Matt Yglesias

23 Responses to “The Life of Citi”

1. Don Williams Says:
   February 14th, 2009 at 11:56 am

   Re “But now Citi’s gotten so big that only the federal government is big enough to provide a workable fix.”
   ————-
   Ah, a dewy-eyed optimist, I see. Didn’t your philosophy instructors even warn you about making questionable assumptions?

   Although I suppose we could threaten to nuke anyone who tries to collect on Citi’s debts. That might work.

2. rapier Says:
   February 14th, 2009 at 11:57 am

   Come on Matt,read the comments once in awhile. Well sure I’m a crackpot but I can recall at least twice pointing out that the major money center banks were virtually bankrupt during those periods. All banks always end up bankrupt. You can take it to, ah, the bank.

   Here is what I recall saying. US Banks in 08 lost more money in total than they have made in profits since 1779. It’s not as bad as it sounds because they are always losing it all. With intermittent bank panics from then till 1907, after which the Fed was founded to end all that. Then 16 years later the mother of all bank smackdowns started.

   All history suggests, no shouts, that banks always fail. It isn’t a bug of a feature, it’s the very nature of them. The best we can do is hope to craft a better system but none will be perfect. Human nature never changes.

   The fist thing is bankers should always be held in a certain contempt The second thing is they should not be huge, too big to fail.

3. DaveinHackensack Says:
   February 14th, 2009 at 12:06 pm

   It might be worth reading up on the events of 1990-1991 Matt, since there are some parallels to today. Back then Citi got bailed out by the Saudi prince Alaweed, who is still its largest shareholder. He ponied up a few billion more this time around, when Citi raised additional capital (before it got its two capital injections from the government).

   “All banks always end up bankrupt.”

   Really? My bank has been in business for 121 years. I’m sure there are plenty of others like that. Banking is hard business to screw up, if you keep it simple.

4. Don Williams Says:
   February 14th, 2009 at 12:07 pm

   Paging Robert Rubin.

   Come to think of it, where are Bill Clinton and Hillary? We haven’t heard from them recently, have we?

5. Don Williams Says:
   February 14th, 2009 at 12:13 pm

   This rather sad story is just in from http://news.yahoo.com/s/nm/20090214/ts_nm/us_madoff_britain

   “LONDON (Reuters) – A former British soldier killed himself after losing his life savings in an alleged $50 billion fraud run by Wall Street financier Bernard Madoff, the dead man’s son said.

   William Foxton, 65, who had served in the British Army and more recently worked as a defense contractor in Afghanistan, died from a single bullet wound to the head in the southern English port city of Southampton on Tuesday, police said.”
   ———-

   See, this is what I don’t understand. Why are Madoff investors shooting themselves?

   Why aren’t they shooting Madoff — and maybe Chris Cox and that bitch at the SEC?

   What’s the worst that could happen — they might face the death penalty in 15 years after exhausting appeals?

   Hell, after the Depression hits, the public might demand that they be released from jail and allowed to run for office.

6. Don Williams Says:
   February 14th, 2009 at 12:21 pm

   Re DaveinHackensack’s comment “My bank has been in business for 121 years. I’m sure there are plenty of others like that.”
   ————-
   I concur. I grew up in the boom and bust coal mining area of Southwest Virgina. An area that had 35 percent unemployment at times but which also created a number of multimillionaires.

   My father always kept his money in a small local bank because he remembered his older relatives speaking with admiration of how that bank had survived and remained open during the Great Depression when so many other banks closed and wiped out their depositors.

   I checked The Street’s listing of A-rated (Most secure) banks recently and sure enough, that small bank is on the list. As are a number of other obscure banks around the country.

7. zic Says:
   February 14th, 2009 at 12:52 pm

   Finally! Growth, size, and “too big to fail” are the operative words of the day.

   Any corporation that’s “too big to fail” is too big; and biggering it only makes matters worse.

   Citibank should be dismantled. As should most of the other large banks. And regulation should cap the size of banks in the future.

8. Warren Terra Says:
   February 14th, 2009 at 12:57 pm

   It’s just a scaled-up version of the old saw that If you owe the bank $1,000 the bank controls you, but if you owe the bank $10,000,000 you control the bank. Turns out, if you Are The Bank, then if you owe the country (or whatever the next step up is) $1,000,000 then the country controls you, but if you owe the country $10,000,000,000 then, once again, you’ve got a lot of control over the country.

9. Don Williams Says:
   February 14th, 2009 at 1:09 pm

   Re zic’s comment “Any corporation that’s “too big to fail” is too big”
   ————-
   I concur –but it was President Bill Clinton, Larry Summers, and Robert Rubin who joined with Republican Senator Phil Gramm to repeal Glass-Steagall. The Depression era law that had prevented this type of clusterfuck by keeping banks restricted to individual states — so that a goatfuck in one area of the country wouldn’t drag down the rest of the USA. Also, to keep the fucking investment banks out of the banking sector needed to sustain our economy.

10. ron Says:
    February 14th, 2009 at 1:35 pm

    So how did that go?
    Bobby Rubin (along with Summers,Levitt and Greenspan) boosts the leverage his prior employer Goldman-Sachs can utilize TO 30 or 40 times, over the objections of the head of the CFTC.
    Then, at the request of his good buddy Sandy Weill, he convences Clinton to sign the bill repealing Glass,Steagal just in time for Citi’s acquisition of Travelors Insurance to go through.
    Then, a little later Bobby signs on with Citigroup in a job that pays $30 or $40 million per year and requires one day’s work per month.
    Then Bobby becomes lead economic advisor to the Obama campaign and, once Obama is elected, Bobby’s protege Geithner becomes Treasury Secretary and his Sancho Panza Larry Summers becomes chief economic advisor.
    Change we can believe in.

11. DaveinHackensack Says:
    February 14th, 2009 at 1:47 pm

    “My father always kept his money in a small local bank because he remembered his older relatives speaking with admiration of how that bank had survived and remained open during the Great Depression when so many other banks closed and wiped out their depositors.”

    Incidentally, I first chose my bank after seeing it listed among the safer banks in the country in Ravi Batra’s book, “Surviving the Great Depression of 1990″.

    “In fact, lots of little banks are being taken over by the FDIC on a regular basis.”

    Care to put a number on “lots”? Relatively few little banks have been taken over recently, compared to the last real estate bust/banking crisis.

    “That is a classic example of survivorship bias. Go back 121 years, look at all the banks in existence then, and see what happened to most of them.”

    I’d venture that most of them ended up getting bought out by larger banks, but that’s immaterial to my point, which was to refute Rapier’s claim that all banks go out of business. As I said, banking is a hard business to screw up, if you keep it simple.

12. cram Says:
    February 14th, 2009 at 1:51 pm

    ps: inside word on the Street is that Citi has been bust from a regulatory standpoint for almost 18 months now.

13. Don Williams Says:
    February 14th, 2009 at 1:51 pm

    Re DTM’s comment “A systemic banking crisis can happen just as easily, if not more so, with lots of little banks as with a few big banks. In fact, lots of little banks are being taken over by the FDIC on a regular basis. ”
    ————
    This is utter bullshit.

    Yes, SOME little banks are being taken over — lots of others are not. Which means that there is some COMPETITIVE pressure to not be a total fuckup — because depositors will shift funds to your safer competitor if you take too many risks.

    It also means no bank can gamble recklessly with confidence that the US Taxpayer will be stuck with the losses -because the Bank is too big to fail.

    It also ensures that bubbles in one section of the country don’t take the whole country down — that 49 remaining states are left secure enough to clean up the mess.

    I don’t see what is so fucking hard to understand here — watertight compartments. Look at the big fucking hole Al Qaeda blew in the middle of the USS Cole — yet Cole did not sink. Because other sections could be sealed off until repairs were made. See http://img.timeinc.net/time/daily/2007/0710/uss_cole_1011.jpg

    By contrast, Bill Clinton turned our damm banking system into the USS Titanic — where a small gash in the bow from hitting the inevitable iceberg eventually sinks the entire big ass ship.

14. Don Williams Says:
    February 14th, 2009 at 2:01 pm

    WHY did Bill Clinton put us all on the USS Titanic? Because Bill is as much a dick-licking whore for the rich as George W Bush.

    I suppose you guys think Wild Bill picked up that $100 Million after leaving office for all the good works he’s done. A display of a benevolent God showering gifts onto his virtuous servant.

15. El Cid Says:
    February 14th, 2009 at 2:28 pm

    Running back the time machine:

    Robert McNamara [then World Bank President] made a great show of confidence in the 1970s. In 1977 he declared in his annual presidential address that “the major lending banks and major borrowing countries are operating on assumptions which are broadly consistent with one another” and he concluded that “we are even more confident today than we were a year ago that the debt problem is indeed manageable.” |21|

    Some big commercial banks also showed great serenity |22|. In 1980, the Citibank declared: “Since World War II, defaults by LDC’s, when they have occurred, have not normally involved major losses to the lending banks. Defaults are typically followed by an arrangement between the government of the debtor country and its foreign creditors to reschedule the debt … Since interest rates or spreads are typically increased when a loan is rescheduled, the loan’s present discounted value may well be higher than that of the original credit”. |23|

    This statement is to be taken with the greatest caution as to the motivations of its author. In fact, by 1980 the Citibank, one of the most active banks in the 1970s in terms of Third World lending, was beginning to sense that the wind was changing. At the time these lines were written, it was already preparing to withdraw, and was granting almost no more new loans.

    The text was destined for smaller banks, especially local banks in the USA, of the Savings and Loans type, that companies like the Citibank were trying to reassure so that they would continue to grant loans.

    In the Citibank’s view, the money that Savings and Loans continued to send to the countries of the South would enable them to repay the big banks.

    In other words, for the indebted countries to carry on repaying the big banks, there had to be other lenders. They could be private (small or middle-sized banks, less well informed than the bigger ones or misinformed by them) or public (the World Bank, the IMF, public export credit agencies, governments…). There had to be lenders of last resort for the big banks to be sure of getting fully repaid.

    In this respect, it might be said that in falling over themselves to be reassuring in the run-up to the crisis, institutions like the World Bank and the IMF connived with the big banks that were on the look-out for lenders of last resort. The smaller banks that continued to lend capital to the developing countries were forced into bankruptcy after the 1982 crisis and they were bailed out by the US Treasury, that is, by US taxpayers…

    …Until the debt crisis broke in 1982, the World Bank held a double discourse. One, destined for the public and the indebted countries, claimed that there was nothing to worry about and that if there were problems, they would be short-lived; that was what appeared in official documents available to the public. The other discourse took place behind closed doors at internal meetings.

    In October 1978, one of the vice-presidents of the World Bank, Peter Cargill, in charge of Finance, addressed a memorandum to the president, McNamara, entitled “Riskiness in IBRD’s loans portofolio”. In it, Peter Cargill urged Robert McNamara and the whole of the World Bank to pay a lot more attention to the solvency of indebted countries. |24|

    Peter Cargill claimed that the number of indebted countries in arrears regarding payments to the World Bank and/or that were seeking to renegotiate their multilateral debt had risen from three to eighteen between 1974 and 1978! Robert McNamara himself made known his worries internally on several occasions, particularly in a memorandum dated September 1979. One internal memorandum reads that if banks see risks rising, they will cut down on loans and « We may see a larger number of countries in extremely difficult situations » (29 October 1979) |25|.

    The World Development Report published by the World Bank in 1980 gives an optimistic view of the future, predicting that interest rates would stabilise at the very low level of 1%. This was completely unrealistic, as was proved by real events. It is edifying to learn through the World Bank historians that in the first, unpublished, version of the report, there was a second hypothesis based on a real interest rate of 3%. That projection showed that the situation would eventually be unsustainable for the indebted countries. Robert McNamara managed to get that gloomy scenario left out of the final version! |26|

    The World Bank’s World Development Report of 1981 mentions that it seemed very likely that borrowers and lenders would adapt to the changing conditions without starting a general crisis of confidence. |27|

    Robert McNamara’s presidential mandate at the World Bank ended in June 1981, a year before the crisis broke and became common knowledge. The president, Ronald Reagan, replaced him with Alden William Clausen, president of the Bank of America, one of the major private creditors to the developing countries. Rather like putting a fox in the chicken-run…

    And

    In 1986 Citibank, the most aggressive American bank in international private banking, had over 1,500 people dedicated to IPB worldwide (although to maintain discretion, they were usually connected with other parts of the bank). About half of its $26 billion in IPB assets probably belonged to Latin Americans. The “Big Four” — Brazil, Mexico, Argentina, and Venezuela — owed Citibank only about $10 billion. All told, Citibank may owe more money to Latin Americans than Latin American countries owe it.

    As U.S. tax laws exempt non-residents from paying taxes on portfolio interest, and disclosure laws do not require U.S. banks to report the countries of origin of private banking assets, the U.S. became one of the world’s more attractive tax havens for flight capital.

    U.S. banks came to manage international private banking assets of roughly $100 to $120 billion, 60 to 70 per cent of which came from Latin American private banking assets, while U.S. banks had outstanding Latin America loans of about $83 billion. Not only was the U.S economy as a whole probably a net debtor of Latin America: U.S. commercial banks were close to being net debtors of Latin America.

    The banks’ real role, said Henry, “has been to take funds that Third World elites have stolen from their governments and to loan them back, earning a nice spread each way.” The banks had to realize they were playing the role of the go-between: just as surely as they lent the money to governments, deposits from individuals in those same countries would come right back to them. “Sometimes the money never even leaves the United States. The entire cycle is completed with a few bookkeeping entries in New York.”

16. DaveinHackensack Says:
    February 14th, 2009 at 8:19 pm

    BTW, check out the image on the website of my local bank: “We don’t need to be rescued”.

17. neff Says:
    February 14th, 2009 at 11:32 pm

    Don Williams — the Titanic was a British ship, so it’s RMS not USS

18. DaveinHackensack Says:
    February 15th, 2009 at 2:51 am

    “See here for the list:

    “It isn’t hard to see how things have taken off starting in 2008.”

    Since the credit crisis effectively started in August of 2007, let’s start counting from there. I count 38 banks. The FDIC currently insures 8,303 banks. So the failed banks so far are equal to about 0.046% of the total number of banks the FDIC insures.

    “It is true not all banks go out of business. But I think if you looked at the actual batting average, it is very low.”

    Evidence?

19. Jose Padilla Says:
    February 15th, 2009 at 8:37 am

    Citigroup’s not too big to fail. In terms of market cap it’s less than 1/10th what it was 14 months ago–the size of a large regional bank.

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