Investigating Friedmanism at the Fed
Bailout a Piggy Bank or ATM?
Are US taxpayers getting their bailout money back from Wall Street? Even if they are, is somebody else getting an even bigger bang for the buck? If anyone needs help, why not bailout the bottom and let it trickle up? Bigger picture, would we even have boom/bust if society adopted geonomics and ended land’s role as an object of speculation? Instead government could use land rent for public benefit. We trim, blend, and append three 2010 articles from: (1) Weekly Wastebasket, Volume XV No. 13: Apr 2, on Citigroup by Taxpayers for Common Sense; (2) Huffington Post, Apr 1, on Citigroup by Dean Baker, author of The Nanny State; and (3) The Nation, Mar 26, on the Fed by Greg Kaufmann.
by TCS, by Dean Baker, and by Greg Kaufmann
Bailout Piggy Bank
Treasury announced intentions to sell the 7.7 billion shares of Citigroup stock it had purchased with TARP funds -- aka the bailout. Taxpayers own more than a quarter of the company and at current stock prices would receive $33 billion, netting perhaps $8 billion on the sale. The sale would be structured over a long period, as the share price may take a bit of a dip as the market is flooded with Citigroup stock.
The Troubled Asset Relief Program (TARP) -- $700 billion, the “nice round number” that Treasury officials conjured “out of the air” -- did just about everything but buy troubled assets. Instead, a large portion of the program was directed at bolstering banks, supporting the auto industry, investing in AIG, propping up money market funds, and helping the home lending sector.
TARP, which expires in October, will have cost well more than $100 billion.
JJS: And some say that’s a conservative estimate.
Did We Make a Profit on Citigroup?
In 2008, late November, Citigroup's stock price was rapidly descending toward zero and private investors would not go near the collapsing behemoth. The Treasury and Fed came up with a package that had the Treasury buying $20 billion in preferred Citigroup stock and guaranteeing the value of $300 billion in troubled assets. In exchange for this guarantee, the government got another $7 billion in preferred Citigroup stock.
The total value of this deal -- $27 billion - exceeded the full market value of Citi's stock on the last trading day prior to the rescue. In other words, the government could have owned Citigroup outright for the money that it handed the bank.
Four months later, when Treasury converted its preferred stock to common stock, taxpayers only got a 27% stake.
Investors know that the government will not allow Citi to fail; taxpayers are implicitly guaranteeing Citi's loans. This allows Citi to borrow at lower cost than if it had to compete in the market against other businesses. Citi's indirect subsidy could be as much as $4.4 billion a year, which would account for most of the current market value of its stock.
In effect, the government's profit is entirely due to the value of the government's guarantee -- which provides much larger gains to the other shareholders and allows the top executives to score billions in bonuses.
The November rescue was actually Round II. The first round took place the prior month when Treasury handed Citi $25 billion in TARP money. While we did collect interest payments on this money, in addition to stock warrants, we taxpayers overpaid Citi by $9.5 billion.
Citigroup also borrowed money that was explicitly guaranteed by the Federal Deposit Insurance Corporation (FDIC) and was paying just a 0.91% interest rate, a subsidy worth almost $1.4 billion a year.
Fannie Mae and Freddie Mac lose money -- already close to $120 billion -- by paying too much for mortgages and mortgage-backed securities. Undoubtedly some of these purchases were from Citigroup. If Fannie and Freddie hadn’t dealt with them, Citigroup would have suffered larger losses, around $6 billion.
The Federal Housing Authority (FHA) over the last two years lost $30 billion. If we assume that Citi got 10% of the FHA's losses (this is a bit more of a leap, since in many cases the mortgages simply would not have been issued), then Citi's FHA subsidy comes to $3 billion.
There are also the various special lending facilities created by the Federal Reserve Board, in addition to its ongoing operations through the discount window. If Citigroup borrowed $200 billion of the more than $2 trillion lent through these facilities, and lent the money back to the government by buying Treasury bonds that pay 3.7% interest, then it could earn more than $7 billion a year by lending our money back to us.
Plus, the Fed's buys mortgage-backed securities. This could raise the market value of Citi's mortgages on its balance sheets by more than $35 billion. And when the Fed resells the mortgages it bought for $1.25 trillion, it could lose $180 billion.
The fuller picture reveals taxpayers did not make a profit from our investment in Citi.
JJS: What taxpayers lost big, insiders gained.
Investigating 'Friedmanism at the Fed'
In December 2008, when former New York Federal Reserve Bank Chair Stephen Friedman was prohibited from owning any, he nearly doubled his Goldman Sachs stock. At the time, the public was still in the dark about which banks were benefiting from the AIG bailout. Turns out Goldman was the greatest domestic beneficiary to the tune of $13 billion in taxpayer money.
Friedman resigned. He had been granted a waiver that allowed him to simultaneously serve on the Goldman and New York Fed boards. Congressmen Towns and Lynch have asked for copies of all waiver requests over the past ten years by regional fed bank board members in connection with ownership or purchase of stocks, and the decisions that were made on those waivers.
JJS: As long as you let mortgages include land, you have to expect such shenanigans. To remove temptation, you must recover natural values for public benefit while losing taxes on labor and capital. That's geonomics.
Jeffery J. Smith runs the Forum on Geonomics.
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