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NYT Conceals Welfare for Citigroup
The government is handing even more money to Citigroup and the NYT is doing its best to cover up. The NYT reports on the fact that the government's preferred shares in Citigroup are being converted to common shares at a price of $5 per share, more than twice the market price.
The article describes this move as, "giving taxpayers more risk, but more potential for profit if the company recovers." This is extremely misleading. At the point of the transaction, the government is effectively losing half of its money, which had already been invested at a return that was far below market rates.
At one point the article notes that the government holds controlling stakes in Fannie Mae, Freddie Mac, and AIG. It then tells readers that "none of those deals have turned out well," implying that government control has caused the losses at these institutions to be larger than they would have been otherwise.
It is unlikely that they would find any economists who would make this claim. All of these institutions had enormous losses locked in at the point where the government took them over. It is true that the Bush administration underestimated the size of these losses, but if the government's control has increased the losses at these institutions, it is not clear how.
--Dean Baker
COMMENTS (7)
"which had already been invested at a return that was far below market rates"
I thought the government was getting 9% on its preferred shares -- since when is that "far below market rates?"
Posted by: Dan Owen | February 27, 2009 9:18 AM
An apparently more recent NYT story
http://www.nytimes.com/2009/02/28/business/28deal.html?hp
seems to be saying the price is $3.25 (not $5), but a) it's still a giveaway and b) as far as anyone can tell, there is no real plan - they just seem to be giving money to the finance industries in a somewhat more guarded way in response to recent criticism, hoping that things will turn around.
Posted by: Anonymous | February 27, 2009 10:05 AM
OT but maybe interesting, or at least humorous:
Citibank when I last looked was trading at $1.54/share. It's ATM fee is $3.
Thanks to LBO.
Posted by: JohnT | February 27, 2009 3:26 PM
Dan Owen: I thought the government was getting 9% on its preferred shares -- since when is that "far below market rates?"
No, the government is getting 5%. Warren Buffett got 10% from Goldman Sachs (a far safer bet than Citi). So the government's interest rate is less than half of the market rate.
Not satisfied with that sweetheart deal, the gov't agreed to accept nearly worthless common shares instead of at least trying to get our money back. To add insult to injury, the only reason the common stock isn't completely worthless is because of anticipated future gov't bailouts.
I don't think the timing of this announcement was accidental. Coming right after the Obama budget proposal, it seems to be pretty buried, even on the blogs. If ever I had any doubts that Obama/Summers/Geithner are simply handing money to banks, this has squelched it.
More outrage please.
Posted by: alex | February 27, 2009 4:34 PM
It might be of interest for some readers to take a look at a post "Citigroup arithmetic explained" on at the Baseline Scenario blog.
Posted by: Pebble11216 | February 28, 2009 1:08 PM
Please excuse my ignorance. Could someone make it clear who will personally benefit from this government largesse? The holders of Citigroup stock or ?
Or is the theory that everyone benefits because the system does not collapse? Is such a theory true?
If the system collapsed, who would win? Holders of gold?
Posted by: Robert Hume | March 3, 2009 12:48 PM
Citibank when I last looked was trading at $1.54/share. It's ATM fee is $3.
Thanks to LBO.
Posted by: MP3 | February 9, 2010 4:06 AM