Wall Street Journal: Throw Citi Under the Bus

I stopped reading the Wall Street Journal editorial page when it soared off into wingnuttery, writing tomes on the imaginary conspiracy to off Vince Foster and other fantasies. The news pages remain useful; the editorial page hasn't improved much.

But as they say, even a monkey at a typewriter eventually will write something interesting. But on Tuesday, the lead editorial of the Journal -- "Making Failure an Option" made a strong argument.

The big banks are lining up to pay back the money Treasury gave them under TARP, after passing the Treasury's softball "stress test." Eager to avoid any restrictions on pay, bonuses or activities, they are rushing to declare their health and independence.

The Wall Street Journal would allow them to get out from under the Federal thumb and go free, so long as they give up all the other guarantees and subsidies provided by the government (with the exception of deposit insurance).

But this raises the fundamental question - what economists call "moral hazard," only multiplied many times over. These banks have been deemed officially as "too big to fail." When they operate, it is with the implicit backing of the US Treasury. They will be able to borrow money more cheaply as a result, and will be tempted, big time, to take greater risks. Risk and leverage create the potential of bigger bonuses for bankers. But they can gamble with their losses implicitly covered by taxpayers. This is a recipe for renewed catastrophe.

There are different ways out of this box. Some, like Federal Reserve Governor Daniel Tarullo suggest that "too big to fail" should mean too big to exist, and that the Congress should break up the big banks into smaller, simpler, more transparent entities. Others, like Nobel Prize winner Joe Stiglitz suggest treating banks like public utilities, regulating their activities and fees strictly. Isolate the venture capital function to operate separately, but turn banks back into a version of the savings and loans of the old days. Others, like Paul Krugman and Robert Kuttner, suggest that the big banks should be treated like we treat any banks that are insolvent: take them over, strip away the bad assets, fire the management, reorganize them, merge them or sell the sound bank off at the end of the process.

The Treasury Departments under both Bush and Obama decided against taking over and reorganizing the big banks. Instead both chose to subsidize them, and nurse them back to health. Congress and the administration are turning their attention to new regulations for finance, but congressional action won't take place for a while - and initial proposals don't include either a lid on size or turning the big banks into public utilities.

Just telling them they are on their own won't work, the WSJ rightly concludes. The markets won't believe it. So the Journal suggests, Why not let one of them fail? And then it nominates Citigroup to be thrown under the bus.

"Resolving Citi - by either forcing it into a strategic partnership, if anyone will have it, or selling off its assets and breaking it up - wouldn't be cheap," the WSJ editorialist writes. But it would eliminate one of the leading "zombie" banks, end the "slow bleeding of taxpayer money into the bank," and send the banks a message: you are on your own and we really do mean it.

Citibank is essentially already owned by the Federal Government. As the WSJ notes, it has received insurance on $300 billion in deposits, some $63 billion in FDIC-guaranteed debt, and another $300 billion or so in taxpayer guarantees of its toxic assets, $45 billion in direct capital injections, and more. It is, along with Bank of America, the weakest of the major banks. And Citibank has a checkered history of needing bailouts from huge bad bets -- from the time it speculated on Russian bonds on the eve of the Russian revolution to betting on loans to Latin American governments in the 1980s, to needing bailouts twice in the most recent crisis.

Treasury has joined with the banks in peddling confidence, so it is unlikely that the editorialist's advice will be taken. But that leaves the question. If the banks are free of the TARP but officially too big to fail, what is to keep them from taking larger and larger gambles with other people's money, knowing that they pocket the profits and taxpayers will cover their losses? You don't have to believe in Vince Foster conspiracies to think this is a question that deserves a straight answer.

Comments

[tomasedison]

Citi handles too much of the credit card market (once again - too big to fail and to control). It needs to be broken up between at least 3-4 banks. And it needs to be closely regulated.

[racetoinfinity]

You won't get a straight answer from Geithner.

[RoseMerry]

"Federal Reserve Governor Daniel Tarullo suggest that 'too big to fail' should mean too big to exist, and that the Congress should break up the big banks into smaller, simpler, more transparent entities."

YES! Exactly what I have been saying since I heard this horse pocky about "Too Big To Fail".

[Bob48Burg]

Throwing them under the bus works for me. They've mismanaged my escrow account and then want to charge me hundreds to get rid of the account. Seems like they already have enougth of my tax dollars now and even with using the escrow fund free of charge all these years, they still can't hack it. I do feel sorry for the bus, however.

[amerigo212]

I'm less convinced they are worth keeping afloat as each day passes. My personal belief is that most of the House and Senate, and Geithner himself, are in bed with the banks. I think we've made banks too powerful with 20+ years of deregulation and bank moguls have become fomidable foes. The Whitehouse and the Senate will have to gird their loins to take on the banks. Here's an article that might be of some interest:

http://www.thenation.com/doc/20090622/scheer

[WFTomba]

I support the idea of making an example of one large bank. To drive home the point, Obama should choose which bank to sacrifice by drawing its name out of a hat.

[John Robert]

As Nassim Talib pointed out in his excellent treatise "The Black Swan"
the US has encouraged New York Banks and Wall Street to run flat out
without a net because Big brother would be there to bail them out.
We encouraged the young 'Masters of the Universe' to use computer
programs to play Monopoly. And we tacidly agreed to bail them out whenever
they screwed up.

[BurtonOerney]

WSJ is always advocating for this kind of survival-o­f-the-fitt­est policy. I haven't looked but I wouldn't fall on the floor if the editors supported Paulson's first moves with Lehman Brothers and Bear Stearns.

[Freenation]

WSJ has transformed itself into glorified NYPost tabloid after Murdoch's takeover...the editorials are regularly penned down by right wing nut.s with screaming tabloid headlines....

[BurtonOerney]

Lotta lather here. Did anybody think that maybe Citi's stock will drop because they're still holding TARP funds? The comparison between Citi, BoA and the companies that returned the bailout with interest (hurray for that, eh?) is a little strained anyway. The former make the majority of personal and business loans, a place I think we'd all like to see continued improvement. Once one of the major lenders comes out ahead of the others to pay back the bailout, then treasury gets a Lehman situation without having to explicitly throw thousands more people out of work. I think treasury would ask that group to try to pay back the money at about the same time, though, to avoid just that situation.

[sc300nc]

Which is exactly why we must let them fail. They should have never been given any of our tax money to cover their bad investments. It's too late now, but this should be a good lesson for the future. Risk can bring higher returns, but it can also bring devastation.

[doneflyin]

Won't happen. Citibank is too well connected with Rubin, [former Sec. of Tr. for Clinton] re-cycled from being on Citibank's board of directors to being back on the Obama economic team.
The same people just come and go.
The beat goes on.

[LynnW49]

"you are on your own and we really do mean it"

Make it so.

[Wolves50]

They should have let them fail. It's amazing how many people have been scared into thinking the sky would fall if these companies went bankrupt. Is there no one left who can handle the bleak aftermath for a few years until a healthier system rose from the ashes? Lack of regulation of the derivatives markets helped fuel this crisis. Why not just regulate the derivatives markets the way they should have been ten years ago? Why do people keep claiming the government has to dip its beak into the whole finacial services industry?

The argument that we couldn't have faced the bankruptcy of these companies is flat out wrong. It will be a lot worse when we have saddled the government with so much debt that it will take generations to even put a dent in it. If you want proof of what the world is starting to think of our debt, the 10 year yield on the treasuries we just auctioned off hit 3.99%, which was described by analysts as "awful".

[PhilipTaylor]

Without removing the ENRON Arthur Anderson Rule that lets them use previously illegal "OFF-THE-BOOKS" accounting to hide TOXIC DEBTS plus reinstituting "Mark-to-Market" so they can not L 1 E about the value of the stuff they show "ON-THE-BOOKS" we Americans and stock investors have no way of knowing what each Banks condition is.

I would bet that many of the regulators do not fully know what these Banks conditions are, but since most of them are part of the revolving door between Wall Street and Washington they would not tell us the truth even if they knew it.

As an investor I refuse to invest in the markets that are so manipulated by the oligarchical structure that runs Wall Street and Washington. Until that MAF1A crowd is cleaned OUT millions like me will find other investments, like my children, or cash. Still NO Regulations and the ones coming look weaker and weaker as Geithner brings in the Wall Street types to revise the final regs.

Campaign Reform is a CENTRAL FIRST STEP:

[PhilipTaylor]

TIME TO REFORM CORRUPTION IN CAMPAIGN FUNDING SYSTEM

Simple Solution to PROTECT OUR Congress Members Votes so votes are NOT sold to Highest Bidders:

1. Setup a Government Contribution Acceptance and Funds Distribution Agency
2. Funnel all Political Contributions through this agency
3. Uses strict formulas for allocating funds to House+Senate Members
4. "Blindly" distribute lump sums twice per year to Politicians - No KNOWN SOURCES of funds!
5. Reserve part of funds for those New Candidates that meet campaign funding criteria
6. Two? Term Limits for Senators - Max 18 years to avoid collusion!
7. Four? Term Limits for House Members - Max 18 years - even police rotate people around to avoid collusion!