Page 1 of 2 Outhouse politics
By Julian Delasantellis
The daughter of US Speaker of the House Nancy Pelosi, Alexandra Pelosi, has
recently been making her own name for herself as a skilled video journalist and
documentarian. Her most recent production, currently being shown on the Home
Box Office cable network, s Right America - Feeling Wronged, her account
of the interviews she conducted at John McCain and Sarah Palin rallies during
last autumn's presidential election.
These were the people in absolutely no mood to listen to the Barack Obama
campaign's argument that the division of America into hostile red and blue
camps was artificial. They proudly proclaimed themselves rednecks, by virtue of
both the hard, manual work they did in the hot sun all day, and their
self-professed ideology. One young man sported a T-shirt with a
handwritten message advising voters to "say no to socilism". When informed by
Pelosi of the spelling error, he requested a marking pencil to fix it. When
further asked for his definition of socialism, he knew where the truth did lie.
"There is a definition. I can look it up really quick. " He turns to his
Blackberry, punches a few keys.
"Tell me just in principle," requests Pelosi.
"Umm, OK, well socialism, it's basically like the views of Hitler, it's ...
it's the in-between, it's like, between communism, and, ahh I don't know what
the other word is, but it's between, it's like, the medium between two views,
between communism and another view, but I don't know exactly what that is. "
"O tempora, o mores" Cicero cried out to the Roman senate in 63 BC,
decrying the depths to which Roman society had fallen to in the wake of the
rebellion of Catiline. At the Lowe's Motor Speedway NASCAR track, in Concord,
North Carolina, a race fan updated the sentiment for these more contemporaneous
times.
"If you own guns in this country, if you drink beer in this country, if you go
to titty bars in this country, for some reason, you're a bad person."
There it is, another eloquent argument against bank nationalization.
To understand just what was going on with last Friday's third US government
rescue of financial giant Citigroup in less than six months, an advanced degree
in finance or a master's in business administration sheepskin would have been
of little use.
Better yet, you should have had experience in the rules and practice of the
children's and family party game "Twister", which requires its contestants to
be able to contort their bodies into the most bizarre, twisted and tangled
anamorphoses. New US Treasury Secretary Timothy Geithner, at least in terms of
his ever-more questionable efforts to rescue the financial system, seems to be
a true expert in the game.
In American baseball, it's three strikes and you're out, but in terms of trying
to keep Citigroup from sinking into oblivion and then sucking down the entire
world financial system with it, it seems to be three strikes, but then you're
still very much in.
Last autumn, Citigroup got US$45 billion in US taxpayer capital for granting
the US government a quantity of convertible preferred shares, a hybrid between
corporate stock and bonds, when then-Treasury secretary Henry Paulson switched
the emphasis of TARP 1 (his first effort at the Troubled Assets Relief Program)
from buying distressed assets to injecting capital directly onto the bank's
balance sheets.
That didn't seem to work, and Citi's stock, after getting a bit of an upward
bump in early October, fell from $23 to $6 by late November. That brought on
the second rescue, the government's pledge to guarantee the bank against up to
$300 billion of losses from the toxic securities at the heart of the financial
crisis. A brief rally in early December was met by lots more selling, and by
Valentine's Day last month, the company was blowing a big wet bon mot to its
shareholders in terms of a share price of $3.50, down almost 95% since late
2006.
Early and mid-February saw Geithner's dance card filled with the preparations
for release of the "Financial Stability Plan" that the markets hoped would
start to clear the toxic, rapidly depreciating assets the banks were clutching
onto in their portfolios. That went over about as well as the time they tried
to show Fiddler on the Roof to a Hamas convention.
In the wake of its failure, many observers, including South Carolina Republican
Senator Lindsay Graham, as well as that eternal hippie and former Federal
Reserve chairman Alan Greenspan, began to speculate that, indeed, at least some
form of temporary nationalization of the banking system, or at least a few or
more of its major participants, might now be the last, best solution for
financial system rescue.
But from, as they say on the political news shows, the "highest levels of the
Obama administration" (those would be the levels of the administration First
Lady Michelle Obama has to keep telling to stop hogging the blankets at night)
came the word that bank nationalization was off the table. So what Geithner
then had to do was find a way to do something his predecessor Paulson totally
failed in doing - aid the banks while stopping short of nationalizing them.
(See Perhaps a
cool hand, Asia Times Online, February 18, 2009, for my account of the
poor reception to the Financial Stability Plan.)
During the last 10 days of February, the financial media was thick with reports
that some sort of deal was in the works to have the US government take a big
equity stake (although short of a 50% +1 controlling ownership level) in Citi,
perhaps up to 40% of the common shares. This could act to pump more capital
into the bank while stopping short of the assumption of full majority stock
control that might be classified as a nationalization. When it was announced
last Friday morning that the US government was converting $29 billion in TARP 1
equity injections into ownership of 36% of Citi's outstanding common stock, it
seemed, at least on first glance, that Geithner had threaded the needle.
Bu what exactly had Citi given, and, more importantly, what exactly had the US
government gotten?
The delicious confection known as Reese's Peanut Butter Cups used to advertise
itself as the sweet treat for those who can't decide between chocolate and
peanut butter; in that vein, you could say that convertible preferred stock is
for those who can't decide between owning a company's stock, or its bond.
Convertible preferreds usually pay a higher dividend, like a bond's interest
coupon, than the common stock, but if you want to participate in the common
stock's appreciation you can "convert" the preferreds into common stock.
But that's the absolute last thing that seems to happening here. No one outside
of a straitjacket would say that, since Citi's stock will soon be undergoing
such a thunderous rally, the US Government is getting in on the ground floor of
2009's best hot stock.
One obvious thing that is happening here is that Geithner is handing back to
Citi at least $2 billion a year in the dividends due to the government from its
ownership of the preferreds. It could be argued that, in saving the bank funds
it desperately needs, the capital bloodletting out of every bank bodily orifice
being caused by the toxic securities would be at least, to a small degree,
temporarily staunched. But this point, at the very least, carries a healthy
quantity of pungent pharisaism, since, one of the arguments Paulson made to a
skeptical, soon to be an outright hostile and hateful America in regards to the
TARP was that the taxpayer investments in the program would eventually bear
healthy dividends.
Not when you give the dividends away.
Along these lines, after one examines just what the government gave up, it is
equally useful to look at what it's getting.
On Thursday, February 26, the day before the preferred-to-common deal was
announced, Citi's stock closed trading at $2.46. The next day, Wall Street gave
it's thundering thumbs-down on the deal,
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