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« Beach Party Bailout! tuesday morning bailout news links | Main | The Three Stooges Located...Hint: somewhere in your house »

citi, AIG, Bank of America are never-Ending black holes of insanity

Hold the grammar and punctuation, just a rant with a side of huh, seriously, wtf?

As sub-title, we're sticking with: 'Dumb, Dumber and The Big Ignoramus.'

Stab at who is leading this group of brainiacs.

Some of the bailouts have been necessary.  I'm gonna go ahead and put that one out there.  There have been failure bailouts in so many industries that really, each one deserves to be debated on its own merits.

The airlines have been getting help for years and I'm ok with that.  It's been just a few billion every few years since September 11th, and we need viable air travel so it passes.

The autos are less straightforward; you've got union issues, pension and healthcare issues from overpromising for too long, as well as serious management problems.  It's made more murky by Cerberus owning Chrysler as well as 51% of GMAC.  And the mammoth PE firm Cerberus is not a company that we want to be rescuing, at all.  Trust me.  Private Equity is a twist of the tongue from what used to be known as LBOs, leveraged buy-outs.  These firms do nothing productive save enrich themselves as they drive once-stable business to the point of bankruptcy once their cash hoards have been plundered by the PE pirates.  Still, given the magnitude of the rescues offered to the banks and insurers, I give a mild pass to bailouts for the autos.  Though, this pass is offered with a hope that the attched conditions can help the industry get realistic about it's future obligations as well as drive the unions back into negotiations on concessions.

However, this bank stuff is another enchilada entirely.  I'll give you an example I haven't written about yet but really angers me, AIG.  It's a virtual black hole, around $150 billion at last check.  And AIG was NOT originally going to be saved.  Treasury was steadfast in saying 'no' until the final night before declaring bankruptcy, then suddenly had a change of heart.  Look no further than GS for why.  It turns out that goldman sachs had used AIG to hedge hundreds of billions of their asets.  So if AIG went down then goldman would lose the billions it paid AIG in insurance payments on those assets in the form of CDS premiums.  Their was concern for Goldman's solvency were this to have occured.

On the first day of the AIG conservatorship, goldman received a $37 billion dollar check from AIG/the taxpayer.  Since then, hedge funds who also used AIG to insure their assets have received about $40 billion of your children's money.  European banks and other US institutions have received the remaining $60 billion in payouts from AIG/the taxpayer.

Again, I will offer that there are reasons to save certain companies.  It's the money to Bank of America, aig, goldman, citi, that really enrages me, and likely for the same damn reasons you are enraged too.  I don't mind re-capitalizing the relatively good banks.  PNC has gotten a bunch of cash and that's ok I suppose .  After all, if you're giving our money to the banks, you had better give a fair share to the banks that didn't screw up. 

But Citi, AIG and Bank of America are never-ending black holes of stupidity.  BAC's acquisition of countrywide and merrill lynch has proven to be the among the most poorly considered and ill-timed bank purchases ever.  Then the government, our shrewd tax stewards at work, buys the idiot who had already bought the stupid.  Translated: merrill and countrywide managements were just plain dumb by nature.  And then our government became leader of all brainiacs with its decision to support bank of america.  And just to demonstrate that our lack of intelligence was not a fluke, please see our previous purchases of AIG, Citi as well as Phony Mae and Fraudie Mac.

Citi, AIG, and Bank of America all played a bad hand and lost, and they should fail and their shareholders and bonholders pay the price.  Not the taxpayer.  All three were so poorly manged that they, and their stakeholders alone, should be held accountable.

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Reader Comments (7)

It is time, we must stop feeding this spend and hope government. We all need limit the amount we give them to spend, please spread the word. Change your W4 to 10 dependents; this will lower your Federal Income Tax. Deposit the additional net pay in a money market. In September change your W4 to your previous # of dependents, and have an additional Federal tax amount deducted ($ in money market / # of pays left in year). If Millions of middle class people did this it might go a long way to changing the now "We The Government" back to "We The People"

Jan 19, 2009 at 10:34 AM | Unregistered CommenterSmallGov

Yeah! Damn bailout! Huh! Who needs it! Stupid lying bankers! Stupid economists! Stupid financial regulators! They suck! Seriously, I can only say that this demonstrates my long-held belief that economics may not be a fraud, but it is no more a predictive "science" than is psychology, and in some respects less so. The most insightful thing economics has discovered lately is that most people have a core streak of crazyness and stupidity which is prone to overrule their "good judgement" at crisis points. What we need is to put that guy who piloted the plane into the Hudson in charge of the treasury. Unfortunately, guys like that are one in a million, and most of them are too busy doing real work to bother fooling with economics. Probably wouldn't work anyway, though, since even the smartest guy can't do much with a system that is fundementally chaotic and unstable. My favorite item in the paper yesterday - an add for a travel company that is swapping Carribean vacations for securities, with the deal that they will value them at their July 1, 2008 price. Forget about the last 6 months and go chill in St. Thomas. There's a stratagy.

Jan 19, 2009 at 11:29 AM | Unregistered CommenterSmieyBone

Hey Dailybail:

To clarify a few things: I agree theoretically companies should fail, thats basic and vital for any free market economy to flourish. And in an idealistic world i would have loved AIG to go under, especially since they had their auditors in late 2007 question their whole derivatives evaluation, and instead of management reviewing it, and reflecting the correct valuation on their books (which would have adversely affected their earning report) they chose to keep it as it was: inflated and out of wack!!! and in addition to that i think that any company should bear the consequences of their poor decisions, this way bad companies can't linger and further infect the economy by making good firms lower their own standards to compete against them.
with that being said, these bad banks that made all of these poor decisions where flying under the radar of the poor regulation of this past government, maybe even as early as Clinton's presidency, because CITI started this whole expansion campaign with their merger with Travelers in 98', all this was under the nose of the "all mighty, AKA the Wizard" Alan Greenspan which condoned the whole free market theory, let the companies make their guidelines, and eventually it will all turn out fine... NOTTT. This recession has started with housing, bad and good mortgages packaged into MBS's and traded as derivatives and insured by the likes of AIG and others and underwritten and traded by Goldman, Lehman, Merrill Etc and so to speak condoned by Greenspan.

Here is a personal example, I was a loan officer for for 4 years, and i could have told you as 21 year old "kid" then, that some of these mortgages just didn'tt make sense. For example a 100% finanicing, 6% sellers concession to cover closing costs, stated income, aka u tell me how much u make (meaning they do not have to verify any income by means of W2's or paystubs), and 600 credit score ( C rating)... i could have told you that this guy was going to foreclose, and no i am not a prophet.
These banks accepted and even pushed these loans, because investors bought them through the means of MBS's which had insurance by AIG. OH and by the way this loan fell under the guidelines of Government sponsored Enterprises (GSE): Fannie Mae, Freddie Mac etc.

So to make a long story short, the whole system was screwed up and it was all condoned by our Government, our electives (Democrats and republicans alike), and the person whom we called a genius, Alan Greenspan, who sat in office for nearly 20 years turned out to be a fraud... for he has encouraged this system. And our regulatory agencies i.e. SEC has approved all these mergers and acquisitions which created the sad but very true phrase of "too big to fail" companies, because they are too integrated into our financial system, which we so very clearly depend on (try to get a loan now, nearly impossible, believe me)...

again as for AIG what i think what they should have done, was take over it, like Fannie and Freddie, dilute the shareholders, fire management and restructure it, and then spin it off...

HINDSIGHT is 20-20...

Unfortunately (i mean it) bailouts of CITI and BOA are necessary, and i hate to rain on your parade, but Wells is next in line, because to correct you, Wachovia (not Countrywide) acquired the California based Golden West for 20bln in 2006 and Golden West was the biggest underwriter of Option Arms, mostly in given in California (where property value has decreased by more than 25% on avg) and Wells acquired Wachovia...

But to deal with current situation i am kind of looking forward to the new proposal of this "bad Bank" which will clear some these toxic assets of balance sheets, and free up capital so that credit will unfreeze

Jan 19, 2009 at 12:19 PM | Unregistered CommenterMr. Big

@ mr. big

thanks for the heads up on the countrywide/golden west error...it has been corrected in the story...

henry blodget has a new post up dicussing the good bank/bad bank scenarios...in a nutshell he believes, as i have also written, that ithese toxic assets should be written down until they reflect true market value and then force the shareholders and bonholders to absorb these loses...not the taxpayer...

here is the link to the story and i am reprinting the text below...

"Last week brought another outrageous gift to bank stakeholders at the expense of taxpayers: $20 billion and trash-asset guarantees to insolvent Bank of America (BAC). This followed close on the heels of a similar gift to save the stakeholders of insolvent Citigroup (C).

It's easy to blame these bizarre and undeserved gifts on fear of another Lehman Brothers (Sure, it's infuriating, but think of the alternative!). But that's ridiculous: You don't have to subsidize banks and their stakeholders at taxpayer expense to avoid another Lehman. You just have to fix the banks the right way.

What's the right way?

* Temporarily seize the banks
* Write their assets down to nuclear-winter levels (or, if desired, put them in a big bad bank, as Sheila Bair wants to do.)
* Convert enough of their debt to equity to put them in a strong capital position.

That's it. No taxpayer money. No citizen outrage. No comical "Yes, we're lending" assurances when what the banks are really doing is, sensibly, hoarding everything.

We could do this to Citigroup and Bank of America tomorrow afternoon, and on Wednesday morning, two of our biggest banks would be rock solid (they could also still be publicly traded, under the same ticker symbols, with different shareholders). The banks would have hundreds of billions of dollars of assets on their balance sheets that would be marked at or below market, and they could sell them for gains or hold them as their managers saw fit. They would be liquid and able to lend. They would have no reason not to lend because their assets had already been written down to the worst-case scenario. (Another plus: Management wouldn't have to lie about the value of their assets anymore). Bank employees would still have jobs. Senior management would now be free to pay themselves whatever massive bonuses they wished--without doing it at taxpayer expense. Sanity and fairness would have been restored.

The drawbacks? It's hard to even call them drawbacks:

Today's common shareholders would get wiped out
Today's preferred shareholders would get wiped out

Today's debtholders would take a big hit, with unsecured debtholders ending up with equity stakes.
But wait--isn't that unfair? Arbitrarily deciding that shareholders and debtholders will get dinged? Isn't that an abandonmnent of free-market capitalism?

Please. These banks have already failed. If it weren't for our having already abandoned free-market capitalism, they'd all have ended up like Lehman. Adults made bets on these securities on their own free will (on the apparent assumption that they come with implicit taxpayer guarantees). These adults can now, finally, accept responsibility for their decisions.

For some reason, this simple, fair solution doesn't even seem to be under consideration. Instead, Sheila Bair et al have floated TARP 2: yet another massive gift to bank stakeholders disguised as a huge "bad bank" (a taxpayer funded entity that will intentionally overpay for trash assets under the absurd argument that the government knows better than the market what these assets are worth). Once again, this plan will reward bank stakeholders and managers for their stupid decisions, and it will do it at taxpayer expense.

Why? Why can't we do this sensibly? What on earth are we so afraid of?

*UPDATE: Several readers immediately suggested that "seizing" the banks would be illegal. No it wouldn't: Our bank regulations allow regulators to put involvent banks into receivership. This is what the government did last year with IndyMac and the dozens of other failed banks. And it's basically what it did with Fannie, Freddie, and AIG. This only modification here to the standard "receivership" play is that the banks would remain publicly owned companies. The government would do a horrible job running them, and there's no reason to go down that road...

(Yes, the banks might disagree with the assessment that they're insolvent. And, if they wish, they can take that up later, in court--if they can find plaintiffs attorney who stops laughing)."

Jan 19, 2009 at 6:57 PM | Registered CommenterDailyBail

Having been raised with parents who lived through the depression, I think I have a depression mentality. Even though, my husband and I could have lived a much higher lifestyle, we opted to live within a budget. This afforded us the opportunity to help with grandchildren's tuition, provide family trips, and give to church and non for profits. I am driving an 11 year old car, my husband one with a few less years. My point is this: we have paid our exorbitant taxes as a result of having owned a small business, saved for our retirement years, and for what good? It is appalling, disgusting, discouraging, and infuriating that those who chose to live beyond what they could afford, I now get to pay for their lack of thriftiness.
It is, also, with disgust I listen to CEO's of large companies bemoan that now they must wait in Northwest's reservation line for regular tickets, stay in more economically hotels, and no longer receive large bonuses or raises. As others have been heard to comment to these laments, "welcome to the real world".
We live in a very self-centered greedy society fueled by the appetites of those in power. And, we want to tell other countries what is wrong with their societies? Interesting!

Jan 19, 2009 at 9:06 PM | Unregistered Commenterpatricia - St.Louis

Welcome to the great U.S.S.A.. Where bailouts of failure are what we do best. Long gone are the traditions of fair competiiton and level playing fields. Say hello to a future of Trotsky, Paulson, Marx, Geithner, Lenin and Summers. Add some Kashkari and Stalin, mix with a dash of Mao and stir with a Kruschev and you have a brand new country, the good old U.S.S.A.


Jan 20, 2009 at 2:36 PM | Unregistered CommenterComrade_Unhappy_Taxpayer

It is time to stop the bailout of the banks and PEs. They caused the problem and they should not be supported by taxpayer dollars. Spend the money on road, bridges, waterways. Get our infrastructure repaired and ready for growth.

Jan 20, 2009 at 8:52 PM | Unregistered CommenterNo More Bailout

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