OPINION

Citibank - The New State Bank of America

November 24, 2008
Aaman Lamba

The United States Government took a giant step towards nationalization of the American banking system by announcing a plan to fund and backstop Citigroup, the beleaguered financial giant that has lost over $160 billion in market cap. The guarantees being provided include an additional capital infusion of $20 billion, loss guarantees up to $306 billion in a layered manner between Citi, the Federal Reserve, and the FDIC.

In return, Citi would issue $7 billion of 8% preferred stock to the government and additional stock warrants of about $2.5 billion. It would also promise not to pay out more than 1 cent dividend on common stock for the next three years. Finally, and most notably, the government would have final approval over all executive compensation and bonuses.

This last point is perhaps the most far-reaching, and as we all know the adage about paid pipers and their tunes, Vikram Pandit is henceforth a Federal Government employee, with hopefully greater job security than he had before this weekend. This mechanism gives government regulators a greater say over banking operations, and potentially opens the door to similar measures being adopted for other banks, or even other industries.

President-elect Barack Obama might end up appointing an auto czar, a music supremo, and perhaps even look to employ Bill Gates as CIO. The corporatization of the state will have an impact on the way it is run, which could work positively, but states have been corporatized for a long time, and this will only accentuate the incestuous relationship between neo-liberalism, corporatism, and statism.

Unfortunately, the victim in this circle jerk will be liberalism. Friedrich Hayek put it well when he noted,

If we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject.... The monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money.

Consider a humble bank manager in the Midwest a year from today having to evaluate between a loan to a start-up promising to improve productivity by over 20% with more efficient outsourcing automation. He is about to sign on the dotted line when he gets a call or a buzz from his friendly neighborhood Congressman, suggesting it might be a better idea instead to fund the local chapter of the UAW.

Welcome to Citibank, the new State Bank of America.

Aaman Lamba is the Publisher of Desicritics.org, a Blogcritics network site. He also blogs, more infrequently nowadays, at Audit Trails Of Self
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#1
Ruvy
URL
November 24, 2008
10:36 AM

There is a certain irony and justice in seeing state sociali$m being introduced to the United States by Republicans under the lash of an economic crisis.

While these actions may save the big corporations from sinking like the Titanic, will they benefit Joe Sixpack? I really doubt it.

I can't say I enjoyed reading this, Aaman. I still remember the days when "Citibank" wa called "First National City Bank". I knew a kid (we wee all in our twenties then) whose dad was a VP at a local branch in New York. It is no pleasure seeing all the institutions and bywords of my youth disappearing into the smoke and mirrors of the new Union of Soviet Sociali$t States of America.

Soon even Sivercup Bread (baked in Brooklyn, with its sign featured in the movie, "The Highlander") and Levy's Rye will be gone!

#2
smallsquirrel
November 24, 2008
01:18 PM

Hmmm... I think there is a big difference beween oversight and what you imply by saying that Pandit is now a Federal employee. I do not think that is really the case, is it, or were you simply overstating the case?

I am just over all these bailouts. as a fiscally responsible american, this pisses me off. plus, these banks should be ashamed of themselves with their interest rate bait and switch scheme and pushing people to spend spend spend by upping their credit limits... never mind these home equity lines of credit.

#3
kerty
November 24, 2008
01:40 PM

GM is now on the verge of bankruptcy and seeking a government rescue. There was once a saying 'as goes GM, so goes the economy'. Auto industry was truly an engine of economic growth until foreign cars cracked it. Thankfully, tech-IT sector came along to replace auto sector as the chief mascot of economy. And when outsourcing cracked the tech-IT sector, real-estate sector became the main engine to pull the economy along. However, they all have fallen like a domino - tech-IT, real estate, and now auto - three pillars who have sustained the economy for last 50 years. The finance and insurance that have provided the economic infra-structure have fallen too. In a nut shell, there is no bottom for this economy from free fall. There is no Saviour in sight. Only thing that can preempt steep depression and divert the economy away from recession is government.

Coincidently, government is in perfect hands who believes in government as a cure all and a Massiah. Perfect timing. Just what doctor has ordered. Had it been McCain, he would have dogmatically limited government's role in economic rescue and America would have crashed into depression for sure. Obama can use government without restraints and it will be a good thing for the economy. Forget 'tax and spend', Government should go all out for 'print and spend' - it should bailout every key ailing sector until economy turns around. Worry not deficits - Obama should go for it without remorse or restraints. Deficit financing was invented precisely to tackle this kind of situation. Let there be only thing that remains sick in the end - deficit-ridden government. Government should mop up sickness from all over US economy. When economy finally turns healthy, sick debt-ridden government can eventually be cured, so worry not about it at the moment. As along as bailouts do not engineer welfare state or entitlements that stay on beyond economic recovery, and that is a real danger with unbridled socialism, and GOP has a big role to play to make sure that bailouts do not end up as socialist take over of the economy. I think in 2-3 years, this economy can turn around with right doze of bailout medicine. It has no other choice. If Obama pulls it off, and I think he can, he will be hailed as a great president for generations to come. Yes. He Can.

#4
Guido
November 24, 2008
03:23 PM

"Welcome to Citibank, the new State Bank of America."

I would add, Welcome to the United Sates of Europe.

As the big three went pandering for tax dollars, Honda was opening a new non-union plant in Indiana. Go figure!

Government intervention in the form of lending GSEs was the catalyst for this mess, and now the same boneheads who botched it are supposed to fix it. And the good folks voted those responsible back into office. You couldn't make this stuff up.

On the bright side, if you're a committed socialist, collectivist, communist, Leninist, or Marxist (pick your poison) then this is the perfect opportunity to expand, expand, expand. And as a side note, say farewell to liberty and opportunity.

Ciao, Guido

#5
kerty
November 24, 2008
04:01 PM

Guido

"say farewell to liberty and opportunity."

They would be gone anyway if depression takes over America. Socialist medicine is going to be bitter. But there is no other way depression can be avoided even if the sickness may have been caused by too much government intervention. On the bright side, once economy somewhat recovers, America can be rescued from socialism, and it will be.

#6
Patrick
URL
November 24, 2008
10:52 PM

my initial thought upon hearing about Citibank's potential bankrupcy was, Yipee! this will cancel out the small fortune's worth of debt I have stored up on my trusty Citi-card... right?

#7
smallsquirrel
November 25, 2008
06:42 AM

patrick, no it will only make them more determined to get their money.

#8
Guido
November 25, 2008
04:51 PM

Kerty,

Opportunity and Liberty

Private enterprise opportunities are inversely proportional to corporate and capital gains taxes. An increase in the latter decreases the former and a sagging economy gets worse as the economic engine (small business) suffers. Job loss and unemployment follow. Even Clinton knew this and trimmed the capital gains to 20 percent from 28 percent in 1996.

At the height of the great depression many lost their savings and means yet retained liberty. This constitutionally guaranteed individual right is slowly being eroded by those who think they know what's "best and fair" for all. The entrepreneurial opportunity losses can be regained with the right leadership and economic policies. And I'm confident they will. Liberty is quite different and I'm afraid it'll take more than a change in fiscal policy to bring it back once lost.

Ciao, Guido

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