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Colossal Financial Collapse: The Truth behind the Citigroup Bank “Nationalization”
F. William Engdahl
Global Research
Monday, Nov 24, 2008
On Friday November 21, the world came within a hair’s breadth of the most colossal financial collapse in history according to bankers on the inside of events with whom we have contact. The trigger was the bank which only two years ago was America’s largest, Citigroup. The size of the US Government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be ‘too big to fail.’
The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker’, whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.
‘Spitting into the wind’
A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September. Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.
That means half of the public’s money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.
Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.
It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.’ surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.
(ARTICLE CONTINUES BELOW)
Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.
Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.
The scale of the hidden losses of perhaps the twenty largest US banks is so enormous that if not before, the first Presidential decree of President Barack Obama will likely have to be declaration of a US ‘Bank Holiday’ and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.
Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10% and the government absorbing 90%. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the Government’s Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It’s by no means certain they will salvage the dollar system.
The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions. Total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.
The madness over a Detroit GM rescue deal
The health of Citigroup is not the only gripping crisis that must be dealt with. At this point, political and ideological bickering in the US Congress has so far prevented a simple emergency $25 billion loan extension to General Motors and other of the US Big Three automakers—Ford and Chrysler. The absurd spectacle of US Congressmen attacking the chairmen of the Big Three for flying to the emergency Congressional hearings on a rescue loan in their private company jets while largely ignoring the issue of consequences to the economy of a GM failure underscores the utter lack of touch with reality that has overwhelmed Washington in recent years.
For GM to go into bankruptcy risks a disaster of colossal proportions. Although Lehman Bros., the biggest bankruptcy in US history, appears to have had an orderly settlement of its credit defaults swaps, the disruption occurred before-hand, as protection writers had to post additional collateral prior to settlement. That was a major factor in the dramatic global market selloff in October. GM is bigger by far, meaning bigger collateral damage, and this would take place when the financial system is even weaker than when Lehman failed.
In addition, a second, and potentially far more damaging issue, has been largely ignored. The advocates of letting GM go bankrupt argue that it can go into Chapter 11 just like other big companies that get themselves in trouble. That may not happen however, and a Chapter 7 or liquidation of GM that would then result would be a tectonic event.
The problem is that under Chapter 11 US law, it takes time for the company to get the protection of a bankruptcy court. Until that time, which may be weeks or months, the company would need urgently ‘bridge financing’ to continue operating. This is known as ‘Debtor-in-Possession or DIP financing. DIP is essential for most Chapter 11 bankruptcies, as it takes time to get the plan of reorganization approved by creditors and the courts. Most companies, like GM today, go to bankruptcy court when they are at the end of their liquidity.
DIP is specifically for companies in, or on the verge of bankruptcy, and the debt is generally senior to other outstanding creditor claims. So it is actually very low risk, as the amount spent is usually not large, relatively speaking. But DIP lending is being severely curtailed right now, just when it is most needed, as healthier banks drastically cut loans in the severe credit crunch situation.
Without access to DIP bridge financing, GM would be forced into a partial, or even a full liquidation. The ramifications are horrendous. Aside from loss of 100,000 jobs at GM itself, GM is critical to keep many US auto suppliers in business. If GM failed soon most, possibly even all of the US and even foreign auto suppliers will go under. Those parts suppliers are important to other auto makers. Many foreign car factories would be forced to close due to loss of suppliers. Some analysts put 2009 job losses from a GM failure as high as 2.5 million jobs due to the follow-on effects. If the impact of that 2.5 million job loss is seen in terms of the overall losses to the economy of non-auto jobs such as services, home foreclosures caused and such, some estimate total impact would be more than 15 million jobs.
So far in the face of this staggering prospect, the members of the US Congress have chosen to focus on the fact the GM chief, Rick Wagoner, flew in his private company jet to Washington. The Congressional charade conjures up the image of Nero playing his fiddle as Rome goes up in flames. It should not be surprising that at the recent EU-Asian Summit in Beijing, Chinese officials mooted the idea of trading between the EU and Asian nations such as China in Euro, Renminbi, Yen or other national currencies other than the dollar. The Citigroup bailout and GM debacle has confirmed the death of the post-1944 Bretton Woods Dollar System.
The real truth behind Citigroup bailout
What neither Paulson nor anyone in Washington is willing to reveal is the real truth behind the Citigroup bailout. By his and the Republican Bush Administration’s adamant earlier refusal to take an initial resolute action to immediately nationalize the nine or so largest troubled banks, he has created the present debacle. By refusing on ideological grounds to instead reorganize the banks’ assets into some form of ‘good bank’ and ‘bad bank,’ similar to what the Government of Sweden did with what it called Securum, during its banking crisis in the early 1990’s, Paulson and company have created a global financial structure on the brink.
A Securum or similar temporary nationalization would have allowed the healthy banks to continue lending to the real economy so the economy could continue operating, while the State merely sat on the undervalued real estate assets of the Swedish banks for some months until the recovering economy made the assets again marketable to the private sector. Instead, Paulson and his ‘crony capitalists’ in Washington have turned a bad situation into a globally catastrophic one.
His apparent realization of the error of his initial refusal to nationalize came too late. When Paulson reversed policy on September 19 and presented the nine largest banks with an ultimatum to accept partial Government equity ownership, abandoning his original bizarre plan to merely buy up the toxic waste asset-backed securities of the banks with his $700 billion TARP taxpayer money, he never revealed why.
Under the original Paulson Plan, as Dimitri B. Papadimitriou and L. Randall Wray of the Jerome Levy Institute at Bard College in New York point out, Paulson sought to create a situation in which the US ‘Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by “healthy” ones.’
Paulson soon realized the scale of crisis, largely triggered by his inept handling of the Lehman Brothers case, had created an impossible situation. Were Paulson to use the $700 billion to buy up toxic waste ABS assets from the select banks at today’s market price, the $700 billion would be far too little to take an estimated $2 trillion ($2,000 billion) in Asset Backed Securities off the books of the banks.
The Levy Economics Institute economists state, ‘It is probable that many and perhaps most financial institutions are insolvent today — with a black hole of negative net worth that would swallow Paulson’s entire $700 billion in one gulp.’
That reality is the real reason Paulson was forced to abandon his original ‘crony bailout’ TARP plan and opt to use some of his money to buy equity shares in the nine largest banks.
That scheme as well is ‘dead on arrival’ as the latest Citigroup nationalization scheme underscores. The dilemma Paulson has created with his inept handling of the crisis is simple: If the US Government paid the true value for these nearly worthless assets, the banks would have to write down huge losses, and, as Levy economists put it, ‘announce to the world that they are insolvent.’ On the other hand, if Paulson raised the toxic waste purchase price high enough to protect the banks from losses, $700 billion ‘will buy only a tiny fraction of the ‘troubled’ assets.’ That is what the latest nationalization of Citigroup is about.
It is only the beginning. The 2009 year will be one of titanic shocks and changes to the global order of a scale perhaps not experienced in the past five centuries. This is why we should speak of the end of the American Century and its Dollar System.
How destructive that process will be to the citizens of the United States who are the prime victims of Paulson’s crony capitalists, as well as to the rest of the world depends now on the urgency and resoluteness with which heads of national Governments in Germany, the EU, China, Russia and the rest of the non-US world react. It is no time for ideological sentimentality and nostalgia of the postwar old order. That collapsed this past September along with Lehman Brothers and the Republican Presidency. Waiting for a ‘miracle’ from an Obama Presidency is no longer an option for the rest of the world.
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25 Responses to “Colossal Financial Collapse: The Truth behind the Citigroup Bank “Nationalization””
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November 24th, 2008 at 2:53 pm
I saw on the cover of a major newsrag in the supermarket a picture of Obama done up to make him look like FDR. This is how they are going to try to position him, as an FDR.
Pete
November 24th, 2008 at 3:34 pm
Citi has also been awarded the Government Travel Card contract as of November 1st.
November 24th, 2008 at 4:28 pm
Article: “The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.”
I’m inclined to put more credence in the theory that this current financial crisis is the result of a systematic collapse of the economic system, as is Webster Tarpley. But the observation that the situation has reached its crisis point conveniently(?) in an inter-regnum period gives weight to the theory that the collapse (at least the banking collapse) was planned and managed, as Alex Jones believes. There are facts that support both theories, and perhaps the reality is a synthesis of the two. Financial boards, like military general staffs, have contingency plans and wish lists, and often congratulate their strategic prowess where it is luck that gives them success. The capitalist élite have gotten where they are by taking advantage of famines, plagues, and war; so a natural systematic collapse is fair game for them, and many of them share the conceit that they can stir the course of the economic system. Just because there are conspiratorial cabals with operational plans to move society into crisis for their own ends, it does not NECESSARILY follow that the crisis is the result of what these cabals have done. But they DO have enormous leverage, and they DO exert this leverage to the best advantage in the most favorable moments for them. Howevermuch the economic system is manageable, both theories have merit. Great historical events are the result of the playing out of social forces and resolution of historical contradictions, but they require human actors.
November 24th, 2008 at 5:05 pm
#3 very true. Just as in any crisis there are opportunities for those best prepared to capitalize on them. The NWO certainly isn’t going to be left holding the bag in this one.
November 24th, 2008 at 5:13 pm
RE: Pete,
Yep, Obama IS a bit like FDR; a wily opportunist masquerading as a compassionate do-gooder.
November 24th, 2008 at 5:31 pm
SHIT!! IT JUST HIT ME THAT THE BANKS AND THE FED ARE ACTUALLY PRIVATIZING THE GOVERNMENT! OH FUCK!!
November 24th, 2008 at 7:41 pm
Can anyone say Germany, North Korea, China, etc……………….I hope the sheeple are understanding what’s going on here.
For the sheeple; it’s like the government bought Hollywood and the Music world; and now the only movies and songs you’ll be able to hear, are the ones they “ok” and nothing else, that’s it, you only have a few choices, not many, only a few, over and over again. Can you understand it now ????
November 24th, 2008 at 7:49 pm
Dear “Think” , the US government has been privatized since at least 1871 with the creation of DC. It is a British Colony and everythings privatized and alwasy has been. This is the nationalization of the whole country, it will belong completely to CORP USA which belongs to the Crown, which belongs to the Vatican. This is a mixture of true failure and planned failure to further the creation of the NWO/
November 24th, 2008 at 8:56 pm
Candace, You are exactly right. Furthermore if you look at ANY fed flag, in schools, court houses, wash dc, you will notice that they are all “guilded”. This dates back to Maritime Law. The flag flown on a merchant Vessel in any port is the law you must obey while on said vessel. The Guilded Flag denotes you will be under British Maritime Law. Anybody that does not believe this MUST investigate it, only then will you believe ME.
November 24th, 2008 at 10:34 pm
Former Secretary of the Treasury William E. Simon writing in his book, A Time for
Truth, 1978, wrote, “Most Americans believe that ‘dictatorship’ means the arrival on the
political scene of a little man with a mustache, wearing a khaki suit, shouting Marxist
slogans…This is extremely convenient for those clean shaven gentlemen in business
suits …who are seeking dictatorial powers over the American people in the name of the
‘public interest’. It has enabled them to lay the groundwork for an economic dictatorship
which is expanding geometrically year after year.”
November 24th, 2008 at 10:42 pm
The information in this article while partially true does not really fess up to the facts. We have a free market economy. GM is free to either become competitive or be replaced by another company that will.
If GM went under, we would not have millions of people without jobs. Instead, we would have thousands of people looking for a new place to work in the US. Outside the US, sure there would be millions of people where like Ford and Chrysler, they have created plants, and re-tooled them to build their POS SUV’s.
The folks in the US would find new jobs at companies that replaced GM, Ford and Chrylser.
This is the real world. When 911 happened, did anyone bail out the airline industry? No, instead Bush and Co passed new laws making it impossible to actually file a true bankruptcy.
Millions of jobs were lost in the Travel and Airline Industry, any bail out? Nope.
These monster companies have sold out the American Dream to build cars in another country where labor can be bought for a few dollars a day. With the cost 100th of what it used to be, they are selling these gas pigs far more than they were worth if they cost the money to build them in the US.
The profits GM, Ford, and Chrysler and the banks have made off the people in the US is in the Trillions of dollars.
We have been sold into slavery! Plain and simple.
November 25th, 2008 at 6:00 am
Bring it all down…let it all collapse. Only a global crisis will awaken those who are sleeping. When the majority of people are out of work and destitute, a sizeable minority will rise up and awaken to the “game”. Once this takes place, a large majority of the remainder will join them and overthrow the elite by drying up their waters from within. In other words, covincing their brain washed minions that they are the dupes being used as front men to do the dirty work for the elite. Once these waters dry up and we set up new national currencies the tables will be turned. Their CURRENCY WILL BE WORTHLESS. THEIR WEALTH WILL BE WIPED OUT IN AN INSTANT!. They can call on kali, gaia and lilith all they want. They can cut themselves and prostrate themselves. We will simply try them and imprison them. They can grow old and bitter in a regulation orange jump suit.
November 25th, 2008 at 7:40 am
Let the automakers fail, they had their chance to compete with import cars, and instead caved to the oil lobby to make bigger SUVs that use more gas and thus help pump up petro prices during the driving season. Or even better, let the oil companies bail out the automakers, record profits should not be awarded to CEOs after consumers were gouged this past summer due to manipulation of oil prices by the hedge funds bidding the futures contracts thru the stratosphere ..
November 25th, 2008 at 7:47 am
Why doesnt the gov hand out vouchers for say 10,000 to anyone who would be willing to buy a new vehicle? then us consumers who have not seen our income rise in the last 8 years might possibly consider buying one of these over priced cars.Low interest rates or easy credit is what has gotten us in this mess ,the consumers purchasing power has hit a brick wall. Bailout the big 3? we still cant afford to buy,bail out the banks? we still dont have any money left,easy credit has taken its toll, i.e. middle class serfs!!!
November 25th, 2008 at 7:51 am
It is so sad, but it is not Paulson incompetence, but that he is personally doing this to destroy the economy. The only they can restore confidence now into the economy is if they started making arrest. If not, i don’t think there is no way Obama can fully bring us out of this recession.
November 25th, 2008 at 8:08 am
The automakers won’t fail.
The automakers will have to shed a lot of sweetheart deals they have given away over the years to preferred stock holders, to retirees and to the UAW, but the automakers will not fail. That is a falacy.
Right now AUW retirees receive retirement compensation that is far more than probably 60% of what American workers make, for being retired!
Not everyone can work for the auto companies. And not everyone should be asked to pay for these sweetheart deals.
The companies cannot afford the deals the agreed to, so let them declare bankruptcy. They then can reorganize and get on with the business of making cars.
November 25th, 2008 at 8:21 am
WORLDWARX, you make some good points, however after 911 there was just a drop in flighing that was gradual. The bottom didnt fall out, like what has been seen in multiple, diverse industries over the past 4 months. I agree that all of these globalized companies have been robbing us so blind its like we never had eyes.
I am originally from the detroit area and will admit i am a little biased. I have a couple of opinions on all of this. First, why do banks get bailout preference. In the past airlines have been bailed out if my memory serves me correctly. So if you are going to bail out AIG and Citibank, why CANT the big 3 get a LOAN. At least they admit its a loan. Not like the banks who just want a hand out because they mismanaged…sorry defrauded not only their stakeholders but their customers as well.
My other opinion is, if you want to let the big 3 fall…im fine with that. But let E V E R Y T H I N G fall. AIG, Citi, circuit city, starbucks….let them all fall to the ground. Then take that 700B that Hanky Panky gave to his boys, and give it to the american people. Because they actually work at the Citis and the AIGs and the GMs and the Fords. I do believe though that Chrysler should just fold up and its assets liquidated.
I knew that 700b would be a gravy train for people who didnt deserve it. I think that at least the BIG 3 failed honestly. Yeah they made crap for 40 years and just started making better cars in the last 10 years but at least they made what i say are honest mistakes….Credit Default Swaps and subprime loans/mortgages are just get rich quick schemes.
I also agree with BeTrue…..the economy and even the world as we knew it, is over.
November 25th, 2008 at 8:24 am
Bill I like that….let the oil companies bail out their auto buddies. NICE!
November 25th, 2008 at 12:30 pm
The employees, pensioners and shareholders of General Motors, Ford and Chrysler bet on these respective companies and lost. Welcome to capitalism.
I hope not one cent of public money is used to bail out these dinosaurs. There is a reason they are going broke - they built products that no one wanted.
Throwing good money after bad will only prolong the agony and delay the rebuilding of the american automotive industry.
November 25th, 2008 at 12:34 pm
To World War X,
Just in case you haven`t figured it out yet 9/11 was an inside job.
November 25th, 2008 at 2:32 pm
You could put a quadrillion dollars into the banking system and it wouldn’t change the fact that most Americans are tapped out. Giving them more loans and credit cards at favorable terms won’t make the nut if they can’t pay back the loan. After all, that is the situation we are in. Our banks and financial institutions are holding more debt than can reasonably be paid back. We have a debt crisis, not a credit crisis. And Paulson’s answer is to dump more debt onto the backs of the taxpayers? This sounds to me like some mideaval physician “bleeding” the patient who is just hanging on to life. I actually think that Paulson and company have about as strong and accurate a grasp on the situation as the above mentioned “physician”.
November 25th, 2008 at 6:14 pm
Joshua,your right on! Why cant the gov just give a bailout to the people then we can pay the banks ,the banks can pay the international banks,everybodys happy right? then the consumers can start buying again.Of course this cant happen,the nwo,fed reserve wants the people in this subservient position,were much easier to buy into there policy,when were desperate. You know,if this bailout money is actually ours,and we have to pay it back,why cant we have some!!!
November 25th, 2008 at 11:08 pm
lets see in the 70s we had a gas crunch and jap cars sold like crazy. Why, ‘cuz they got great gas mileage. what did we get from America? the pinto and the vega both pieces of crap. so here we are 40 years later jap cars still get 30+ mpg so do korean cars. American cars still get crappy mileage and the quality sucks, but they cost 40k. we have the technology today to tune these cars and suvs to get 25-30mpg easy. this is fact. I’ve been working on them 25 years and i recently got a f150 to get 28mpg so I know it can be done.(and I do not have the fancy computers they do.) an average camry can get 65 mpg. Big oil owns our gvt and our car companies. f em all. this summer we barely could pay our mortgage and still get to work feeding our transportation. my ass is getting sore from all this help the gvt is giving. if in 40 years the big three can’t be competitive then it’s the f ing they get for the profits they got. thats why they call it ‘free market’ I worked for Ford, GM and Chrysler. I am a proud American but I don’t drive or own an American car ‘cuz they f ing
suck. maybe if they quit building piles of crap we would buy them. p.s. my toyota has 100k and it has cost me total about 1500 in maintenance. never been to the dealer with problems under warranty, ever. name 1 American car like that. anyone…bueller.
November 26th, 2008 at 12:39 am
wow so this is what it felt like on the titanic… God have mercy on us.
November 26th, 2008 at 4:57 am
Steve in oc,just like the titanic,most people refused to believe they were sinking, that some obama ship might come along and rescue them,instead of getting on the life boats,of cutting back on spending,only buying whats ness,sqeezing the sob”s look whats happened to gas prices since we cut back on driving,they have already made a fortune,lets all quit buying for 6 months prices will come down,we will be much better off.hell there gonna get there bailout anyway,lets sqeeeeeze em,watch them squirm,come on protests and signs do no good ,violence begets violence,lets hit em where it hurts. ANYBODY WITH ME???