More Propping Up of the Distorted Bank System, Just Ahead

The banking system continues to reveal more ugly creases and cracks than an old hag with her make up off.

The latest to take a look at herself in the mirror, sans makeup, is Bank America. After a shotgun marriage to Merrill Lynch, the hag realizes that Mother Merrill is more a drag than a shot of youth and energy. B of A wanted out, reports indicate.

According to FT, several people close to BofA said that it had told the government that it wanted to scrap its takeover of Merrill Lynch last month after realising the depth of the investment bank’s losses in the fourth quarter.

The Treasury, however, reportedly will step up with billions more in cash to keep the marriage in tact. BofA has already been given $25bn in federal funds as part of the TARP program.

BofA and the Treasury have declined to comment, but reports indicate no final decision on the amount of funds to be injected in BofA has been taken. Rest assured it will be multi-billions.

Meanwhile, Robert Rubin's departure from Citi has that stock reeling. Citi shares plunged on Wednesday, closing down 23 per cent to $4.53, the lowest level since the government’s $300bn bail-out, that was guided in by Rubin.

The plunging stock price at Citi, along with the soaring cost of insuring against a Citi default, is raising concerns that the government might have to take additional steps to buttress the bank. This time, however, Citi won't have Mr. Insider, Bob Rubin, around to stick handle in any new bailout funds.

Looks like things are about to get interesting, again.

Citi Jumps Into Bed With the Government, Again

Citgroup has taken $45 billion from the government's Troubled Asset Relief Program, and in November won a federal bailout that will limit losses on $306 billion of toxic assets. WSJ points out in an editorial this isn't enough for Citi. They are jumping in bed with government to stfle their competitors. WSJ with the details:

After years of resisting, Citi has suddenly signed off on Senator Dick Durbin's plan to allow judges to rewrite mortgage contracts for borrowers in Chapter 13 bankruptcy. Under the Illinois Democrat's plan, which is earmarked for inclusion in the pending stimulus bill, judges could reduce the amount of principal, lower the interest rate, and change the length of the mortgage term.

Until Washington embraced the politics of housing panic, even sensible Democrats recognized that allowing such mortgage "cramdowns" was a terrible idea, sure to punish future borrowers with higher rates as lenders calculate the increased risk...

Citigroup may support this plan precisely because it isn't a big player in the mortgage market. Sure, it has some dodgy mortgage-backed securities on its books, but they've been written down and the feds cover 90% of losses beyond $29 billion in any case. When it comes to making loans, however, Citi originates less than 10% of American mortgages.

Citi is falling further behind J.P. Morgan Chase, which acquired Washington Mutual; Wells Fargo, which acquired Wachovia; and Bank of America, which bought Countrywide. J.P. Morgan's mortgage business is now twice the size of Citi's, while Wells and BofA each originate almost three times as much dollar volume as Citi. So in agreeing to Mr. Durbin's offer, Citi is also volunteering its competitors to write down more mortgages, giving Citi a comparative advantage.

The Robert Rubin Wing of Goldman Sachs Is Closed

Under continuing fire, Robert Rubin has resigned from Citigroup. Other than providing access to government coffers under favorable conditions, which kept Citigroup alive and prevented it from going the way of Lehman Bros., Bear Stearns and others, Rubin's period at Citi was viewed as a disaster, by many.

Rubin is stepping down as senior counselor, immediately. He will remain a director until the bank's annual meeting later this year.

In his resignation letter, Rubin admitted to not having foreseen the credit crisis and market deterioration, which caused roughly 88 percent of Citigroup's share price to evaporate over the last two years.

The bank has taken $45 billion from the government's Troubled Asset Relief Program, and in November won a federal bailout that will limit losses on $306 billion of toxic assets. Rubin played a major role in garnering these funds on favorable terms for Citi, but shareholder activists were more concerned with Rubin's role in the poor management of Citi. The activists have won with the departure of Rubin. Now, however, they have to run Citi without the access and protection Rubin provided. They obviously thought his price tag ($17 mllion per year) was too much for access, when he garbled everything else up.

It'll be back to polishing up government contacts for Rubin, now.

Rubin said he plans to focus more on outside activities and organizations, and "intensify" his work in public policy. He has worked on a transitional economic advisory board for President-elect Barack Obama.

The Robert Rubin Wing of Goldman Sachs is Doing Well Under President-elect Obama

The Robert Rubin Wing of Goldman Sachs (Citigroup) did very well for itself under GW and Treasury Secretary Paulson.

It appears that the trend will continue under Obama. Dean Baker spots a very interesting tax break as part of Obama's "stimulus" package (my emphasis):

The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to theWashington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years,as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007.

Baker then asks the big question:

Did the political connections of Robert Rubin and others in the financial industry have anything to do with the decision of Obama's economic team to be so generous to them? I don't have an answer to that question, but the media should be asking it.

How tight are Obama and Rubin? Very tight.

Citibank's Computers Down, Blocking Account Info

Do you want to see a bank run into physical currency? Let this go on for more than 24 hours.

Yahoo news has the details:

Customers of New York City-based Citibank have lost access to much of their account information because of a computer outage.

Many of the troubled bank's clients haven't been able to retrieve account details online or by telephone since Tuesday afternoon. Others can access only parts of their account profiles.

Citibank telephone representatives say they don't know what caused the outage but technicians are working to fix it. They've been telling customers to call back after Wednesday morning. A Citibank spokeswoman hasn't replied to a phone message or an e-mail sent after business hours.

The Obama Mantra: "Things Are Going To Get Worse"

The influence of Rockefeller operative Paul Volcker on President-elect Barack Obama is coming through loud and clear.

Twice during the opening moments of his interview Sunday on NBC's "Meet the Press." Barack Obama said the economic situation "is going to get worse before it gets better."

"It's going to be a tough period," Volcker said in a speech at the Urban Land Institute in late October. And Obama just named him to head his an economc advisory team.

What will it mean if Volcker has Obama's ear?

It likely will mean that Ben Bernanke will not be renamed Fed chairman when his term runs out in 2010, if he lasts that long. Volcker has been a long-time behind the scenes critic of Bernanke.

It will also mean more regulation of the financial industry, including hedge funds. Look for more power to shift to money center banks. Any changes will benefit Citi, Goldman Sachs, JPMorgan Chase and the like. Volcker has this absurd notion that the mortgage crisis was caused because there wasn't enough regulation. Here's the LA Times on his views:

Volcker feels that tremendous changes in the financial system have eclipsed government regulators, allowing excesses to go unchecked and subjecting the economy to ever greater shocks. Over time, the U.S. has moved from a system of highly regulated banks that funded the economy to a system of highly engineered financial markets that operated outside the scope of regulators.

For the true facts of the Housing Crisis be sure to read Larry White's column, which I first linked to below.

Volcker is correct in that financial engineering also played a role in the crisis, but as I argue here, it is absurd to think that government has the all knowing crystal ball that will direct the economy in the right direction.

Volcker and Obama, though, are going to use the mantra, "Things are going to get worse," to add more regulation and, thus, in a sense they are correct. Things are going to get worse by the new burdens that more financial regulation will create.

It will be crony capitalism at its worst, championed as though it was designed by wise men of high integrity. Volcker's integrity is probably self-delusional, Obama is just slick. What a team.

What Exactly Did Robert Rubin Do To Earn $115 Million?

WSJ is asking:

Was Mr. Rubin to be primarily a member of the board overseeing management, or a part of the management reporting to the board? Things became even murkier when Messrs. Weill and Reed described Mr. Rubin's job: "Bob will participate in strategic managerial and operational matters of the Company, but will have no line responsibilities."

As a great man of finance, Mr. Rubin would be paid CEO money -- a total of $115 million since 1999, not including stock options -- but without having to run a business or be accountable for the results. For years, journalists tried to figure out exactly what Mr. Rubin's job was at Citigroup, and perhaps even his fellow Citi directors weren't entirely sure.

Then WSJ reaches the only conclusion possible. He was the fixer. As former Treasury Secretary and former head of Goldman Sachs, he's the man with the insider hook-up:

Mr. Rubin was reportedly critical to securing the latest federal bailout of Citi -- $20 billion in preferred shares plus taxpayers taking on most of the risk in a $306 billion portfolio of dodgy assets. This is on top of the $25 billion in Citi preferred shares that taxpayers bought in October. Giving Mr. Rubin the benefit of the doubt that he is the fixer who delivered the federal cash, this could make his paycheck appear more reasonable to many shareholders.

Former Treasury Secretary and former Goldman CEO Rubin cut a deal with current Treasury Secretary and former Goldman Sachs CEO Henry Paulson for billions in taxpayer money and guarantees. Cute, eh?

Oh, to be the head of Goldman Sachs and a Treasury Secretary, this is a club you want to get into.

Citi wasn't stupid paying Rubin what they paid him. That's how insiders operate. Many, many years ago I worked for a money manager of sorts, who had this high powered white shoe law firm on his payroll. Month after month, he sent this firm a pretty big check. I never saw any of them and they certainly weren't doing any work for the firm. At the time, I didn't understand it. Why was my man sending this firm this huge check, which it appeared he had been doing for years? Then one day a knock came on the door and my man appeared to be in, shall we say, a little trouble. My man called the law firm he had been sending checks to for years, and they came over and sat down with the people who knocked on the door, all like true gentlemen, the white shoe lawyers all wore suspenders and horn rimmed glasses, and they all discussed this "misunderstanding" .

Something that usually doesn't go away very easily, completely went away. The door knockers went to knock on other doors of those who didn't have a downtown law firm on retainer.

That's what Rubin is there for at Citi, so that if a problem arises, he can sit down like a gentlemen, solve sticky problems and rape taxpayers when necessary.

GE Conference Call

GE stock was down more than 9%, yesterday. The stock was down amid concern that the overview, which was announced less than a week ago, implies GE Capital will become a bigger-than-expected drag on overall results.

GE will hold a conference call this morning in an attempt to quell the panic. Of late, these investor conference calls have only added to selling pressure. Citi's conference call before the government rescue being the most recent example.

GE has missed its own quarterly earnings guidance twice this year in large part owing to shortfalls at GE Capital.

UPDATE: On the conference call, GE said earnings are trending toward the low end of its previous range and it plans restructuring charges.

Fear At Berkshire Hathaway?

A trader friend reports that Berkshire Hathaway's cost for credit default swaps (CDS) has soared to $475,000 per $10 million which was higher than Citicorp’s at it's peak fear period, which was about $380,000 per $10 million.

This is still isn't red light danger level for Warren Buffett's holding company, but is indicative of nervousness, and awareness that he may be holding some toxic derivatives.

Citi Never Sleeps,' Says the Bank's Advertising Slogan. But Its Directors Apparently Do...

....so says WSJ, as the Rupert Murdoch media empire has gone into attack mode against the Citigroup board of directors.

A New York Post editorial is calling for all of the directors to be removed and the Wall Street Journal saying most of them did not deserve to remain. Murdoch owns both papers.

Says WSJ:

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly deserve to remain on the board?

WSJ calls for the resignation of Chairman Sir Win Bischoff, who has held senior positions at Citi since 2000, and seven fellow directors, former Treasury Secretary Robert Rubin, John Deutsch, Richard Parsons, Franklin Thomas, Michael Armstrong, Alain Belda, and Kenneth Derr, who have all served for more than 9 years.

NyPo keeps things simple.

The Headline: BOUNCE THESE BOZO BANKERS

The Conclusion:

There should be no mistake about where the responsibility resides.

That would be with the Citigroup board of directors - and Robert Rubin in particular.

LOL: Krugman Blames Lame Duck Bush Administration for Rape of Taxpayers in Citi Bailout

Says Krugman:

Amazing how much damage the lame ducks can do in the time remaining,

In fact, this bailout has Citigroup vice-president and "senior counselor" Robert Rubin's fingerprints all over it. And that means the incoming Obama team was all over the deal, since Rubin's robots are all in position to run Obama economics. And, don't forget, the next Treasury Secretary, Tim Geithner, a Rubin robot, was also in the room that cut the Citi deal. Geithner is current NY Fed Prez and future Treasury Secretary, do you think he might have had some say in this new rape of the taxpayer?

The Bush Administration was at the scene of this crime, but, make no mistake, the capo in charge was Obama's man Rubin. Nothing in this bailout would have changed in a post Jan. 19 bailout.

CITIGROUP BAILOUT: It's Up To $306 Billion in Guarantees Plus Equity Infusion

The United States government will guarantee up to $306 billion of Citigroup assets, as part of a major bailout of Citi.

In addition, Citi will receive a capital injection of $20 billion. As part of the capital injection, the U.S. government will receive warrants exercisable at $10.61 on 254 million shares. Given the stock closed Friday at $3.77, this is a non-dilutive deal on a per share price basis for Citi shareholders.

THIS IS THE FIRST DEAL DONE BY THE GOVERNMENT WHERE SHAREHOLDERS HAVE NOT BEEN FORCED TO TAKE HUGE HITS ON THEIR STOCK POSITIONS. Freddie and Fannie shareholders are likely to lose everything. Lehman Brothers is in bankruptcy and Bear Stearns shareholders received less than 50% of the closing price on the last day Bear Stearns traded before the government rescue. In this deal, if the warrants are exercised, the government will pay more than 280% above the closing price on Friday.

It pays to be the Robert Rubin wing of Goldman Sachs.

UPDATE: Unlike Freddie, Fannie, Bear and Lehman, no one at Citi in senior management will lose their jobs. Bobby R. has their back.

It's the Robert Rubin Wing Of Goldman Sachs That Will Be In Charge of Obama Economic Policy

So says WSJ:

The new economic team emerges from the Democratic Party's moderate flank, with Mr. Rubin as the common denominator. Mr. Summers was Mr. Rubin's longtime deputy at Treasury and then succeeded Mr. Rubin as Treasury secretary. Mr. Geithner was a senior aide at Treasury during this period.

Peter Orszag, who will be Mr. Obama's budget director, was the first director of the Hamilton Project, a program co-founded by Mr. Rubin at the Brookings Institution, a think tank...

Rubin was Vice Chairman and Co-Chief Operating Officer from 1987 to 1990. From the end of 1990 to 1992, Rubin served as Co-Chairman and Co-Senior Partner along with Stephen Friedman. He then served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations.

He now is Director and Senior Counselor of Citigroup where he draws an annual salary of $17 million.

The supermerger between Travelers Group and Citicorp was facilitated by the repeal of the Glass-Steagall Act (Gramm-Leach-Bliley Act). This legislation was passed under the Clinton administration, days before Rubin's resignation. Some believe that Rubin's $17 million Citi salary is quid quo pro for his role in the repeal of Glass-Stegall.

Citi Rescue Coming

Details remain hazy, however, I remain convinced that there will be no significant dilution of Citi stock. Which means it won't be like the Bear Stearns rescue or the Lehman Brothers collapse or the Freddie and Fannie rescues.

NYT says as much in its report on the developing rescue:

If approved, the plan could serve as a model for other banks, heralding another shift in the government’s morphing financial rescue.

Citi Execs Meeting With Government Officials

The meetings started Friday on how to stabilize Citi.

Since this is the Robert Rubin wing of Goldman Sachs expect a new twist to the bailout format: Shareholders will be protected.

The Citibank Insured/Non-Insured Deposit Picture

Citi has around $773 billion in deposits, only $100 billion are FDIC insured.

According to John Carney, most Ctit deposits are held outside the US, for tax and accounting reasons or because they are accounts owned by foreigners or ex-pats, and are therefore uninsured.

As Carney notes, there are certainly the seeds for an overseas led depositor bank run if uninsured investors get nervous.

A Bet On The Robert Rubin Wing of Goldman Sachs

Prince Alwaleed bin Talal's Kingdom Holding said Alwaleed will increase his Citigroup stake, his largest holding, to 5 percent. His holdings in Citi are currently less than 4%.

In his mysterious role at Citi as "Director and Senior Counselor", since joining the bank n 1999, Rubin has pulled down $150 million in salary and bonuses.

Citigroup Liquidates Fund That Fell 53% In a Month

Citigroup is liquidating its Corporate Special Opportunities hedge fund after it lost 53 per cent of its value last month. This is the ninth time in recent months that the bank has had to close or rescue a fund in its alternative investment unit.

Citibank Alert: The Week Ahead

With its stock crashing, Citibank holds a "townhall" meeting Monday.

An Explanation for Sheila Bair's Erratic Behaviour

It was obvious from the start that FDIC head, Sheila Bair, was pushing for Citigroup to acquire Wachovia at a sweetheart price, then Wells Fargo stepped in to bid on Wachovia and screw up Bair's early Christmas gift to Citi.

It is now clear that Citi is a financial wreck and Bair was most likely attempting a stealth bailout of Citi via gifting it Wachovia. Oh my, what regulators can do.

John Hempton of Bronte Capital had some early speculation on what was going on n this blow-by-blow analysis