x Abu Dhabi, UAEThursday 27 July 2017

Another crisis, another bailout

In an effort to restore confidence to the financial system, the US government steps in to protect Citigroup - a bank that is "too big to fail". "The question now, however, is whether an institution of that size and scope is also too big to succeed." President-elect Obama moves to fill the leadership vacuum in Washington by announcing his economic team and promising that it will begin working right away. Tibetans are losing patience with the Middle Way approach of seeking autonomy.

"Guarantees that could not be honoured thrust the world financial system into its worst crisis since the Great Depression," wrote Floyd Norris in The New York Times. "Will a guarantee by the United States government finally restore confidence in the American financial system? "Only a week after treasury secretary Henry M Paulson Jr said that the government bailouts had stabilised the most important financial institutions, plunging stock prices forced it to step in again, both to make another direct investment and to guarantee that losses would be contained from $306 billion in possibly toxic assets on Citigroup's balance sheet. "The government injected an additional $20bn into Citigroup, on top of the $25bn it invested a few weeks ago. It also said that it would cover 90 per cent of the losses on those $306bn in securities after Citigroup absorbed the first $29bn of losses. "The fact it was necessary to guarantee so many assets - about a sixth of the $2 trillion in assets that Citigroup reported at the end of September - was another indication of both the complexity and the opacity of many of the securities that were created by financial engineers in the great wave of innovation.... "The financial boom of the first half of this decade will be remembered as a time that innovation overwhelmed the capacity of both regulators and financial institutions to assess risk." In The Washington Post, Steven Pearlman wrote: "Of all the rescues mounted by the government so far this year, none carries with it more symbolism, or more irony, than that of Citigroup. "Until recently, Citi was not only the largest US financial institution, but the very embodiment of the new financial order. Under the relentless empire building of former chief executive Sanford Weill, it was Citi that brought down the old regulatory wall that had separated commercial banking from investment banking and insurance. "The combination of Citibank with Solomon Smith Barney under the bright red umbrella of Travelers Insurance was accepted with a regulatory wink and nod by the Federal Reserve while then-Fed Chairman Alan Greenspan worked to persuade Congress to make it legal by repealing the Glass-Steagall Act, put in place during the Great Depression to prevent another market crash like that of 1929. Now that another market crash has required the government to rescue Citi, there will certainly be those who wonder whether the New Dealers didn't have it right all along. "The rationale for saving Citi is that with $2 trillion in assets, more than 300,000 employees and operations in 100 countries, this was a bank that was too big and too interconnected with the rest of the financial system to be allowed to fail. The question now, however, is whether an institution of that size and scope is also too big to succeed." On The Baseline Scenario blog, James Kwak wrote: "The government [should have] had two goals for this bailout. First, since everyone assumes Citi is too big to fail, the bailout had to be big enough that it would settle the matter once and for all. Second, it had to define a standard set of terms that other banks could rely on and, more importantly, the market could rely on being there for other banks. This plan fails on both counts. "The arithmetic on this deal doesn't seem to work for me (feel free to help me out). Citi has over $2 trillion in assets and several hundred billions of dollars in off-balance sheet liabilities, $20bn is a drop in the bucket. Friedman Billings Ramsey last week estimated that Citi needed $160bn in new capital. (I'm not sure I agree with the exact number, but that's the ballpark.) Yes, there is a guarantee on $306bn in assets (which will not get triggered until that $20bn is wiped out), but that leaves another $2 trillion in other assets, many of which are not looking particularly healthy. If I'm an investor, I'm thinking that Citi is going to have to come back again for more money. "In addition, the plan is arbitrary and cannot possibly set an expectation for future deals. In particular, by saying that the government will back some of Citi's assets but not others, it doesn't even establish a principle that can be followed in future bailouts. In effect, the message to the market was and has been: 'We will protect some (unnamed) large banks from failing, but we won't tell you how and we'll decide at the last minute.' As long as that's the message, investors will continue to worry about all US banks." Even so, The Financial Times reported: "Shares of other large financial institutions such as Bank of America, Morgan Stanley and Goldman Sachs surged on Monday as investors interpreted the rescue plan as an indication that further government bailouts, if necessary, would provide more protection for shareholders. "Previous rescues, such as those for AIG, Fannie Mae and Freddie Mac have all but wiped out shareholders. "But in contrast, the government's rescue package for Citigroup was structured in a way that both protected holders of the bank's debt and diluted the bank's shareholders only by the cost of $20 billion of additional preferred stock for the US government. "At the same time, the rescue will help protect the bank from losses on a $306bn pile of troubled US home loans, commercial mortgages and corporate loans, prompting some banking advisers to question whether the handful of other large US banks that still have toxic assets on their balance sheets will now push for similar support." Meanwhile, The New York Times reported: "With the financial crisis looming as a priority of his term, President-elect Barack Obama sought to put his imprint on efforts to stem the turmoil as he introduced his economic team on Monday, nominating Timothy F Geithner as Treasury secretary and Lawrence H Summers to head the White House Economic Council. "By naming a team deeply experienced in dealing with financial crises - Mr Geithner was heavily involved over the weekend in the efforts to stabilise Citigroup - Mr Obama underscored his determination to assure Americans and foreign investors that he would aggressively step into a leadership vacuum in Washington during the transition. "Moreover, by pledging that his economic team would begin work 'today' on recommendations to help middle-class families as well as the financial markets, the president-elect sought to convey an impression of continuity and co-ordination, so that his administration can 'hit the ground running'." The Christian Science Monitor said of the Treasury secretary nominee: "Boyish and unpretentious, Geithner is well-liked by his staff. He's not an economist by training, or a veteran of Wall Street's commercial world. Instead, he's largely risen through the bureaucratic ranks, having worked in a variety of Treasury positions. He's also served a stint at the International Monetary Fund, where he was director of policy development from 2001 to 2003. "If any one word describes his professional focus, it might be 'internationalist'. His undergraduate degree from Dartmouth College was in government and Asian studies, and his master's degree, from Johns Hopkins, was in international economics. "He rose to prominence within the Treasury in part due to the brilliance of his work in helping to manage the multiple international economic crises of the 1990s in Brazil, Mexico, Indonesia, South Korea, and Thailand."

"What would the great men of old Communist China think of the ones leading today's quasi-capitalist boom? 'If Mao were alive, he'd get rid of them all,' the Dalai Lama said to a gathering of his followers today. The line got a big laugh and signalled a more forceful tone in the Tibetan spiritual leader's approach to China," Time magazine reported. "He was speaking in the grand, ornate temple overlooking his exile government's headquarters in Dharamsala, India, at the close of a week-long summit of Tibetan exiles to discuss the future of their movement. He made a point of reaching out, as he often does, to the Chinese people and explicitly compared himself to the student protesters of Tiananmen Square: 'We are all equal in working for democracy.' He was plain about his disappointment with their leaders: 'My trust in the Chinese officials is becoming thinner and thinner.' "His tone was echoed in the final report issued yesterday by the summit, which included elected members of the parliament-in-exile, regional leaders of the Tibetan diaspora and independence activists. They recommended that after three decades of following the so-called 'Middle Way' of seeking autonomy within China, the movement should consider some new options if there is no progress in negotiations: stop sending envoys from the Dalai Lama to China, for example, or simply pursue full independence: 'The Middle Way Approach, independence or self-determination, whatever is pursued in the Tibetan struggle, we shall not deviate from the path of non-violence to achieve our aims,' the report said." Reporting for McClatchy Newspapers on the Dalai Lama's possible successor, Tim Johnson wrote: "Give the magnetic personality and hunky good looks of a rock star to a Tibetan Buddhist monk, and the result might be Gyalwang Karmapa, the third-highest lama in the Tibetan religious firmament. "The Karmapa, as he is known, is getting more than his share of attention these days. "He's being talked about as a possible transition figure for when the Dalai Lama, who's the spiritual leader of Tibetan Buddhists, dies. The Dalai Lama, 73, was hospitalised last month to have gallstones removed. "At 23, the Karmapa has some unique characteristics that make him appealing to a broad cross-section of Tibetan Buddhists, and even to China, which now claims the right to approve or veto all reincarnations born to become 'living Buddhas' - or senior lamas delivered to help alleviate human suffering. Reincarnation, or rebirth, is a basic tenet of Tibetan Buddhism. "The Karmapa is the first Tibetan Buddhist reincarnation to be recognised by both the Dalai Lama and Communist Party authorities of China." pwoodward@thenational.ae