Monday, November 24, 2008

New Week, Same Economy

So the gubmint is bailing out Citi. Or should I say, continuing to bail out Citi.

$20 Billion on top of the $25 Billion already pledged. $45 Billion to bail out the once largest financial organization in the world. They're also guaranteeing $306 Billion worth of poisonous loans and mortgage-backed securities held by the company (well, $(306-29)*.9)B. Further socialization of debt... sigh.

In return, the Guv gets $7 Billion in preferred shares paying 8%. Oh, and Citi cuts their dividend from 16 cents to 1 cent and restricts executive compensation. So the government gets about 1/3 of what they're giving, and forces Citi to do something it should have done months ago.

Now, these are preferred shares, which means they won't increase in value over time. The price of a pref changes in order to adjust the yield so it remains attractive versus the corporate bonds. The government is getting interest paid, and not much else out of this. There should be some sort of rights or warrants with this deal too, but it doesn't look that way.

What a fucking joke. Citi has been one of the worst-managed companies during its entire existence. It was on the verge of collapse in the 80's, saved by a prince, and grew through acquisition and diversification of businesses. It got so big that it SHOULD have collapsed under its own weight. Everyone knew it was a mess internally, and that management didn't have a clue. Now it faces a day of reckoning, and Unca Sam steps in with a big chunk of change to keep it afloat.

Should Citi be allowed to fail? I don't know. It's huge, backing tons of other businesses and people, and its failure would have been disasterous. But this is a terrible method of saving it. Token restrictions from the government will not fix what's wrong with the company. Plus, where's the $200-some Billion in guaranteed backing coming from? You of course. Granted, that's IF all the assets go bad... some have got to be good, right?

Same ol' crap.

On a related topic, take a look at this post for a great video of Peter Schiff (Ron Paul's economic advisor and President of Euro Pacific Capital) predicting this collapse and the reasons for it over 2 years ago. He kept repeating himself every time he was brought on TV, but nobody listened. In fact, the other "experts" literally laughed at him on camera and said he was full of shit. They offered wagers with him on his opinion. They said the exact opposite he was saying, and he was 100% right. Alright, 99% right, his call on GLD would still be down, but far, FAR less than the market is.

I love this video. You've got a guy sticking to his guns, with a reason behind it, while all these other smug bastards are giving bullshit reasoning as to why they're right. It's substance vs smoke and mirrors. I particularly like Ben Stein (once he had my respect, but after his pro-creationism movie and now this, he's lost it) pushing Merrill Lynch as a bargain over a year ago). I wonder if anybody's called out the other tools in this video on their horrible advice.

1 comment:

OhCaptain said...

I'd seen that video before. Very good stuff. It would be nice to see someone call the others out. The mocking was hilarious in hindsight. He couldn't have been more right.

People like to hear happy news, he was selling that.