These are times that have been made desperate by risk, greed and stupidity.
And as we all know, desperate times require desperate measures.
Federal handouts ”“ and bailouts and rescue plans ”“ continued last week when the government plowed $20 billion into Citigroup and guaranteed $306 billion in loans and securities. That money comes just a month after Citigroup received $25 billion under the Troubled Asset Relief Program.
No strings-attached bailouts are making many Americans question the intelligence of our government officials. And still other Americans ”“ stockholders of these companies and financial institutions ”“ say it”™s necessary the government do this to make the businesses turn a profit again.
And there”™s the rub.
How does the government placate everyone as it tries to extricate the nation from the financial juggernaut whose appetite seems to grow with each heaping banquet of capital?
Pouring billions of dollars into irresponsible financial institutions without any solid contractual obligations other than lopsided benefits to the receiver puts the taxpayer on the hook for who knows what.
Most of these bailouts have been crafted during private weekend talks. Backroom negotiations are never a good thing. Look to New York state as the poster child for what backroom shenanigans can lead to or not lead to.
Questions have been raised from several quarters as to how the Fed chooses the recipients of its ”“ read that as taxpayers”™ ”“ money. A close look at Citigroup”™s recent management principles ”“ or lack of ”“ should have made the government hesitate before doling out $20 billion.
In May 2004, the Fed assessed a civil penalty of $70 million against CitiFinancial and required it to pay restitution to certain subprime personal and home mortgage borrowers. It was accused of converting personal loans into home equity loans without doing its due diligence such as determining the borrowers”™ abilities to repay the loans.
Hmm, if ever there was a warning shot fired.
Also that same month, Citigroup agreed to pay $2.65 billion to settle a class-action lawsuit brought by WorldCom shareholders. The lead plaintiff in that case was then-New York state Comptroller Alan Hevesi.
Later that same year and on the other side of the world, Japan”™s Federal Services Agency, a financial regulatory body, said it would close Citigroup”™s private banking business in September 2005. It was accused of taking part in activities that were only to be done by securities companies. The Fed in turn told the bank not to make any large acquisitions until it did some regulatory housekeeping.
Apparently Citigroup”™s past mistakes didn”™t count, while the ones made by the Big Three automakers do.
If one is to view the bailout to Citigroup as a misstep, the government made up for it a few days later when it announced that it would bombard the economy with $800 billion to make borrowing easier for small businesses, homebuyers and students.
The Fed said it would initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks and mortgage-backed securities backed by the trio.
“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said in a statement.
The Fed also announced the creation of the Term Asset-Backed Securities Loan Facility, which would lend up to $200 billion to meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities supported by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration.
It appears the government is doing an end-around banks that have been sitting on their money and not offering up loans.
“By providing liquidity to issuers of consumer asset-backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower-cost consumer finance and small-business loans,” Treasury Secretary Henry Paulson said. “Today”™s initiative to support the small business and consumer finance market is similarly aimed at increasing the availability of affordable lending.”
Finally, a bailout to help Main Street. We”™ll see.
