Tuesday, March 3, 2009

Nationalized Firms & Socialst Govenment

Privatized Profits & Socialized Losses

Government has changed the tax payer investment in Citibank from 5% preferred stock into plain common stock that is paying a dividend about half that rate. We have now invested at least 45 billion in exchange for a third of a company that the market currently values at 6.5 billon dollars. I was the first to comment last September that from a corporate governance stand point, the ultimate success is to be labeled “too big to fail”. They need to make a new version of the game Monopoly to reflect the new reality of these global behemoths.

Senator Bernie Sander (I - VT) said that as far as he is concerned, “too big to fail is too big to exist”. And a congressman on banking committee asked the Fed Chairman an interesting question, “at what point does too big to fail become too big to save?” His answer was that no one has been able to devise a way of saving the banking system without saving the banks. There was also a reference to brand name value of these franchisees that could be destroyed. But I don’t think these brand names are worth much at the moment. The real answer came next day to Senate Finance committee when Fed head said there is no authority or mechanism to shut down a global institution like Citibank or AIG. But allegedly it was not our own financial experts or government that decided to save those firms last fall. They were preparing to do just that. But pressure put on the treasury from foreign capitals from London to Hong Kong convinced them that this would lead to a global financial collapse.

Black Hole

Lets not even get into Fanny or Freddie for now. But that 45 billion to Citi maybe even higher because the Federal Reserve has loaned out some two trillion dollars to troubled financial companies. And the Fed will not to disclose who got this money let alone how much under the guise that no one would borrow from them if were to be public. As if a multinational conglomerate is going to decide they are going to be shy about borrowing money in a crisis. So what is Bernake saying, instead they might borrow from someone else at a secret higher rate? They are not allowed if they are public company. To me the real message here seems to me to be that if the full truth were really known the financial system might just collapse completely instantly.

GAO report says we over paid for what we got with our first capital injection. That was obvious as Warren Buffet got much better rate of return from Goldman Sachs then US Government. And now we have converted to an even worse deal for the taxpayer meaning a better deal for Citibank.. But it is with the caveat or the guise that this will stabilize the institution for a possible worst case scenario.

Experts, Feelings, & Inflation

So far the entire crisis has exceeded worst case projections from 90% of the experts. Reminds me of the global warming projections and realities. Radio talked show host Lionel pointed out that having views on economics is not like having an opinion on the abortion issue. This is not about values and faith but about science and reason. Sure economists can differ but they are all operating on an education of accepted theories. No reputable economist is currently worried about inflation in the next few years and almost all would say that any inflation but stagflation would be an improvement over current crisis.

Whole Lot of Stimulus

There will be a highway bill, an energy bill, an education bill, a series of health care bills, all adding to the legs of the financial rescue package. Much more money for States, the unemployed, and corporations. There will be huge outsourcing to private sector and their will be jobs. Will it be enough? Will it be in time? Will it be the right thing to do? Will we get our house in order to prevent our demise? If you the face of Japanese finance minister at recent emergency economic summit you might be very scared.. Stay tuned with me.

A crisis of confidence has been greatly exacerbated by cast of characters that even Hollywood would not think plausible. A crook named Madoff made off with billions of money from the wealthy and charities. The head of the SEC had multiple opportunities to stop that scam was a dick named Cox. I am appalled that Paulson was the person put in charge of saving the banks having made a half billion dollars and a lot of friends running one of them. Oh Henry gave money to biggest failing banks and nothing for the banks that behaved responsible. Talk about competitive disadvantage. And finally it was downright scary that the guy he chose to carry out this cash infusion was named Kashkari. Is there a Shakespeare here? I smell a tragedy.

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