltered and separate insurance assets (basically raiding the safe to pay off counterparties). Then the public cry was put in the air to "save insurance holders" with the AIG bailouts. Even though the assets were separate. This was all done to the benefit of the counterparty in AIG trades: Goldman Sachs.

What is happening is raiding of the treasury to cover bets by speculators from Warren Buffet to Goldman Sachs.

[TCO]

Maguire: You persist in idiocy or mendacity. You don't have to "sell Citi". It has little real assets or value as a going concern. Liquidate it like Circuit City. There are still plenty of banks around. And it is easy to create a new one (hire a lawyer, buy a computer). The employees should be layed off. Including management. The assets partitioned according to seniority. And the ones with the most exposure should take losses. It's just that simple.

[TCO]

Oh...and I keep getting credit card applications in the mail.

Plus why do you all think we need to reinflate a bubble. You all are such morons.