Page 2 of 2 Outhouse politics
By Julian Delasantellis
opening the stock at $1.56; it traded as low as $1.15 on Monday. If there was
one thing you could say about this deal, you'd have to admit that the
government was certainly getting a good deal on a really seriously cheap stock,
right?
Wrong.
It turns out that converting the $29 billion into a 36% share translates into a
share purchase price by the government of $3.50 a share, more than double what
the stock opened for on Friday.
One thing you learn if you trade cheap stocks is that a 25% loss on a
two-dollar stock, to $1.50, hurts as much as losing $50 from
a $200 stock - maybe even more, since with the loss in the cheap stock you're
concomitantly so much closer to losing the whole investment.
Late last January (see
Back to the woodshed, Asia Times Online, January 28, 2009), I noted how
many informed observers were arguing that the government should take a harder
line with the private banking system, not coddling them with continued
string-free support and indulgences.
But support and indulgences seem to be precisely the philosophy behind the
latest Geithner/Citigroup plan, in terms of giving up the preferred dividend,
converting at the expensive, $3.50 per share conversion price, and, of course,
not requiring Citigroup to make any sort of move towards a solution of the
toxic assets issue in any of this, or even addressing the issue.
Henrgy Blodgett observed on his "Clusterstock" blog that "Tim Geithner is
transforming into a weird reverse Robin Hood who takes money from regular
people and shovels it into banks that vaporize it."
Charles Gasparino of CNBC says the entire point of all this generosity is to
provide Citi with a capital cushion sufficient to sell the toxic securities
from its portfolio at cheap, market prices without driving it into bankruptcy.
It's a nice sentiment, but, to me, Gasparino's wishing upon a star seems more
the triumph of hope over experience, since no Citi official, certainly not Citi
chief executive Vikram Pandit, has suggested that the bank intends to do
anything close to what Gasparino suggested with the government largesse.
Historical legend has it that Spanish Conquistador Hernanado Cortez burned his
own ships in the harbor of Veracruz, Mexico, in 1519, in order to convince his
men that there was no going back from their destined role as conquerors of the
New World. What Geithner seems to have done here is something along these
lines. As nationalization talk proceeded in February, from the likes of those
red radicals such as Greenspan and Lindsay Graham, a general assumption was
heard in the markets that such a move would inevitably be followed by bank
shareholders seeing the value of their holdings cut to zero. Of course, bank
share prices fell sharply as a result.
Geithner's move seems to have been an attempt to convince skeptical markets
that nationalization was not in the cards by, in essence, jumping into Cortez's
boats. "I'm not going to bankrupt the shareholders of Citi - with my 36%
ownership of the joint, I'm the biggest shareholder of them all! Now do you
believe me when I say that I'm not going to nationalize?"
And with every Citigroup and other financial institution sell order that
arrives on the floor, the shareholders answer with a resounding "no!"
If policy initiatives such as this are the result of the Obama administration
taking bank nationalization off the table, the question then becomes, what do
they see that would be so bad with nationalization?
What is commonly called "nationalization" should probably more accurately be
called receivership or guardianship. The cause of all these troubles continues
to be the unwillingness of the banks to sell the toxic mortgage backed
securities (MBS) at prices anywhere near what the market wants to pay for them.
Both Paulson and Geithner fumbled impotently on this issue, and, as the economy
continues to careen down the cliff, the absolute number and value of MBS
plaguing the banking system only continues to grow.
"Nationalization" in this context is, in reality, just a quick surgery, almost
like the extraction of an infected tooth. It involuntarily separates the toxic
MBS from the banks to move towards selling them off from out of a new,
specially created government institution such as the Resolution Trust
Corporation that disposed of the savings and loans industry's assets in the
1990s.
But that's not what average Americans, like the McCain/Palin supporters
profiled by Alexandra Pelosi, see or understand when they hear the word
nationalization. For them, nationalization is something like the October
Revolution as seen in 1971's Nicholas and Alexandra - with Leon Trotsky
tasking his bands of swarthy thugs (Leon Trotsky and swarthy thugs - gee, just
what ethnic group are they actually trying to portray?) to take over
Petrograd's electric generating plant or railroad station.
Present-day Americans probably don't care much about the railroads (already
nationalized with Amtrak in 1971) or power plants, but they'll fight to the
last shotgun shell to keep Trotsky and his ilk from taking over the gun range
or the "titty bars".
Obama still enjoys very enviable personal popularity ratings, but as for his
programs, especially the $800 billion economic stimulus signed into law on
February 16, Republican attacks on "big government" and "socialism" have at
least partially hit their mark; approval ratings on those initiatives are
significantly below Obama's overall numbers.
Obama must still remember the sting of talking about small-town America
"clinging" to their guns and their religion. It is baffling to non-Americans,
but there are still millions of Americans whose homes are without running water
sporting American flags on the sides of their outhouses, fearing that, should a
socialist/big government regime take over in America, then their lives would
get really rough.
Still, the problems continue. Monday's announcement of a $61 billion loss by
the AIG insurance firm is just another manifestation of the toxic asset
problem; the banks lost their shirts with mortgage-backed securities, AIG with
credit default swaps written on those same mortgage backed securities. One
wonders if the young Ohio man portrayed by the younger Pelosi will have better
luck spelling "depression" than he did with "socilism", or by that time will he
be more concerned with just not starving to death.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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