Citigroup Latest Shameful Bailout
I am sure you have seen the details of the obscene bailout of Citigroup (C) by the US government. Just when you think you have seen it all, our Treasury finds new and exciting way to guarantee massive taxpayer losses for years on end. I have to admit, the talent the FED and Treasury have for throwing money away is far more imaginative than I could have thought possible. Cheers fellas!
The C bailout is basically a pyramid scheme where C takes a hit on the small stuff and the government guarantees everything else. Everything. To the tune of anywhere up to 300 Billion dollars, or about half a TARP. Naturally the market loves a any bail, and the action was to the upside. Why anyone would think C is a buy here is confusing, but I am easily confused anyway. Something like 5X dilution of shareholders, earnings will be suppressed for years as they pay back the government (yeah right), and now made into a zombie with their balance sheet stuck at the FED/Treasury. Screamer of a buy!
Naturally the same old excuses were in use; "systemic risk", "financial collapse", bla bla bla. Check out this little fear monger from the AP story on Yahoo:
"If they didn't help, the damage would be beyond imagination," said Teck-Kin Suan, economist at United Overseas Bank in Singapore."
Who's imagination Mr. Suan? Yours? Mine? Another choice bit from the same story:
"It would create chaos," said Winson Fong, managing director at SG Asset Management in Hong Kong, which oversees about $3 billion in equities in Asia. "Simply put, you couldn't borrow or lend for a while. This is a nightmare scenario."
Oh my god! No borrowing or lending for a while! Holy shit and fried eggs! Reread that one again and try to remain calm! I mean this is a f#cking CRISIS!
All this systemic risk garbage is wearing me thin. The only thing at risk is the massive notional money scams that enrich bankers. Of course they are scared, they are soon to become like UAW workers or Realtors; historical bin residents.
25 Billion Here, 300 Billion There, Another Trillion Here and Pretty Soon You Are No Longer Talking About Real Money
"A billion here and a billion there, and pretty soon you're talking real money." -Everett Dirksen
I see that quote out a bunch as of late relating the current wild spending by the FED, Treasury, FDIC etc during this mess. It is both overused and totally inaccurate. The truth is much more sinister. With the amounts of money being used and proposed to be used the ability to even grasp what is going on has been lost. And it is here that I think the powers that be have made a terrible miscalculation that is going to have some serious unintended consequences (are there any other kind?).
Now this is just one bloggers take on the macro picture, so please sound off in the comments with your own thoughts.
What started as a "subprime" debacle quickly morphed into a gargantuan credit bust over the last year and a half. Through the wonders of fiat currency and financial tools of leverage the US (and many other countries) generated so much "money" that is detached itself from any tether to reality. Now I understand that by definition ALL fiat currencies work this way, but there is a subtle difference: You can push the boundaries of belief only so far before you fail to maintain the charade. I think we are at that point now or soon will be.
What should have happened at the beginning was the public failure of Bear Stearns and others; A recession for the US; Quiet capital infusions to keep the system moving; and an unwind of debt levels that were just too big. That would have been the ticket to keeping the smoke and mirror show in business.
Instead in an election year the powers that be decided to open the floodgates and pour government backed debt onto private debt that could not ever be paid back. The US government, through proxy of the FED and Treasury, attached their voucher to all the notional money in the system.
So what? Well, this is where i think things are going to get ugly. Everyone KNOWS the US cannot pay off their debts. There is no mathematical way possible, this is a fact. The world over has been accepting of this because many of their fortunes are tied to the US through many channels. Now we are faced with around 7 TRILLION in obligations to backstop a shadow banking system with more on the way. We may have reached the debt Chandrasekhar Limit I have written about.
Perception is all that keep the financial system going. It is the perception that the Government has saved Citi from collapse that is seen as a good thing. The perception that the FDIC could ever make you whole in widespread bank failures keeps people from pulling their money out. The perception that the debts of the US can be honored keeps pig like foreign buyers coming back to the trough.
I think we may have tilted the pinball machine of perception a bit too hard this time.
So if the US generates say 10 trillion dollars in new debt to cover all things systemic risk, how do we intend to pay that back? Our three auto makers are about finished, so not much there. I doubt securitized mortgage paper will ever be bought again from the US. We do sell some cool military stuff, but nobody can buy that much hardware. We do design some good computer software, but competition in that arena is high.
We are facing a serious recession; We are scrambling to try and make some kind of infrastructure jobs bill which will be funded by more borrowed money; Debt is maxed out at all levels of the US from the consumer, state and city governments, and many businesses. Just how in the world are we going to pay back all this money?
We are not of course. That was acceptable for a while, but now the numbers being pushed around have become so enormous there can be no more pretending. Only complete fools would continue to fund US debt. China seems especially retarded in this case with Japan a close second.
Again, this is just my take. I just think we are getting to a point where we will be laughing about debt obligations because they are so absurd. We are supposed to pretend we are serious about making good on our obligations and everything we have done to this point should make it clear we are not. You have to play the game to keep the show on, and we have gone out of bounds with all the bailouts and stimulus cash. It remains to be seen when foreign debt buyers give us the hook and take us off the stage.
Have a good night.