The story of the year was a weak economy that could have been much, much weaker. Thank the man who runs the Federal Reserve, our mild-mannered economic overlord.
Slightly off topic - can someone who knows stuff tell me if it's true that most of the bailout money has been paid back or is fairly reliably expected to be paid back? I think I've only head from partisan extremists on both sides of this issue, and now I want to hear from a smart person who's paid five bucks for the privilege of telling me.
I think it's hilarious that one of the main reasons banks want to pay back TARP funds is so they can once again pay themselves absurd amounts.
On Monday, Citigroup received permission from its regulators to buy back the remaining $20 billion in preferred shares held by Treasury because of its investments under TARP. (Treasury invested $25 billion in October 2008 and another $20 billion November 2008; however, $25 billion worth of preferred shares were converted into common shares earlier this year, giving the government about a 34% ownership stake in the bank.) The stock then fell by 6%. What’s going on?
This is another example of a bank doing something stupid in order to say that it is no longer receiving TARP money, and probably more importantly so it can escape executive compensation restrictions. As Citigroup CEO Vikram Pandit himself said last October, TARP capital is really cheap (quoted in David Wessel, In Fed We Trust). Instead of paying an 8% interest rate* on $20 billion in preferred shares, Citigroup chose to issue $17 billion of new common shares while its share price is below $4/share. Citigroup’s cost of equity is certainly more than 8%, so it just increased its overall cost of capital. The stock price fell because existing shareholders are guessing that the dilution they suffered (because new shares were issued) will more than compensate for the fact that Citi no longer has to pay dividends to Treasury.
Paying back the TARP money also makes Citigroup weaker. That’s $20 billion less in cash it has to withstand any potential problems in its asset portfolio. Now, you can say that it compensated by issuing new equity. But those are two separate transactions; Citi could have issued the common shares whether or not it paid back its TARP money. Standing on its own, paying back TARP money is unequivocally bad for the balance sheet.
Winning on this issue in the political heart of the country is some consolation after disappointments in Maine and New York. Those losses themselves followed legislative victories in Vermont and New Hampshire, and a wild-card judicial win in Iowa. It’s hard to believe, but all of this happened in 2009.
TIME Looks for Greatness in All the Wrong Places
As this will be the next-to-last column I write before the decade ends, and given the fact that Time Magazine chose to anoint Ben Bernanke Man of the Year, I thought I would share my opinion on the subject.
First of all, Bernanke's being made Man of the Year is an ironic bookend to the fact that Greenspan, along with Robert Rubin -- another financial operator who seemed to have little actual understanding of the financial system, as he was paid tens of millions of dollars to help preside over Citigroup's destruction -- were Men of the Year in 1999. That dual anointing was apparently a function of their guiding America (and, by extension, the world) so brilliantly through the Long-Term Capital Management fiasco in late 1998.
Of course, the eventual trouble precipitated by an anything-goes mentality brewing in the wild and crazy banking system -- and NOT realizing that speculation run amok could threaten the financial system --caused Greenspan to behave as he did. His action and words fomented the stock mania, which sent prices high enough such that now, one decade later, the market has generated a total return just shy of minus 10% -- the worst decade in history for stocks. (For perspective, the 1930s yielded a modest loss of about 0.3%.)
Guys That Only Had Eyes for Moneyprinting
All of which reminds me that during the stock mania, I used to try to explain to people that while printing money seemed like so much fun, the attendant consequences were never worth it. That argument was lost on people as they were delirious with chasing stocks and uttering the battle cry: Where else can one put one's money? -- as though that meant it had to be a good idea.
Fast-forward to today. In the wake of the real-estate bubble, I think some people are beginning to understand that the consequences of moneyprinting are never worth the supposed benefits before all of it turns to disaster. Of course, all of that is lost on Time Magazine as they give their Man of the Year award to Ben. On the other hand, had they not done that, they wouldn't have been able to help me frame this story as I've just done.
I believe that this "lost decade" is worth thinking about -- because if the country is to ever get away from the dangers created by allowing a group of bureaucrats try to pick the right interest rate with which to run the world, then the public first has to recognize the consequences of letting them do that. Perhaps this line of logic that I have just shared will be thought about by others, and that will help promote change, at least I hope so.
Consumer credit decreased at an annual rate of 3-1/4 percent in the third quarter of 2009. Revolving credit decreased at an annual rate of 7-1/4 percent, and nonrevolving credit decreased at an annual rate of 1 percent. In October, consumer credit decreased at an annual rate of 1-3/4 percent.
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