Jul
7
Citigroup Bailout – Corporate Welfare
Filed Under Economics
The problem with corporate welfare is that, unlike personal welfare, the most sinister elements go unnoticed. A government subsidized contract, bailout or tax break which rips off the taxpayer is far less obvious than the person cashing their welfare check or food stamps.
One of the biggest beneficiaries of corporate welfare is Citigroup. Aside from TARP funds and asset buybacks (taxpayer buying their lousy loans at full value), there are even more nefarious examples of how Citigroup is ripping off the taxpayer.
Below you will find the Standard and Poor’s and Moody’s credit ratings for Citigroup.
Further down, you can see how these rating agencies gave Citigroup very safe ratings days before Citigroup would have gone bankrupt and gone out of business if not for the bailout.
In other words, these rating agencies, Moody’s and S&P, gave Citigroup ratings of AA- and Aa3, respectively, while Citigroup was days away from dying.
In their own words…
Current Citigroup ratings - click for a larger view
Moody's ratings for Citigroup - note that the October 2008 bailout just put them on Credit Watch negative until December 2008
S&P's ratings for Citigroup - again, only a slight downgrade before the 10/2008 bailout
You’ll notice that Citigroup’s ratings have never fallen below investment grade. So, despite needing and continuing to need your tax money to operate, these credit rating agencies never saw the need to downgrade them significantly.
Normally an incompetent credit rating is nothing to get worked up about, however, Citigroup’s bogus credit ratings have consequences that ripple all across the capital markets, which subsequently affect the taxpayer.
Here is how: With an artificially high credit rating and numerous government handouts, Citigroup’s cost of capital (the rate at which it borrows money), is artificially low. This allows Citigroup to borrow money at artificially low interest rates.
Since its credit rating and government handouts allow it to borrow money very cheaply, it sucks up productive capital from other enterprises competing for capital. This is called “crowding out“.
This means healthier companies and local governments have to pay higher rates of interest to borrow when they issue corporate bonds and municipal bonds, respectively.
Guess who pays the artificially higher interest payments on municipal debt?
The taxpayer.
So, in a sad way, Citigroup gets two forms of corporate welfare. One is explicit, the other implicit.
Explicitly, your federal taxes pay to keep alive Citigroup via asset buybacks and other federal programs to “save the (inherently flawed!) financial system”
Implicitly, bogus credit ratings and government handouts give Citigroup a facade of safety, allowing it let it borrow cheaply, which force other, legitimate debt issuers (companies and municipalities) to pay more in interest to receive funding.
Even if the federal government were scared of a run on all the banks, they could have easily unwound Citigroup in a reasonable fashion. They could have zeroed out all the equity (stockholders) and, in an orderly way, liquidated the firm to other institutions which could buy up productive assets cheaply and let the creditors take losses on the parts which no one wanted.
Since Washington is afraid to say no to the financial bozos that own Citigroup stock, this strategy was not employed. Instead, they are flooding Citigroup with cheap money and hoping the money will be lent out or miraculously make Citigroup solvent.
A free market efficiently allocates capital and provides price transparency which allows individuals to make accurate decisions on how to best maximize their resources. Government intervention is permanently damaging our economy by obscuring these valuable pricing mechanisms with bailouts, “liquidity facilities” and other forms of corporate welfare.
Intervention via corporate welfare all in the name of helping the little guy is a gross form of statism and market distortion.
Takeaway: Government intervention to save banks is not a Democrat/Republican issue, it is a right/wrong issue. More intervention, bailouts and stimuli are not the answer.
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I think you’ve just captured the answer petcferly