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Citigroup Bailout – Taxpayer Losses : Inthon

A special guest post from my friend, Matt M.


My morning bus rides invariably begin with a visit to the Bloomberg app on my iPhone. I find their journalism to be second to none in the financial space, thanks to Bloomberg’s worldwide focus and very informed opinion writers. However, I was taken aback when I came across the following headline and attached article last Thursday:  Citigroup Rescue Earns Three Times as Much as S&P 500

It is important to note the new title was modified from the original titleCiti pays taxpayers 3 times as much as S&P“.

Regardless of the title, this article contains blatant propaganda that is designed to mislead and deceive the Average Joe.  The general tone of the article suggests that the entire Citigroup “situation” is now a complete piece of historical fact to be analyzed as such.

Logic leads the reader to conclude that we (the taxpayers) have locked in some sort of gain, thus proving the Citi bailout was a good idea since we’ve collected a couple billion in dividends.

Nothing could be further from the truth, and there are many examples of how this logic is an inappropriate way to analyze any investment.

First, the author of this article is only talking about one government department, the Treasury.  Let’s review what happened here:  The Fed has purchased some $2-5 trillion in assets (depending on who you ask, and don’t you dare ask the Fed what they’ve purchased) from U.S. banks. This is the most important aspect of the multi-faceted bank bailout, for without these purchases, most major U.S. banks would be out of business.

What’s relevant here is that the Fed and the Treasury are completely separate government entities. The Fed is directly responsible for bidding up toxic assets and exposing taxpayers to massive, unknown, impossible to define amounts of credit risk. This socialization of losses is what saved Citi, but it didn’t cost the Treasury a dime.  To suggest that the taxpayers somehow made out like bandits is untrue, amateur reporting.

By stepping in and literally becoming THE market in many segments of the credit market, the Fed has so far done a fantastic job of propping up the assets on their balance sheet. That’s not to say they’re showing a gain, that’s not to say the Fed is showing a loss. Once again: no one knows.

What we do know is that the eventual value of most of these assets is going to be dependent on cash flows from mortgage payments, rather than current marks. Right now, these cash flows are a monumental risk, a subject which is completely ignored by this Bloomberg article.

Perhaps most important, the Fed is desperate to see these investments work out. Ultimately, this will corrupt what’s left to be corrupted in the political process. No wonder the Fed recently hired Linda Robertson, former lobbyist for Enron. They need to convince Congress to bailout everyone who can’t pay their mortgage.

Finally, this article represents a shift in attitudes towards government intervention since the March lows in the markets.  I have been complaining about this for months and it really bothers me.

When governments around the world intervened and markets still fell off a cliff, I felt like everyday people were finally thinking critically about the futility and backward logic of government.  When S&P went from 1575 to 900, people were really freaking out. When we went from 900 to 666, people got to talking about genuine reform. They expressed anger about how the government incentivizes bad behavior and excessive use of leverage.  Now that markets have bounced from 666 back to 900, people have turned back into mindless cheerleaders.

Talk of genuine reform has stalled as our problems have been bandaged by trillions of borrowed dollars.

The government has declared victory and the media keeps churning out propaganda, as evidenced by the article discussed above.

Aren’t we better than this?

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One Response to “Citigroup Bailout – Taxpayer Losses”

  1. Citigroup Bailout – Taxpayer Losses | Inthon | Business News on June 19th, 2009 2:37 pm

    […] What we do know is that the eventual value of most of these assets is going to be dependent on cash flows from mortgage payments, rather than current marks. Right now, these cash flows are a monumental risk, a subject which is … Read the rest of this great post here […]

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