Try Getting Your Head Around This One

$295 billion Bail Out For Citigroup

Not a day goes by without some drastic news. The stock market keeps going down and occasionally perking up in some kind of mad hallucinatory rush that everything might be okay, only to find out it isn't, and plunges further. It's a dog-eat-other-dog-as-sushi kind of world.

The US government is now bailing out Citigroup to the tune of $500b.

The US government has unveiled a bold plan to rescue troubled Citigroup, including taking a stake in the firm as well as guaranteeing $US306 billion ($500 billion) in risky assets.

The banking giant will also get a $US20 billion cash infusion from the Treasury Department, adding to the $US25 billion the bank received last month under the Troubled Asset Relief Program.

In return for the cash and guarantees, the government will get $US27 billion ($43 billion) of preferred shares paying an 8% dividend. That is higher than the 5% the government charges dozens of other lenders under its $US700 billion financial industry rescue package.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp, is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the US economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

"With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,'' the three agencies said in a statement issued today.

The decision came after Citigroup's tumbling share price sparked concern that nervous depositors might pull their money and destabilise the company, which has $US2 trillion of assets and operations in more than 100 countries.

"It really was a must-do thing,'' said Nader Naeimi, a strategist at AMP Capital Investors. "If they'd let Citigroup go, that would've been disastrous.''

Citigroup agreed to absorb the first $US29 billion of losses on the $US306 billion portfolio, plus 10% of additional losses, for a maximum total exposure of $US56.7 billion.

The Treasury Department could end up absorbing $US5 billion, the Federal Deposit Insurance Corp $US10 billion, and the Federal Reserve the rest.

Talk about a house of cards! After all the bickering over 700billion, they're simply throwing 500billion at this problem. Now, here's something else to ponder in all this mess:

Naomi Klein Cries Foul

Naomi Klein's one of those thinkers that seem to come out of the far left. I liked her stance when she was doing 'No Brands' as a movement, but as that movement blossomed into a global network of activists that seemed to picket the World Bank and IMF meetings, I kind of lost interest.That's just me, and not her message's fault or her fault. I'm just a little JP Sartre in those moments as I've discovered.


Here she is, saying the way Washington is handling the actual bail out is borderline criminal.

In a moment of high panic in late September, the US Treasury unilaterally pushed through a radical change in how bank mergers are taxed--a change long sought by the industry. Despite the fact that this move will deprive the government of as much as $140 billion in tax revenue, lawmakers found out only after the fact. According to the Washington Post, more than a dozen tax attorneys agree that "Treasury had no authority to issue the [tax change] notice."

Of equally dubious legality are the equity deals Treasury has negotiated with many of the country's banks. According to Congressman Barney Frank, one of the architects of the legislation that enables the deals, "Any use of these funds for any purpose other than lending--for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc.--is a violation of the act." Yet this is exactly how the funds are being used.

Then there is the nearly $2 trillion the Federal Reserve has handed out in emergency loans. Incredibly, the Fed will not reveal which corporations have received these loans or what it has accepted as collateral. Bloomberg News believes that this secrecy violates the law and has filed a federal suit demanding full disclosure.

Despite all of this potential lawlessness, the Democrats are either openly defending the administration or refusing to intervene. "There is only one president at a time," we hear from Barack Obama. That's true. But every sweetheart deal the lame-duck Bush administration makes threatens to hobble Obama's ability to make good on his promise of change. To cite just one example, that $140 billion in missing tax revenue is almost the same sum as Obama's renewable energy program. Obama owes it to the people who elected him to call this what it is: an attempt to undermine the electoral process by stealth.

I definitely agree with all that. If you found all that interesting, then here's more.

Naomi Klein: Well, there's a few elements now that are being described as illegal that we're finding out. First of all, the equity deals that were negotiated with the largest banks and also some smaller banks, representing $250 billion worth of the bailout money, this is the deal to inject capital into the banks in exchange for equity. The idea was to address the so-called credit crunch to get banks lending again. The legislation that enabled this was quite explicit that it had to encourage lending. Barney Frank, who was one of the architects of that legislation, has said that it violates the act if the money is not going to that purpose and is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers. He said that violates the acts, i.e. it's illegal. But what we know is that it's going precisely to those purposes. It is going to bonuses. It is going to shareholders. And it is not going to lending. The banks have been quite explicit about this. Citibank has talked about using the money to buy other banks.

Then there's other aspects of this that are borderline illegal. We found out that in the midst of the crisis, the Bush Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government. Many tax attorneys who were interviewed by the Washington Post said that they felt that the way in which the Treasury Department went about this by unilaterally changing the tax code was illegal, that this had to include Congress. Congress only found out about it after the fact.

There's another piece of this puzzle that is also borderline illegal, which is that in addition to the $700 billion that we are discussing, the $700 billion bailout, there's another $2 trillion that's been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don't really know who they're handing the money out to, because, apparently, it's a secret. They could be handing it out to a range of other corporations -- I think they are -- but they're saying that they won't disclose who has received these taxpayer loans, because it could cause a run on the banks, it could cause the market to lose confidence in the institutions that have taken these loans. Once again, that represents an additional $2 trillion.

If that doesn't make your blood boil, I don't know what will. These people are losing your net worth to the four winds as they pocket tax dollars as bonuses and service fees. It's insane. Add on top of it the $295.2billion to bail out Citigroup, and the money used to bail out AIG twice, you get the feeling this is all just one big con... but of course, nobody's talking about it too loud.

A Cool Link You Should Bookmark

This one came in the email today. It's a pretty cool blog. I found this link through their blog.

The G-20 came to Washington for the weekend and sucked all the air out of the city before announcing that they were really serious about patching all the leaks in the foundering ship of globalism. Well, they have to at least pretend that they are doing something. Meanwhile, the former bit player known as reality has taken center stage in the ship's main lounge. It is putting on an act even gnarlier than the Kit Kat Klub show in Cabaret.

This reality show is sending some clear signals to the denizens of the real and really crowded world. The main signal is that the trade and financing rackets of recent decades are over. The extravaganza of economic hypergrowth based on cheap resources is over. The promiscuous swapping around of risk and rewards is over. There is no global institutional framework for managing the impairment left in the wake of this binge. It will be up to the individual nations now to figure out their national lives and livings.

Alas, the financial impairment is still on-going world-wide and has quite a ways to run before it's finished working its hoodoo on the so-called advanced economies. The lame duck US economic posse so far has done everything possible except the two things that really matter: allow the fraudulent securities at the heart of the problem to be exposed to the light of day to determine their actual value; and allow those companies who trafficked in them to suffer the full consequences by going out-of-business. For the moment, they're content to shovel cash into the truck-bed of every enterprise in America that shows up at the Treasury loading dock. This can only have the effect of eventually destroying the value of that cash.

Aiyah. The rest of it's pretty intense too, and his message echoes Peter Schiff who I pointed to a several days ago. While he indicates the US economy and its citizens is about to head for a totally different kind fo economic landscape as a result of this crisis, one gets the feeling that nobody can quite imagine how destrictive and transformative this change is going to be. The unravelling of decades-long assumptions and baselines is going to adversely affect everybody across the globe. It's sobering and depressing, not that I was drunk on credit or happy to be in hock before.