x Abu Dhabi, UAEMonday 24 July 2017

A tale of two Citis

It seems at times as though the US has adopted the Gulf work-week, so many meetings now get held on Sunday. This Sunday's boardroom marathon featured eleventh-hour talks to save Citi, and Treasury and Fed officials appear close to a plan that could produce a solution not unlike that once envisioned for Lehman Brothers, with a good bank and a turd bank.

It seems at times as though the US has adopted the Gulf work-week, so many meetings now get held on Sunday. This Sunday's boardroom marathon featured eleventh-hour talks to save Citi, and Treasury and Fed officials appear close to a plan that could produce a solution not unlike that once envisioned for Lehman Brothers, with a good bank and a turd bank. The plan does however appear likely to dilute the holdings of Citi's big Gulf shareholders, such as Prince Alwaleed bin Talal bin Abdulaziz Alsaud and the Abu Dhabi Investment Authority. Citi's plight has sparked an entirely new flight from risk, one that has pummeled emerging markets and propped up the US dollar, sending Treasuries up and yields down to their lowest since 1940. The question facing policymakers now is how to devise a plan that will succeed where the last two have failed to restore confidence in financial markets. While the cost of borrowing for the US Government is falling to near zero despite its ballooning borrowing needs, the spread between that and what other borrowers must pay is widening as the financial system comes under renewed stress and markets grow increasingly volatile. Fears that no solutions will be forthcoming until Jan 20 have thrown aides to President Bush and President-elect Obama into talks on how to push ahead with an economic stimulus package that could be ready for Mr Obama to sign once he takes office. In the meantime, Treasury Secretary Henry "Hank God I'm Heading Out of Here and Handing the Whole Mess to Geithner" Paulson will start doling out the remaining $350 billion of funds provided for by TARP. Economists say the latest gabfest between the G7 and G-20 was useless - no surprises there - but the meeting did serve to clarify just what it means to rewrite the global financial framework. Leaders need to decide how to keep banks and markets apportioning capital efficiently while making sure that institutions that are too big to fail either don't get so big or don't take the kind of risks that could cause them to fail and leave taxpayers holding the bag. Obama, on the other hand, is giving investors some cause for optimism in his tapping of NY Fed Bank president Tim Geithner as Treasury secretary and Former Treasury Secretary Larry Summers as his top economic guru. Less reassuring were Bush's assertions at the APEC meeting in Lima that the US still supports a pan-Pacific free-trade area. Fears remain that this crisis will push back globalization and rekindle protectionism and it is unclear to what extent Obama supports Bush's position on Asian trade or, if he did, what support he would get in Congress for doing so. So concerns that saving nations could face an imminent erosion of their dollar savings may be premature. Instead, the value of those holdings is evaporating in any currency. According to Citi, global equity markets have fallen 47 per cent since the earnings recession began in late 2007. Morgan Stanley estimates the losses in stock markets at $30 trillion. Merrill Lynch's calculations put the number even higher, at $35 trillion, which it estimates is equivalent to the entire spending of the US consumer over the four-year 2004-07 period. The latest source of indigestion in financial markets isn't just Citi's sudden slide, but the failure of Washington to come up with a bailout package for the Big Three automakers. While many have rejected such a plan to save the thousands of jobs at America's faltering automakers as flawed economics - including yours truly - it has now emerged that Detroit could hold a poison pill at Wall Street's throat in the form of $100 billion in loans that could go sour if they fail. The plan to save Citi reportedly involves setting up a "bad bank" that would hold the bank's worst assets, which would then be backed by the US government. Relieved of these dodgy securities, the remaining "good bank" could more easily raise the capital it needs to survive from private shareholders. If, however, the bank suffers a certain degree of losses on its bad assets, the US Government may be entitled to take a stake in Good Bank, or so it seems from various reports. How this differs in impact from the original plan of TARP to buy up such assets is unclear. But Treasury abandoned that plan after spending $350 billion buying stakes in banks and instead said it would use TARP funds to provide money to US borrowers, in the forms of credit cards and car loans. Investors, meanwhile, still seem convinced that Obama will raise taxes and go after foreign-earned income. Clients of Swiss bank UBS, for example, are said to be seeking an amnesty from the IRS. Some economists and strategists keeping track of the rout in global markets are noticing signs pointing to an imminent rally, particularly in China, where inflows are turning positive following the country's massive stimulus package even as funds continue to flow out of global emerging markets.

warnold@thenational.ae