Monday, November 24, 2008

I Wish I Knew More About Banks

[Image credit: Banking decision aid from Carroll College, Montana.]

You're in a business where people say to you "Here's my money. You hold onto it until I need it. In the meantime, do whatever you want with it." How can you fail at this? And yet, so many are:

Stocks surged today as investors cheered a bailout of Citigroup, one of the country's largest banks, and a proposed economic stimulus package that could near $700 billion.


Investors received a boost from a government plan announced late yesterday to protect Citigroup against potential losses on a $306 billion pool of troubled assets and invest another $20 billion in the company.

Stocks Rise on Citigroup Bailout Plan

Once again, we taxpayers get stuck with a bunch of bad loans and $20 billion in a stock that seems determined to drop to the center of the planet. If that were all of it, I guess I'd stop bitching right now. But wait, there's more:

Citigroup’s problems have been thinly veiled, given the tap dance the bank and regulators performed in an effort to keep the New York bank’s purchase of Wachovia on track even after a private buyer, Wells Fargo, stepped forward with a higher price as part of an offer that didn’t require assistance from the Federal Deposit Insurance Corp. Citi was also seen by some as the major bank needing government help when the Treasury Department debuted a program in which it required nine major banks to accept direct government investments in their companies.

Citigroup’s Government Rescue Signals Depth of Banking Woes

That's right - this nearly-insolvent bank was trying to buy another one, even though it needed assistance from the government to do it. Now, remember when I wrote that it seems like this is a difficult business to fail in? One way to do it is to throw your customers' money down a rat hole. This is, it would seem, what Citibank was trying to do. Why the government was going to let this go through, given that there was a better offer from a more solvent bank remains a mystery.

Oh, wait, it isn't such a mystery:

Wachovia Corp., a once-thriving financial giant now teetering on the brink of collapse, confirmed today that it was extending an $8 million loan to the cash-strapped National Republican Congressional Committee for last-minute activities to support GOP House candidates.

Investigation: Wachovia's $8 million bailout to the GOP

This failing bank was willing to make a loan to a failing political party. Looks to me like putting those two together would be a match made in heaven.

So, on the one hand examples like this of how free enterprise works make me think that people who like to talk about socialism and how awful it would be if the banks were run by the government are somewhere between idiotic and crazy. On the other, I think maybe they have a point.

UPDATE: Over at FireDogLake, Ian Welsh, who knows a thing or two about banks, wrote:

The rule here continues to be the same as it has been throughout this crisis: the people who caused the crisis must be left in charge of the organizations, the executive class running financial institutions must not be significantly harmed.

Because these folks are not competent, this is clearly the wrong decision, yet again. If they were capable of managing Citigroup properly, they would have done so. They didn't because they aren't able to do so. The correct decision is to simply nationalize the firm and replace the key executives. Then, in the case of Citigroup, which is too large to be effectively managed, it should be broken up.

Citigroup bailout: leaving the incompetents in charge

This strikes me as the central tragedy of all this - so far we have not really changed things in a way that makes it unlikely this will happen again. What's more, we have rewarded failure.

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