Tuesday, November 25, 2008

Reaction to the bailout

The consensus is that the Citigroup bailout was bad - see Mark Thoma.

I am going to differ here.  The bailout was well designed...

except

1).  The Government should have taken a much larger fee - at least 20 percent ownership of Citigroup - and arguably more.  Shareholders should be punished.

2).  The attachment point of the excess of loss policy is too low.   If the attachment point had been 80 billion Citigroup would survive.  There was no need for a 40 billion dollar attachment point.  

The problem with the bailout was not the design - it was the amount extracted from Citigroup shareholders.  The government took too much risk for too little reward.

I am surprised that the shareholders were not effectively wiped out as per Fannie, Freddie, AIG.

Not displeased - but somewhere I wish the government would get a happy medium somewhere - rather than one rule Citigroup and one rule for Fannie.



John Hempton


10 comments:

  1. How do you feel about JP Morgan at this time? Won't there CDS exposure put them in similar straits?

    ReplyDelete
  2. "Not displeased - but somewhere I wish the government would get a happy medium somewhere - rather than one rule Citigroup and one rule for Fannie."

    Same here, a bit of consistence please. Where possible, I think the G has decided to keep shareholders alive. It could be an extension of the "shortsellers are evil" mentality. Whatever the reason they it feels like a policy shift, for now.

    ReplyDelete
  3. Not sure if John will say this, but I will. JPM is the fed, or at the very least its proxy. I wouldn't bet against them.

    ReplyDelete
  4. @ Matt P.: 'their' CDS exposure, brotha.

    ReplyDelete
  5. my initial thought upon hearing about Citibank's potential bankrupcy was, if Citi goes under, will that cancel out the (negative) small fortune I have stored up on my trusty Citi-card?

    ReplyDelete
  6. JH

    "..Shareholders should be punished".

    No arguement, but, isn't there a certain Saudi prince who will be tapped to 'go to the well' to put up more equity? (the one who bought the 787 for personal use)

    And, didn't the US go to the Saudis and Kuwait on the weekend to 'request' $400B? (not a loan)

    Fat geese, golden eggs and all that..

    CrocodileChuck

    ReplyDelete
  7. Remember Price Alaweed Bin Talal, the Saudi billionaire, has invested several billion into Citi... No way they would wipe out the shareholders

    ReplyDelete
  8. John,

    that may not make a big difference if Citi has to return to the money pool in 2009 or 2010.
    We are looking forward to a "fair" nationalisation then.

    ReplyDelete
  9. John, surely you mean the attachment of loss point is too low?

    Good writing, good analysis.
    Jeff

    ReplyDelete