I won’t review the details of the deal, but I do want to comment on the idea of a good-bank, bad-bank model and the lack of a long-term plan as part of this deal.
The idea that Citigroup can be split into a “good bank” and a “bad bank” is utterly ridiculous. Citigroup is the bad bank. The assets that have been walled off are not to blame; the people at Citi who made those loans are to blame. Walling off the assets and leaving the people in place will just allow a poorly performing bank to keep making mistakes.
Citi has been at the center of every lending debacle I can remember over the last 30 years. In the early 80s they were caught in the Mexican debt crisis and Treasury Secretary Brady bailed them out. The government allowed them to carry those loans on the books for years at a fantasy valuation so they could survive. Citi was neck deep in the commerical lending that was the source of the S&L crisis and had to be bailed out by the Saudi Prince in the early 90s. They were on the hook with Mexico again in 1994 and Rubin rescued them. They weren’t directly involved in the Long Term Capital debacle but they had lent to Goldman and Morgan Stanley who were up to their eyeballs with LTCM exposure. They were a major lender in Asia prior to the Asian crisis in 1997. They recently settled claims with the Enron bankrupcty estate; they were accused of helping Enron deceive investors. And now, once again, they are front and center.
Taxpayers are being asked to bail out a bank that has shown no ability to lend responsibly. Where was the Board of Directors? Why aren’t they being forced out as part of the deal? Why isn’t Robert Rubin being forced to step down? Is there a long term plan for Citi? If the automakers have been told to come back with a plan, why does Citi get funds with no plan? Why isn’t Citi being forced to sell off some assets as part of the deal? Restructure? Fire somebody? Anything?
Companies that destroy investor capital should not be rescued so they can destroy taxpayer capital. Citigroup should have been forced to merge with a better bank or allowed to fail. Propping them up so they can lead us to the next set of bad loans will not benefit taxpayers or the economy as a whole. Too big to fail? I say too big and poorly managed to not be allowed to fail.
One final note; Citigroup bought the naming rights to the new Mets stadium for $400 million. It seems a perfect match of a lousy bank and a lousy baseball team but I don’t like the Mets and I don’t want Citi using my tax dollars to subsidize them. Is Geithner a Yankees fan?
Update: The Economics Babe: “You have to work really hard to make that many bad loans.” The Economics Babe spent six months at Citi as a private banker in the mid 90s, but started her new job search before the ink on her employment contract was dry. Apparently the incompetence was obvious immediately.