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Friday, January 16, 2009

Citigroup and the Absurdity of TARP

There was lots of news reported on Citigroup this morning.

The giant but troubled Citigroup (C) reported an $8.3 billion loss Friday morning, and said it would split itself into two separate companies -- effectively ending its era as the “financial supermarket” molded by legendary Citi CEO Sandy Weill.

Citigroup, which had seen its market value cut by a third this week, reported a fourth quarter loss of $8.29 billion, or $1.72 a share, compared with a loss of $9.83 billion, or $1.99 a share, from a year ago. This was Citi’s fifth-straight quarterly loss since the financial crisis started in August of 2007.

The loss was much more than the $1.12 a share analysts were expecting, according to Thomson Reuters. Excluding one-time items, Citi lost $2.44 a share.


Now, what is happening at Citigroup is a microcosm for the absurdity of TARP. First, before this report, Citigroup received $20 billion in TARP money. Yet, that wasn't enough for Citigroup to make the difficult decision of breaking itself up.

Just last week, Citigroup announced that its best performing division, Smith Barney, would be sold to Morgan Stanley. What's important to understand about the current financial crisis is that all of this is occurring because far too many got far too deep in the Mortgage Backed Securities with sub prime loans as the underlying financial vehicle. What's important is that mega financial companies have perfectly capable investment arms, banking arms, insurance arms etc.

In other words, while it is clear that Citigroup is through, Smith Barney is a perfectly viable investment firm. The same could be said of Merrill Lynch's flagship investment firm. The same could be said of all sorts of financial companies.

Had we not have had TARP, many of these companies would have failed. Then, their profitable assets, like Smith Barney, would have been swept up by so called vultures. Their unprofitable assets would have been sold at deep discounts and then their debtors would have tried to collect whatever they could have. That's what happens in capitalism.

Yet, the Feds convinced all of us that such a process could not occur or the whole entire system would fail. It's of course a prediction that can't be tested. Yet, we also learn that Bank of America just got $20 billion. Yet, BofA has been busy buying up a lot of these troubled assets. Clearly, they aren't at risk of financial collapse. They can't be or they wouldn't have been so busy swooping up a lot of the weak players. In other words, BofA just used tax payer money to buy up these weak players.

Had we allowed the system to transform on its own, BofA's everywhere would have swooped in to buy bits and pieces of failing financial institutions. Make no mistake, many players were in trouble but not all. The Hartford is not in trouble. Warren Buffet's, Berkshire Hathaway, is not in trouble. There are plenty of other banks and other institutions that are plenty viable to swoop up the good assets. Instead, we have carried weak players and allowed them to continue when what should have happened is that they met the fate of Merrill Lynch and Bear Stearns. That's how capitalism works. That's how it has always worked, and prior to now, no one screamed the sky would fall if it was allowed to work. Yet, it seems that now is different, and the natural course of capitalism couldn't be allowed to occur. I believe the fate of Citigroup is proof that folks like me were right and they doomsayers were wrong.

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