by Joe Cooper
In a deal announced on February 27, the giant bank Citigroup agreed to a plan in which the government intends to take up to a 36 percent ownership stake in the ailing bank. This means that the government has pumped in $45 billion to this banking giant.
Call it partial nationalization if you want. Or, since many Americans don’t like the word nationalization, Federal Reserve Chairman Ben Bernanke floated “partnership” as an alternative word this week.
The goal of the Treasury and other bank regulators is try to prop up a troubled industry so that it can play its vital role in the economy and help to end the current recession.
Whatever word one uses for it, the government’s role has already been widening as it tries to rescue banks that face rising loan losses.
Since September, the Treasury has pumped some $165 billion into eight of the largest banks in the form of preferred stock. But in none of those cases has the federal ownership stake edged toward effective control of the company.
In the Citigroup deal, that is about to change. A large chunk of the Treasury’s existing preferred shares would convert into common stock — making the government stake far larger than any other common shareholder.
In response to this latest bailout, Citigroup announced on March 3 that they will lower mortgage payments for some homeowners an average of $500 a month for three months as part of a new program to help the unemployed. This is a bridge program until a more permanent solution can be worked out for distressed homeowners. That is the good news.
The bad news is that Citigroup, along with other banking institutions, will be raising interest rates and minimum payments on their credit cards. They will also be reducing credit limits for some cardholders. This will make borrowing money through credit cards more expensive and add even more stress to the retail lending market. The reduction of credit limits will also reduce people’s FICO score (the number used by credit agencies to determine a person’s credit worthiness). This will make it even harder for some people to secure additional credit.
To add insult to injury, AIG posted a $62 billion dollar quarterly loss, the largest in US history. The government considers AIG too big to fail and is ready to pump in another $30 billion to prop it up. This will mean the government will have given the largest insurance company in the world almost $200 billion.
Don McNay, the award winning financial columnist, recently wrote in the Huffington Post,“Washington and Wall Street keep using terms like ‘too big to fail’ or ‘systemic risk’ as excuses to keep throwing money at Citigroup and AIG. Instead, we can look at two variables. Are the taxpayer bailouts bad deals? Of course they are. If they were good deals, private investors would be jumping at them and we wouldn't need taxpayer money. The second thing to ask, are we dealing with good people? There is nothing in their recent history to suggest that are they are good.”
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