I used to think that the government had some super secret bag of statistics that I was not privy to. They – Bernanke, et al., Paulson and Treasury, Inc. – are running around like chicken with their heads cut off, and for each moving part that could potentially cause disaster – the government adds to the list.
Now, it’s the outcome of the Citigroup bailout, which from my reading is a single-institution Treasury Asset Relief Program (TARP) that was not approved by our elected officials in Congress with no actual money switching hands....yet. The bailout includes the government “providing protection” against $306 billion of Citi’s securitized assets.
Here is the joint statement by the Fed, the Treasury and the FDIC:
The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
Mish Shedlock provides a nice list of the terms of the “agreement” here.
RW: It seems that the Treasury, the Fed and the FDIC say the same thing over and over again when they defend some huge bailout – in this case, $306 billion worth "committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth".
Wouldn’t you like to see a cost/benefit analysis of the government’s decisions to bailout these financial firms? A nice quantitative investigation of how many jobs would be slashed and aggregate income lost had the government not stepped in. In lieu of a cost/benefit analysis for the Citi deal, we do get this:
We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.
RW: There is entirely too much power sitting in the hands of seven individuals: the five members of the Fed’s Board of Governors, the Treasury Secretary Henry Paulson and the Chairman of the FDIC Sheila Bair.
These actions are being taken without the blessing of the public. Elected officials certainly have their shortcomings, but they are nevertheless elected. Bernanke and Paulson were nominated by the President and ratified by the Congress. It’s like making a copy of a copy of a copy.
Bloomberg put all of the numbers together and came up with $7.4 trillion (hat tip reader Paul Cox). BTW: Bloomberg updated this article to read $7.7 trillion. This is the amount of taxpayer money that the U.S. government is gambling with via lines of credit, liquidity, TARP, currency swaps, and everything else under the sun. Last time I checked, the U.S. economy was worth $14.4 trillion .
If the string of government bailouts is the “best thing to do,” then so be it. But the Fed and the Treasury have been sufficiently opaque about their policy choices, which leads one to question their actions.