Monday, November 24, 2008


Citigroup to get another giant bailout; Auto execs to carpool to next begging session

Citigroup, which has suffered from some pretty bad management, is getting bailed out again. They had already gotten $25 billion from the government under the bailout plan.

For those of you who have missed it, the first round of bailouts went like this: Instead of buying up toxic assets as planned, the government just gave the banks big wads of our money. The idea was that if Bush/Paulson/Pelosi gave them lots of taxpayer money, they would make more loans. Of course, the Bush Administration (the sole administrator of the funds) didn't actually require that the banks, you know, make loans-- they just gave them our money, in huge amounts. Not surprisingly, the banks in large part are just keeping the money or using it for other things rather than making loans with it. Sigh. Bank of America took billions of our tax funds, for example. Did they then make loans at a more rapid rate? Nope. Instead, they spent $7 billion to buy a stake in a Chinese bank. Yep-- we give tax money to the bank, they invest in China. Good work, people!

Remember when Ronald Reagan attacked welfare because it gave people small amounts of money while requiring no accountability? Most people, in retrospect, think the reforms he and Clinton made were probably good moves in many ways.

Apparently, though, we still think it is ok to give away gigantic amounts of money to irresponsible corporations without requiring any accountability.

Meanwhile, the automakers are figuring that if the banks can get our money without making loans, they should be able to get our cash without selling us a car. Their plan? In what seems like an idiotic passive-aggressive reaction to the criticism of their fancy private jet travel last week, the auto executives are going to return to DC in a carpool.

Didn't Congress tell the automakers to come up with a business plan? Is this the plan? Wow.
What is sad is that there is little, if any, opposition to any of these government handouts. Bush supports them. Obama supports them. Obama's economic plan seems to be MORE of these bailouts not fewer. The media is mostly supportive of these measures (the voices of opposition are few and far between). There are a few true fiscal conservatives in the House that are saying the right things, but not nearly enough.

For years now I've heard the media tell me they were asleep at the wheel when we got into the Iraq war and they should've voiced opposition. Where are those people now? Have they forgotten why it is important to serve as a check on our government? Do I get credit, like Obama did for opposing the war from the start, for opposing the bailout from the beginning.

News flash everyone, the government sucks at managing things, including managing the handout of $700 billion. They will suck at managing the next round of bailouts. And they will suck at managing a bailout of the auto industry. I'm sure it wont get reported this way, and I'm sure history will not treat it this way, but this is a perfect example of why government shouldn't do these kinds of things. It is like using a chainsaw to perform brain surgery.

The economy will be fine. It will grow again. Markets will turn upwards. And none of it will be because of anything the government did. If anything, the unpredictable and unstable nature of government intervention is adding to the volatility of the markets, not helping to solve the problem.
Where can I sign up for a Bail Out? I would not even mind the Professor writing a snarky blog entry about me...much.

I am also a carpooler's dream, my truck can handle 7 healthy adults, (or 4 whining CEOs) comfortably and I have a DVD player and the entire Sponge Bob catalogue.
Who has to sit on the seat with the funky stain?
It is bad that any of them needs a bailout but if they are giving them out shouldn't saving the automakers be a priority? I think they are idiots and they messed everything up but so did the banks! Is this fair really? I mean 700 billion is a lot compared to 25 billion. I don't get why they are being harder on the auto people than the banks.
The nerve of you, you naughty person, trying to stain my black leather seats! Actually, that would be quite a feat...but you are still paying for my next detailing anyway, buddy.

And I thought CEO's were bad, sheesh. No juice boxes for anybody now.
Just want all of you to know that I met Maheras (one of the key people responsible for the mess) back in 1997/ 1998 when Salomon merged with Smith Barney. He was affectionately known as 'Skippy - The Boy Wonder'. Let me just say that the Derivatives back and middle office employees at Solly did not hold him in high regard.

I have many friends still working at Citi all over the world (who did not cause the problems) and each and every day they go into work wondering if today is their last day. I'm not sure how many of you have been in that situation before - I have twice and can assure you it is not fun. As a lowly consultant it was very easy to see the problems that occur when there are too many mergers too fast the disfunction from the various business cultures does not go away for many, many years.

Sanford Weill was a greedy bastard who wanted to be king of the mountain, got his wish and now gets to watch the entire thing implode from the sidelines.

Please make sure you direct your disgust toward the situation to those at the top and remember a great number of these employees live paycheck to paycheck. It is very easy to pass judgement but this whole mess is very sad no matter what industry is imploding.

Now, if anyone would like to buy my worthless Citi stock feel free to contact me through the Professor.
Dangit anon, you ruined it for everybody!!! Plus I've seen the Ging-mobile and it is spotless.
G, Do you still have the 350Z?? It did not seat 7...not comfortably...ha!
The thing that sucks about the auto industry is that there are so many low-level manufacturing jobs tied to it, which if cut will directly and probably severely impact the towns that have formed around these factories. It's one thing to talk about the effects of a bailout vs. bankruptcy and reorganization in the abstract; it's another thing when the majority of jobs in cities like Dayton, OH or Bowling Green, KY are at risk. I'm not saying a bailout is a good idea in the long-term (in fact, it almost certainly isn't), but unlike the other types of financial markets, where the value of securities and investments is largely created and diminshed in the abstract, there are real, immediate consequences to refusing to help struggling auto makers.
Christine, good point. The upside of any of this is that it may save jobs. I am sorry about your stock though...

TXP: No, I decided the Z was much too fuel efficient for me. :P
It's one of those "two evils" problems again. Do you reward bad management with a handout, or let the market handle it?

On the one hand, there's a moral and fiscal objection to bailouts. On the other, there's a moral and fiscal objection to letting workers and ancillary economies suffer for the problems in a single industry.

I might swallow the idea a little easier if we at least attached some strings to this handout (because it's going to happen, you know it is, resistance is futile), but it'll probably be highway robbery again, and it'll end up in managers' pockets rather than shoring up workers' pensions and health funds.

And while I share RRL's optimism that our economy can recover from this recession, I wonder if, in the meantime, the local economies of these states will survive, and what hardships that will leave people. It's easy to sit here and talk about economic theory and what should be done, but I'm sure that people in those areas have a drastically different view than any of us.
No Auto Bailout!!!!

If Nissan and Honda can make cars profitably in the USA, we should not give GM and Ford any freebies. Let 'em sink or swim.

However, the continuing government bailout/rescue of the financial sector continues to be worth the effort.

In for a penny; in for a pound.

Here is a sad but true fact:

it is better to be a banker than an auto worker.


Because the sine qua non of any modern economy is liquidity. The banks have a gun to our head. If we lose the banks, we are fourth world.

Massive Bank failures = GREAT DEPRESSION.

Nothing else you can imagine compares to this dreadful looming possibility.

Creative destruction is a part of capitalism--yes. And I am a big proponent of capitalism--yes.

Pull GM's decaying carcass off the road and clear the way for the next innovator.

But that is not the way banking works. Remember, massive bank failures = GREAT DEPRESSION.

The Good News: President-elect Obama is bringing back a group of Wall Street sharpies who are clear-eyed realists. They understand where we are and what needs to be done.

The Car Question is politics, the Bank Question is pure survival.

Of course, none of this may matter. The banks might still fail--but, at this point, they will take the whole government down with them.

We cannot save every industry in the coming crisis. But, if we get real lucky, and God really does watch over drunks, fools, and the United States, we just might save the banks--and our own hides.

I think, though, that the bailout is no more creating liquidity than an auto bailout would bring us better cars.

In both instances, we are subsidizing a continuation of failure by the same people who have been failing all along while rewarding themselves quite richly.
It seems to me that the unofficial goal of both bailouts is really to give these companies some money to finance their operations while they figure out what the hell they're going to do next. Both sectors, automotive and financial, have been operating under a business model that's pretty clearly not viable, or at least not sustainable in the long-term. Right now, the best thing for them to do is restructure, reorganize, plan, and prepare, which I honestly think will save more money in the long run than completely demolishing the established industry infrastructure and rebuilding it from the ground up. The problem is that Congress hasn't really given them the incentive to do this, and until something drastic happens, I'm not sure much will change.

Realistically, even with a bailout, it's not likely that the US auto industry will survive, at least not all 3 of the Big Three, without a major change in their business model. I think it's going to take one of them failing to give the other two the incentive to really get things moving. The question is, do we let that one fail and risk the other two following shortly behind, do we bail out 2 but not the third, or do we give all 3 bailout money and let the weakest one squander it and still end up failing? I don't know the answer, but hopefully things will hold out long enough to maybe get it sorted out a little bit better.
THey say Chrysler will prbabl;y fail. They have great minivans but thats about it Seriously. Has anyone looked at their line up lately? Or worse been to a lot? being inside some of these cars they are so cheap and plastic its like sitting inside of an Igloo cooler.

I just made a pecan pie with bourbon in it and either I am a reallllly cheap date or the bourbon did not cook off enough. I feel wasted. The bourbon came from one of those teeny weeny bottles like on airplanes. I get them a lot for cooking. a full bottle of Jim Beam would probably last me 15 years so why buy that when I bake pecan pies like twice a year?

I'm sleepy.
Prof. Osler,

The difference between the banking crisis and the tragedy of American automobile manufacturing is that we can survive without American-made cars.

If the government folds its hands and watches banks like Citi go bust, or the other myriad private financial institutions that we have bolstered, or the quasi-public Freddie Mac or Fannie Mae, we will initiate a launch sequence of massive panic.

Right now the thin blue line between society as we have come to know it and complete chaos is the assurance that money and banks are backed by the United States government.

You are correct that the liquidity is not coming back as hoped--although we have thus far avoided the Great Crash and the ensuing pandemonium.

And there is some irony that the new President-elect is charging the foxes to guard the hen house--but, the truth is, we just have no other choice.

Or do we?

What is your proposal at this point?
Tyd, is it just me or does it seem like there are 2 lines of conversation on the Razor these days? One vehemently political/economical and the other slightly goofy?

It's like a great party, actually.
Ginger Hunter,

Let me just say (as a member of a third category: a serious person with unintentionally goofy ideas), I love and greatly appreciate the intentional goofiness. The laughs keep me from crying.

I think if you are going to intervene, let the weak go bust and bolster two groups-- the strong and the new innovators.

Is someone calling me goofy? You talkin' to me? Hey! You talking' to me?
Prof. Osler,

Are you assuming the feds will cover all the losses on all the banks we elect not to prop up?

I don't think we have the ability to do that. That is, I fear this is financially NOT feasible. NOT POSSIBLE.

The only hope for us, in my view, is for the feds to guarantee the banks, pump in massive amounts of fake cash, create the illusion of security, and allow the banks to heal themselves.

No guarantee there--but our best bet.

If we start letting these big banks fail, I fear we put the lie to the house of cards we are counting on to protect us from the cold.
Personally, I think (know) that Citi got TOO BIG and I don't know if bailing Citi out is truly the right thing to do. But when you examine the human side and the jobs lost and the fact that there are not other jobs for people to move into, I think a bailout to keep US Employees off the unemployment roles is somehow appropriate.

With mergers and mega-size come many costs invovled with combining infa-structures. That leads to internal cat fights over who's system is better suited to do the job and the other guy having to change their way (reluctantly). And nothing happens to fix the problem for a long time as everyone fights about what they need and don't want to give up. I have been in the middle of it as the consultant with the Citi Derivative business. It is a very ugly thing to watch upclose as people go into survival mode.

Don't forget that the shareholders want return for their investment so the business tries to make more and more $$$$ to please the investors ignoring that to make money you have to spend money (on infa-structure). It is a vicious cycle.

Let me add that the B-schools churned out lots of MBA students who only understand MORE, MORE, MORE and have never experienced down times or been denied anything in their lives. These people have (obviously) no clue how to analyze a business and read between the lines.

Someone mentioned pension funds along the way. Most businesses do not offer the old fashioned pension benefit to employees anymore. It was replaced by 401K and equivalent vehicles that place the risk on the employee. Pension benefits still exist with some unionized business. From evertyhing I have heard lately, these funds tend to be protected and segregated and should not be at risk.

Twd - send me some of that pie. It sounds delicious.

Ginger - perhaps a little goofiness is good when truly thinking about and discussing 'reality' is so downright depressing. They say laughing adds to your life expectancy!
Christine, I wouldn't have it any other way! Unless 100% goofy is an option...maybe with more of Tyd's pie...
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