Citigroup Bailout: Stand Up and Cheer or Cower in Fear?

This news leaves us simply speechless.

Nov. 24 (Bloomberg) — Fed Pledges Exceed $7.4 Trillion to Ease Frozen Company Credit — The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

Nov. 23 (Bloomberg) — U.S. to Back $306 Billion in Citigroup Assets, Regulators Say –The U.S. government agreed to protect $306 billion of loans and securities on Citigroup Inc.‘s books against losses, as it seeks to shore up investor confidence in the bank.

Citigroup will, as a fee for the guarantee, provide preferred shares to the Treasury and Federal Deposit Insurance Corp., the regulators said in a statement. The government will also inject $20 billion into the bank from the Treasury’s $700 billion Troubled Asset Relief Program.

Are we supposed to stand up and cheer because the cavalry has arrived? Or are we supposed to cower in fear, because the end is near?

Is this cause for a rally or a crash? We have no idea whatsoever.

How are we supposed to gauge the depth of problems when the stream of announcements of ever growing rescues goes on and on.

One of our five criteria for evaluating time to re-enter the markets with available cash is governments moving to the background and cessation of the weekend surprise announcements by the Fed, the Treasury and other central banks. The midnight announcement of $326 billion for Citi, and a $7.4 trillion tab for the overall rescue just pushes the likely prudent re-entry date farther out for us.

We have yet to learn of the “massive” stimulus plan contemplated by the new Congress and President. Anybody for $10 trillion total rescue package?

Who is going to buy all those bonds? If we don’t borrow, then we have to print more currency. Either approach is highly problematic.

As of this moment (1:15 AM EST) the futures markets like the news. The S&P 500 index (SPY) futures are up over 6% since the announcement. What might the judgement be by the close of the market today? No clue.

1/2 of the US GDP !?

1.5 times the entire outstanding Treasury debt !?

Oh my, oh my.

Comments

[Prudent Man...:]

Break them up.

Introduce a new era Glass-Steagall bill.

Stop the madness of leverage.

Bring back the uptick rule.

Use inductive reasoning to determine the causative factors that created the mess (which are obvious to even a casual observer) and make the necessary changes in regulations necessary to curtail any such future activity.

Prevent brokerage operators from being investment adviser or mutual fund owners because of the conflicts of interest. The "China Wall" is a sieve.

Bar Robert Rubin from anything to do with financial policy. He's smart, powerful, greedy, slick and without conscience.

Forget the ridiculous theory of "too big to fail". Countries have failed! Germany, the third strongest economy in the world failed. If a business fails entrepreneurs with a better business plan will bridge the breach and hire the workers laid off. The auto industry put the horse and buggy works out of one job and got them better ones.

Break up AIG. The parts are worth more than its whole. There are many investors who would like to purchase those parts and a bidding process would quickly determine "market" value. Same is true for Citi or any other business.

For fifty years (1933-1983) we didn't have these crazy problems so, to make things easy, revert to what we did in those days. Worked well for me and the country, especially investors. What we have shown in the recent two decades is that all change is not for the better.

I wish Obama well in his on the job training but it is the non-term-limited Congress that will be calling the tune in Washington. He has that problem and the Clintonites (change?) standing behind him, knife in hand, waiting to retake the throne they believe is rightly theirs.

If Obama does what he says he is going to do in Afghanistan, pouring in troops like the Soviets did, he will have nothing but headaches and be a one term president. Iraq's terrain is nothing like Afghanistan's and, though the media will give him a cover as they did with Kennedy in Vietnam, he will learn quickly that the best we can expect in Afghanistan is containment and support of the tribal chiefs.

2008 Nov 24 08:26 AM

[canb888:]

Citibank makes Enron looks like a child's play.

2008 Nov 24 09:29 AM

[skopros:]

hear, hear prudent man..the whole clinton clique obama's ushering in will give him nothing but grief. and besides your recos, somebody should do some serious prison time for what's happened. another prudent man, doug nouland at prudent bear was onto greenspan years ago. look for his speech "the coin in the fuse box" on google; a little (unheeded) meisterstuck.

thanx for yr comments;i was a war baby in the 30s and you're right about smooth sailing (relatively) until '83. ah, nostalgia!

2008 Nov 24 04:29 PM