Colossal Financial Collapse
The Truth Behind The Citigroup
Bank 'Nationalization'
By F. William Engdahl
11-26-8
On Friday November 21, the world came within a hair's breadth of the
most colossal financial collapse in history according to bankers on the inside
of events with whom we have contact. The trigger was the bank which only two
years ago was America's largest, Citigroup. The size of the US Government de
facto nationalization of the $2 trillion banking institution is an indication
of shocks yet to come in other major US and perhaps European banks thought to
be 'too big to fail.'
The clumsy way in which US Treasury Secretary Henry Paulson, himself
not a banker but a Wall Street 'investment banker', whose experience has been
in the quite different world of buying and selling stocks or bonds or
underwriting and selling same, has handled the unfolding crisis has been worse
than incompetent. It has made a grave situation into a globally alarming one.
'Spitting into the wind'
A case in point is the secretive manner in which Paulson has used the
$700 billion in taxpayer funds voted him by a labile Congress in September.
Early on, Paulson put $125 billion in the nine largest banks, including $10
billion for his old firm, Goldman Sachs. However, if we compare the value of
the equity share that $125 billion bought with the market price of those banks'
stock, US taxpayers have paid $125 billion for bank stock that a private
investor could have bought for $62.5 billion, according to a detailed analysis
from Ron W. Bloom, economist with the US United Steelworkers union, whose
members as well as pension fund face devastating losses were GM to fail.
That means half of the public's money was a gift to Paulson's Wall
Street cronies. Now, only weeks later, the Treasury is forced to intervene to
de facto nationalize Citigroup. It won't be the last.
Paulson demanded, and got from a labile US Congress, Democrat as well
as Republican, sole discretion over how and where he can invest the $700
billion, to date with no effective oversight. It amounts to the Treasury
Secretary in effect 'spitting into the wind' in terms of resolving the
fundamental crisis.
It should be clear to any serious analyst by now that the September
decision by Paulson to defer to rigid financial ideology and let the fourth
largest US investment bank, Lehman Brothers fail, was the proximate trigger for
the present global crisis. Lehman Bros.' surprise collapse triggered the
current global crisis of confidence. It was simply not clear to the rest of the
banking world which US financial institution bank might be saved and which not,
after the Government had earlier saved the far smaller Bear Stearns, while
letting the larger, far more strategic Lehman Bros. fail.
Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an
inter-regnum period when the next President has been elected but cannot act on
the situation until after January 20, 2009 when he is sworn in.
Consider the details of the latest Citigroup government de facto
nationalization (for ideological reasons Paulson and the Bush Administration
hysterically avoid admitting they are in the process of nationalizing key
banks). Citigroup has more than $2 trillion of assets, dwarfing companies such
as American International Group Inc. that got some $150 billion in US taxpayer
funds in the past two months. Ironically, only eight weeks before, the
Government had designated Citigroup to take over the failing Wachovia Bank.
Normally authorities have an ailing bank absorbed by a stronger one. In this
instance the opposite seems to have been the case. Now it is clear that the
Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week
before the US Government nationalization was announced, the stock value of
Citibank plunged to $3.77 in New York, giving the company a market value of
about $21 billion. The market value of Citigroup stock in December 2006 had
been $247 billion. Two days before the bank nationalization the CEO, Vikram
Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop
the slide.
The scale of the hidden losses of perhaps the twenty largest US banks
is so enormous that if not before, the first Presidential decree of President
Barack Obama will likely have to be declaration of a US 'Bank Holiday' and the
full nationalization of the major banks, taking on the toxic assets and losses
until the economy can again function with credit flowing to industry once more.
Citigroup and the government have identified a pool of about $306
billion in troubled assets. Citigroup will absorb the first $29 billion in
losses. After that, remaining losses will be split between Citigroup and the
government, with the bank absorbing 10% and the government absorbing 90%. The
US Treasury Department will use its $700 billion TARP or Troubled Asset
Recovery Program bailout fund, to assume up to $5 billion of losses. If
necessary, the Government's Federal Deposit Insurance Corporation (FDIC) will
bear the next $10 billion of losses. Beyond that, the Federal Reserve will
guarantee any additional losses. The measures are without precedent in US
financial history. It's by no means certain they will salvage the dollar
system.
The situation is so intertwined, with six US major banks holding the
vast bulk of worldwide financial derivatives exposure, that the failure of a
single major US financial institution could result in losses to the OTC
derivatives market of $300-$400 billion, a new IMF working paper finds. What's
more, since such a failure would likely cause cascading failures of other
institutions. Total global financial system losses could exceed another $1,500
billion according to an IMF study by Singh and Segoviano.
The madness over a Detroit GM rescue deal
The health of Citigroup is not the only gripping crisis that must be
dealt with. At this point, political and ideological bickering in the US
Congress has so far prevented a simple emergency $25 billion loan extension to
General Motors and other of the US Big Three automakers-Ford and Chrysler. The
absurd spectacle of US Congressmen attacking the chairmen of the Big Three for
flying to the emergency Congressional hearings on a rescue loan in their
private company jets while largely ignoring the issue of consequences to the
economy of a GM failure underscores the utter lack of touch with reality that
has overwhelmed Washington in recent years.
For GM to go into bankruptcy risks a disaster of colossal proportions.
Although Lehman Bros., the biggest bankruptcy in US history, appears to have
had an orderly settlement of its credit defaults swaps, the disruption occurred
before-hand, as protection writers had to post additional collateral prior to
settlement. That was a major factor in the dramatic global market selloff in
October. GM is bigger by far, meaning bigger collateral damage, and this would
take place when the financial system is even weaker than when Lehman failed.
In addition, a second, and potentially far more damaging issue, has
been largely ignored. The advocates of letting GM go bankrupt argue that it can
go into Chapter 11 just like other big companies that get themselves in
trouble. That may not happen however, and a Chapter 7 or liquidation of GM that
would then result would be a tectonic event.
The problem is that under Chapter 11 US law, it takes time for the
company to get the protection of a bankruptcy court. Until that time, which may
be weeks or months, the company would need urgently 'bridge financing' to
continue operating. This is known as 'Debtor-in-Possession or DIP financing.
DIP is essential for most Chapter 11 bankruptcies, as it takes time to get the
plan of reorganization approved by creditors and the courts. Most companies,
like GM today, go to bankruptcy court when they are at the end of their
liquidity.
DIP is specifically for companies in, or on the verge of bankruptcy,
and the debt is generally senior to other outstanding creditor claims. So it is
actually very low risk, as the amount spent is usually not large, relatively
speaking. But DIP lending is being severely curtailed right now, just when it
is most needed, as healthier banks drastically cut loans in the severe credit
crunch situation.
Without access to DIP bridge financing, GM would be forced into a
partial, or even a full liquidation. The ramifications are horrendous. Aside
from loss of 100,000 jobs at GM itself, GM is critical to keep many US auto
suppliers in business. If GM failed soon most, possibly even all of the US and
even foreign auto suppliers will go under. Those parts suppliers are important
to other auto makers. Many foreign car factories would be forced to close due
to loss of suppliers. Some analysts put 2009 job losses from a GM failure as
high as 2.5 million jobs due to the follow-on effects. If the impact of that
2.5 million job loss is seen in terms of the overall losses to the economy of
non-auto jobs such as services, home foreclosures caused and such, some
estimate total impact would be more than 15 million jobs.
So far in the face of this staggering prospect, the members of the US
Congress have chosen to focus on the fact the GM chief, Rick Wagoner, flew in
his private company jet to Washington. The Congressional charade conjures up
the image of Nero playing his fiddle as Rome goes up in flames. It should not
be surprising that at the recent EU-Asian Summit in Beijing, Chinese officials
mooted the idea of trading between the EU and Asian nations such as China in
Euro, Renminbi, Yen or other national currencies other than the dollar. The
Citigroup bailout and GM debacle has confirmed the death of the post-1944
Bretton Woods Dollar System.
The real truth behind Citigroup bailout
What neither Paulson nor anyone in Washington is willing to reveal is
the real truth behind the Citigroup bailout. By his and the Republican Bush
Administration's adamant earlier refusal to take an initial resolute action to
immediately nationalize the nine or so largest troubled banks, he has created
the present debacle. By refusing on ideological grounds to instead reorganize
the banks' assets into some form of 'good bank' and 'bad bank,' similar to what
the Government of Sweden did with what it called Securum, during its banking
crisis in the early 1990's, Paulson and company have created a global financial
structure on the brink.
A Securum or similar temporary nationalization would have allowed the
healthy banks to continue lending to the real economy so the economy could
continue operating, while the State merely sat on the undervalued real estate
assets of the Swedish banks for some months until the recovering economy made
the assets again marketable to the private sector. Instead, Paulson and his
'crony capitalists' in Washington have turned a bad situation into a globally
catastrophic one.
His apparent realization of the error of his initial refusal to
nationalize came too late. When Paulson reversed policy on September 19 and
presented the nine largest banks with an ultimatum to accept partial Government
equity ownership, abandoning his original bizarre plan to merely buy up the
toxic waste asset-backed securities of the banks with his $700 billion TARP
taxpayer money, he never revealed why.
Under the original Paulson Plan, as Dimitri B. Papadimitriou and L.
Randall Wray of the Jerome Levy Institute at Bard College in New York point
out, Paulson sought to create a situation in which the US 'Treasury would
become an owner of troubled financial institutions in exchange for a capital
injection-but without exercising any ownership rights, such as replacing the
management that created the mess. The bailout would be used as an opportunity
to consolidate control of the nation's financial system in the hands of a few
large (Wall Street) banks, with government funds subsidizing purchases of
troubled banks by "healthy" ones.'
Paulson soon realized the scale of crisis, largely triggered by his
inept handling of the Lehman Brothers case, had created an impossible
situation. Were Paulson to use the $700 billion to buy up toxic waste ABS
assets from the select banks at today's market price, the $700 billion would be
far too little to take an estimated $2 trillion ($2,000 billion) in Asset
Backed Securities off the books of the banks.
The Levy Economics Institute economists state, 'It is probable that
many and perhaps most financial institutions are insolvent today -- with a
black hole of negative net worth that would swallow Paulson's entire $700
billion in one gulp.'
That reality is the real reason Paulson was forced to abandon his
original 'crony bailout' TARP plan and opt to use some of his money to buy
equity shares in the nine largest banks.
That scheme as well is 'dead on arrival' as the latest Citigroup
nationalization scheme underscores. The dilemma Paulson has created with his
inept handling of the crisis is simple: If the US Government paid the true
value for these nearly worthless assets, the banks would have to write down
huge losses, and, as Levy economists put it, 'announce to the world that they
are insolvent.' On the other hand, if Paulson raised the toxic waste purchase
price high enough to protect the banks from losses, $700 billion 'will buy only
a tiny fraction of the 'troubled' assets.' That is what the latest
nationalization of Citigroup is about.
It is only the beginning. The 2009 year will be one of titanic shocks
and changes to the global order of a scale perhaps not experienced in the past
five centuries. This is why we should speak of the end of the American Century
and its Dollar System.
How destructive that process will be to the citizens of the United
States who are the prime victims of Paulson's crony capitalists, as well as to
the rest of the world depends now on the urgency and resoluteness with which
heads of national Governments in Germany, the EU, China, Russia and the rest of
the non-US world react. It is no time for ideological sentimentality and
nostalgia of the postwar old order. That collapsed this past September along
with Lehman Brothers and the Republican Presidency. Waiting for a 'miracle'
from an Obama Presidency is no longer an option for the rest of the world.
© Copyright F. William Engdahl, Global Research, 2008
The Mulindwas Communication Group
"With Yoweri Museveni, Uganda is in anarchy"
Groupe de communication Mulindwas
"avec Yoweri Museveni, l'Ouganda est dans l'anarchie"_______________________________________________
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