Suicide Alert!

Are U.S. Senate Republicans feeling suicidal? Steve Benen's latest report suggests they need some intervention to protect them from themselves: "As of this afternoon, it appears Republicans are prepared to link arms and take their chances, fighting to protect Wall Street from accountability."

Citibust Bank

That idea didn't go so well for the taxpayers, did it?!

Conversion price = $ 3.25 per share. Friday's closing price - $ 1.50 share.

In eight hours U.S. taxpayers lost more than 50 percent of their investment in Citibank. Let's see, now .... $25 billion in preferred shares x .54 loss on the day = $11.5 billion left in preferred value. Zombie!

New Bailout Rules

Bank of America CEO Ken Lewis blatantly refused yesterday to produce information subpoenaed by New York Attorney General Andrew Cuomo.

Cuomo was demanding a listing of "just who got what out of $3.6 billion in bonuses given to Merrill Lynch employees before the banks merged late last year." Those bonuses were rushed out by ex-Merrill Lynch executive John Fain, with considerable help from U.S. taxpayers.

Turns out, however, that Lewis himself -- as Fain's boss -- personally authorized in writing up to $5 billion in bonuses to the Merrill Lynch execs, according to the New York Daily News. Not only that, but he lied to Congress about it earlier this month:

Bank of America CEO Kenneth Lewis told Congress the bank had "no authority" to stop the bonuses, but he didn't reveal that he'd signed a merger document authorizing up to $5 billion in Merrill "incentive payments."

To add insult to perjury, Lewis used one of Bank of America's the taxpayers' private jets -- the very one shown above -- to fly in just so he could obstruct the justice system in person.

All of this inspires us to suggest a few new rules for the bank bailout program:

Rule No. 1: When a duly authorized state or federal law enforcement official who is investigating bank mismanagement asks for information about who personally profited from use of U.S. taxpayer bailout money, the bank CEO must either give it up promptly or he will be fired.

Rule No. 2: When a bank CEO is caught prevaricating, lying, or giving misleading testimony to a congressional committee investigating the misuse of U.S. taxpayer bailout money, he must either resign immediately or be fired.

Rule No. 3: Since the Bank of America "private jet" is so big, the plane will not be allowed to take off if there are any empty seats. Excess seats are to be offered to the general public on a first-come, first serve basis.

Rule No. 4: If it happens that the banker used the jet to get where he perjured himself, he must walk home.

Rule No. 5: In any event, every bank CEOs who seeks bailout money from the federal government must first deposit all of his personal financial holdings with the same bank, to be held in trust during the CEO's term of office. If he screws up, we get it all.

Now, there you have some "job incentives" that are incentives.

Citigroup Stock Swap

Bloomberg has the early news today. Essentially, Investor Uncle Sam is swapping Citgroup stocks.

This resembles turning the taxpayers' somewhat safer investment into a highly risky one, except that when they are both doomed to be worthless investments, Uncle Sam will still wind up with the bank.

Here's a summary:

• Our -- that is, the taxpayers' -- 8% stake of preferred shares in Citogroup will be exchanged for a 40% share in common stock. This really doesn't matter much (see above).
  
• The bank is suspending all dividends to both common and preferred shareholders. This doesn't matter much, either, since everyone knows Citigroup has no money left with which to pay dividends.
  
• The board will be reorganized just as soon as the drunken slumber of the old board can be interrupted.
  
• A "majority" of the new board members will be "independent."Independent of Wall Street thinking? We'll see, but don't count on it.
  
• And, "the U.S. doesn’t immediately intend to inject additional money after channeling $45 billion to the New York- based company last year."

Emphasis on the "immediately." Citigroup is a zombie bank. This latest is merely another half-step in Treasury Secretary Tim Geithner's piquaresque adventure of going through every capitalist contortion to prop up the insolvent mega-bank without nationalizing it. It won't work.

Heck, it hasn't worked. Use whatever word makes you comfortable -- stock swap, nationalization, receivership, insolvency, limbo, purgatory. The fact remains, the U.S. taxpayers now run, and effectively own, Citigroup.

Geithner just can't bring himself to tell the other 60% stockholders that their stock is worthless.

Hell is Freezing Over

Today, Fred Hiatt's right-wing editorial page in the Washington Post comes out four-square in favor of nationalizing troubled banks.

Nationalization Jibber-Jabber

"Citigroup (C) and Bank of America (BAC) won’t live to see May. The government will take them over within the next 60 days. The announcement may come as soon as tomorrow evening."

-- The Motley Fool, Friday, Feb 20

There's been a lot of uninformed, hysterical jibber-jabber on the Tee-Vee and the Internet Pipes about the evils of nationalizing some banks over the last week or two.

It reached a fever pitch today, mostly generated by stock hypsters like Rick Santelli at CNBC. Santelli is not a real economist, by the way. He just plays one on the Tee-Vee.

Paul Krugman, the Nobel Prize winning economist, states the becalming facts in a nutshell:

We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.

And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.

What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.

What's more, as Krugman and Nouriel Roubini and James J. Galbraith and just about every other economist, left and right, has said repeatedly, federal "ownership" would be temporary. It would work exactly like an insolvency proceeding, as Atrios (economist Duncan Black) explains. Indeed, it already does. It's been happening to smaller banks, now, and even large ones like Washington Mutual nearly every Friday.

To be sure, when a bank becomes insolvent and is "nationalized" by the FDIC or some other government insurer or court, common shareholders suffer severe dilution in their investment, at best; more frequently, as in any other insolvency proceeding common shareholders are wiped out altogether.

But preferred shares may retain some fractional value, depending on the severity of the insolvency. And, of course, the creditors are by law given priority to recoup as much of the debt possible; most especially, government creditors like the FDIC that guarantee customer deposits.

Creditors usually are only ones who stand a chance of getting something back on the dollar. Just as in corporate bankruptcy proceedings, they are handed the power to take over management and wind up company affairs by paying off customers of the bank and creditors.

As economists Mathew Richardson and Nuriel Roubini explained two days ago in the Wall Street Journal, there is no other rational option when the banks are essentially broke:

Once we face this truth, there really isn't much left to do but nationalize.

We are not talking about the government operating the banks for the long-term. But, as was done in Scandinavia in the early 1990s, we are talking about orderly clean up, then reselling the banks to private investors.

"Clean up" and "receivership" sound so much better, don't they? More orderly, more lawful. So if you're a free market purist, you don't have to use the 'N' word. Use the "R" word for "receivership." It will make you feel better.

Unless, that is, you happen to hold common stock in Citigroup or Bank of America.

Banks Pour Salt Over the Wounded

Christopher Leonard, AP reporter:

For hundreds of thousands of workers losing their jobs during the recession, there's a new twist to their financial pain: Even as they're collecting unemployment benefits, they're paying bank fees just to get access to their money.

Thirty states have struck such deals with banks that include Citigroup Inc., Bank of America Corp., JP Morgan Chase and US Bancorp, an Associated Press review of the agreements found. All the programs carry fees, and in several states the unemployed have no choice but to use the debit cards.
* * *
"It's a racket. It's a scam," said Rachel Davis, a 38-year-old dental technician from St. Louis who was laid off in October. Davis was given a MasterCard issued through Central Bank of Jefferson City and recently paid $6 to make two $40 withdrawals.
* * *
The fees are raising questions from lawmakers who just recently voted to infuse banks with taxpayer money to keep them afloat.
* * *
Another 10 states — including the unemployment hot spots of California, Florida and South Carolina — are considering such programs or have signed contracts. The remainder still use traditional checks or direct deposit.

Can't really blame the bankers. They just can't help it. They think they own everyone's money, anyway.

Stimulating a Bank Brain Drain

According to the New York Times, U.S. Senator Chris Dodd (D-CT) embedded a provision in the Economic Stimulus bill, which passed both houses of Congress last night, that "would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department."

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.
* * *
“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”
* * *
In addition, the Congressional rules would affect not just a bank’s top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. They have traditionally received multimillion-dollar payouts based on their year-end results.

Good for Dodd.

But the restrictions were opposed by the Obama White House. Why? The Times claims:

Top economic advisers to President Obama adamantly opposed the pay restrictions, according to Congressional officials, warning lawmakers behind closed doors that they went too far and would cause a brain drain in the financial industry during an acute crisis. Another worry is the tougher restrictions may encourage executives to more quickly pay back the government’s investments.

Or, as more succinctly stated by an "independent compensation consultant"who talked to the Times, the pay restrictions "won't work." He claims:

"Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”

There may be a potential legal problem with the Dodd salary restriction; most notably, if true, that it applies retroactively to executives who took TARP money from the Bush administration when the governing rule was "anything goes" for Wall Street miscreants and nincompoops. Whether that part survives court review heavily depends on the exact wording of the retroactivity provision.

But the suggestion that pay restrictions are bad because CEOs will pay back taxpayer money early is hardly persuasive. If anything, that's devoutly to be desired. The earlier Wall Street bankers get off the TARP money train, the better. Out here in the rest of America, normal people would see the prospect of lifting the bonus restriction as an incentive to speed the clean-up of balance sheets.

As for 'getting another job' -- who in his right mind could complain about that? Any Wall Street exec or trader who quits because he can't soak the taxpayers for a bonus "exceeding one-third" of annual pay should go into another line of work -- one more suitable to their character, like robbing banks.

Bank of America Parties With $10 Million Bailout Money

Just weeks after nicking $45 billion in taxpayer bailout money, Bank of American blew $10 million of our money on "a five day carnival-like affair just outside the Super Bowl stadium," ABC News is reporting.

The bank's extravaganza for Super Bowl Week involved 850,000 square feet of "sports games" and "interactive entertainment" for football fans. The tents alone -- tents!, mind you, not houses with mortgages or the emergency shelters where some former homeowners are living -- cost over $800,000.

Willie Sutton ("That's where the money is") must be rolling in his grave.

Ocala National Bank

R.I.P.