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“Incestuous?” That’s Putting it Mildly

25 November 2008

*groan*

As we pause to admire the President-Elect’s “brilliance” and “stature” amid the latest bailout – that of CitiGroup, to the tune of hundreds of billions of dollars, announced this morning – it is shocking to read this from Pinkerton.

I believe the slogan was something like, “Change we can believe in.”

This emperor’s clothes are vanishing like a Cheshire Cat, but the image-makers won’t notice, and won’t care to.

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More evidence every day that we should have lanced this fiscal boil instead of putting more powder and rouge on it.

The Times says:

There are other worries for Citigroup’s big rivals. Almost overnight, Citigroup went from being the sick man of the industry to an institution with an edge over its competitors. The government is guaranteeing $250 billion of risky assets and pumping an additional $20 billion into the bank…“Citi has a decided advantage over them because of the loss-sharing agreement,” said John Kanas, the former chief executive of North Fork Bank of Long Island. While banks may hold out for now, it may be only a matter of time before they too line up, several analysts said.

Indeed, a big question is how Bank of America, JPMorgan Chase and Wells Fargo will respond. Spokesmen for Bank of America and JPMorgan Chase declined to comment on Monday. A Wells Fargo spokesman did not return telephone calls.

Each of these giant banks, like Citigroup, is sitting on piles of residential mortgages, credit card debt, and corporate and commercial real estate loans that are rapidly losing value. Each is trying to absorb new businesses that were recently acquired.

“Everyone is in the same soup,” said Meredith A. Whitney, a banking analyst with Oppenheimer who has been bearish on the industry for more than a year. “Citigroup has a host of problems, but Citi’s problem assets are not dissimilar from its rivals.”

Smaller banks could be even more disadvantaged. Depositors now have stronger incentives to put their money in bigger banks, given the government’s demonstrated willingness to intervene.

“It’s got to be frustrating for small banks. They don’t get special treatment,” said David Ellison, a mutual fund manager who specializes in financial companies. “If you are a big bank, you get special treatment. That is why everyone wants to be so big.”

Too big to fail, that is.

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Of course, JPMChase, Wells Fargo and all the rest of ’em owe their primary allegiance to their stockholders, so we can wonder all we want about what they’re going to do, but it should be obvious by now that because stockholders’ welfare is always measured in short-term returns, their boards of directors really have little choice but to pursue the same deal that CitiGroup got.  And as we observed last week in this space, and a few months ago, there will be no end to the queue now that one group of stockholders and their so-called “servants” have been coddled in the arms of Uncle Sam…our children’s ostensible trustee.

It’s immoral, really.

qb

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