Monday, November 24, 2008

Citibank Bailout

Mike Shedlock continues to be prompt and insightful in reporting developments in the financial crisis. Here he reports the summary of the terms of the Citibank bailout this past weekend (it always happens on a weekend). In an earlier post he had the following to say about the bailout.
I am not in favor of this bailout of course, but it is a far better scheme on the surface than blowing another $350 billion. The pertinent question is just how bad those $300 billion in assets will be. I doubt the Fed will disclose the assets it is guaranteeing.
One of the main causes of the downward spiral in the markets is that no one knows (not even the banks) what the value of their intangible assets and off-balance sheet obligations of the banks are. And the Financial Accounting Standards Board has postponed a rule requiring their disclosure. The markets and the government operatives are driven by fear of the unknown and, not knowing, they must assume the worst case consequences of telling the truth.

Philip Davis in "Options Trader:Monday Outlook" says
90-95% of [Citibank's troubled assets being guaranteed] are part of C’s $Tn in assets that are "on balance sheet." The bank has another $1.2Tn of assets that are not reflected in their books, many of which are tied to mortgages that will still need to be addressed down the road. The assets affected under the government plan are largely loans and securities backed by residential and commercial real estate. "With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the Treasury Department, Fed and FDIC said in a joint statement issued late Sunday.
Whether this is enough to inspire long-term confidence in US financials or whether it leads to panics out of banks that are not given $300Bn by the government remains to be seen, but the immediate upshot of this is it is finally occurring to investors how far the US is willing to go to save the markets. Just looking at the mechanism put in place on the C deal, we can now see that $300Bn in TARP money can be leveraged by the Fed and Treasury into $4.5Tn of bailout funding WITHOUT further Congressional approval. The net effect of this is that gold is flying up in pre-markets as global investors are finally seeing how wet this flood of dollars might make us all (have I mentioned I like gold lately?).
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Reggie Middleton's BoomBustBlog has a good comment on the Citibank bailout-- "It's the government version of 3 card Monte - Betcha 'ya can't guess which company the cash is under"
So does Naked Capitalism -- "US Agrees to Bail Out Citi"
And Seeking Alpha -- "Citi's Underwhelming Bailout"

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