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Citigroup's Welfare Benefits
USA Today has joined the rest of the media in helping to paint a bright picture for the health of the banks. (Can we stop the Fed and FDIC subsidies now?) It goes along with a bit if slight of hand in telling readers about how Citigroup was so easily able to deal with much of its capital shortfall:
"Citi made a deal in February in which the government would be able to convert up to $25 billion of its preferred shares into common stock, for a 36% stake."
The problem in this story is that at the time of the conversion, Citi had a market capitalization of about $20 billion. This means that the government effectively spent $25 billion to get a 36 percent stake in Citi that could have been purchased on the market for just $7 billion. When banks can arrange deals like this with the government, it is not surprising that their books look good. Most businesses would be doing quite well if they could get the government to pay them more than three times the market value of their stock.
--Dean Baker
COMMENTS (4)
Even worse,I believe the Fed is required by law to receive at least as much in assets for any of these "loans". This slight of hand circumvents that law. The Fed has given out $25B and received only $7B back. People should be in jail for that type of behaviour.
Posted by: Tom Cole | May 7, 2009 6:49 PM
Next time USA Today runs an article about some welfare recipient cheating the system for a thousand dollars, they must also include a sidebar article describing the billions of dollars in taxpayer funded welfare Citi was given.
Posted by: gbq | May 7, 2009 9:14 PM
Dean,
You are right but people have been saying your reasoning is wrong and myopic.
They said your comparison is too limited and inaccurate. The benefit is that there was NO collapse in our system, which is so hard to quantify.
They said the benefits were ten times of the TARP $ in that there were no system failure.
So, the benefit is much more than what the gov't received from Citi.
Posted by: James | May 7, 2009 9:55 PM
^James comment is a strawman Argument, since Baker/Stiglitz/other intelligent, ethical, & non-Corporate whore PhD economists have listed proven methods that would "prevent banking system failure" without Wall Street Welfare.
1 UK & Sweden PROVEN model of TEMPORARY NATIONALIZATION, somewhat like what the US FDIC does for regular US no-name non-huge failed banks.
2 Stiglitz idea of Fed lending $0.7 T to existing well-run banks or new banks that would be dedicated for new US business & consumer loans, which given existing US reserve requirements, would result in $7.0T in loans, funding many beneficial projects such as new biz startups, student loans, wind farms, etc
Posted by: No Mames Buey | May 7, 2009 10:30 PM