Dear Citibank, it’s not about the money. It never was.
Perhaps you heard earlier this week that the government bank bailouts were a success. The Los Angeles times certainly implied it, stating, “The U.S. Treasury said late Monday that its $45 billion bailout of banking giant Citigroup Inc. produced a $12 billion profit for the taxpayers.” CBS News splashed it across their headlines, saying “Government annouces $12 billion profit on Citigroup.” The Wall Street Journal reports uncritically that “taxpayers will reap a profit of $12 billion on their $45 billion [bailout].”
This has led to much crowing among the allies of the political powers-that-be. So far, they have thankfully refrained from refrains of “I told ya so,” but there can be no doubt that the paper profits referenced here will be ample ammunition against free-market oriented critics of the bailout nation.
Color me unimpressed.
Let’s forget for a moment the other ways in which Citibank and its affiliates are still government-backed – for example, its $300 billion plus in federal loan guarantees, its hundreds of billions of federally-insured deposits, its access to cheaper-than-market credit as a result of being government owned, and its artificially inflated credit quality due to the implicit backing of Uncle Sam, which became very much explicit a short time ago. These hardly matter at present.
Let’s also set aside the fact that a “$12 billion profit for the taxpayers” will never come close to reaching the taxpayers. This profit will be sucked up instead by the relentless vacuum of government special interests, to be squandered before its ameliorative effects on the national debt can even be calculated. And given the massive additions to the national debt lately, I am not holding my breath for a check in the mail with my portion of these “profits.”
This is not mere sour grapes from a professed opponent of the bank bailouts, who believed (and continues to believe) that the bailouts could never work. In fact, the “profits” realized here barely scratch the surface in the overall story of Citibank and its profligate partners in crime. Claiming victory on the basis of a $12 billion ledger entry would be the intellectual folly of those with the terminal inability to think one step beyond the here and now.
Indeed, the pertinent issue is absolutely not the immediate aftermath of the bank bailouts; instead, one needs to broaden one’s scope in order to fully understand its implications. This means examining the circumstances leading up to the bailout and determining whether we have cured the disease or simply been given a temporary reprieve. Furthermore, an honest assessment of the bailout must include its long-term consequences. Once that $12 billion is gone down the memory hole of federal spending, will we be left with fond memories or festering problems?
The march to insolvency, of course, is not merely a story of reckless lending and disregard for risk. Those elements existed in spades, but they did not exist in a vacuum. By way of example, one can point to the death spiral of credit standards in the mortgage underwriting business, brought on without a shadow of a doubt, by federal regulators in conjunction with the federally-backed mortgage giants, Fannie Mae and Freddie Mac.
Where purchase-money loans secured by real estate were once a nearly risk-free operation, federal rulemakers decided to step in and impose risk, in the name of “consumer advocacy.” The government’s desire to put people into mortgages in the name of an “ownership society” degraded credit standards to the point where mortgages were being offered to those who could clearly not afford them. Ironically, the push toward an “ownership society” led to a huge jump in defaults. After all, it should be obvious that when you add debt to poverty, all you get is leveraged poverty.
The bigger story, however, was “prop trading,” or proprietary trading of stocks, bonds, derivatives, mortgage-backed securities etc. for the bank’s own account. To listen to regulators tell it, the banks were “allowed” to take on huge amounts of risk – as if the government was not complicit, and, given the chance, the regulators would have put a stop to the whole thing. The real story is a bit more involved. Take one of the aforementioned mortgage-backed securities for example, and place it on the books of a bank, like Citibank, which has $1 trillion plus on its balance sheet. The executives in charge of the bank knew that their position was more or less untouchable.
Were they to honestly believe that the government, which had done so much to push homeownership, would suddenly remove its support for the whole program? And even if it did, how could the government allow a bank whose assets were equal to some 7% of the entire gross domestic product to fail? (Of course, assuming that a bank failure causes those assets to simply disappear is facile and silly, but that’s a story for another day.) What incentive did they have to manage risk? Why not ride the property boom to multi-million dollar paydays, and claim to be “too big to fail” if worse comes to worst?
Any bank operations employee knows all to well the litany of regulators involved in every facet of their operations. Among their constant companions are the Office of the Comptroller of the Currency, of the Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities Exchange Commission, the Commodity Futures Trading Commission, bank and insurance regulators in every one of the 50 states, and various and sundry self-regulatory organizations, such as the New York Stock Exchange, and the Financial Industry Regulatory Authority.
The idea that banks were “allowed” to do whatever they wanted without oversight is patently ridiculous. The clear reality is that banks were encouraged, or at the very least, not disincentivized, to heap on risk after risk with the rational expectation – later proven – that they would never be held accountable.
So what now? The banks crashed, Citigroup went down in flames, and the government pledged hundred of billions in aid, even trillions when various “stimulus” packages are accounted for. We need to determine what, exactly, a recovery program such as the Citibank bailout could accomplish to determine whether that recovery program should have been pursued. Again, it is necessary to look beyond the here and now to determine the efficacy of any recovery program.
As usual, we need to begin at the beginning. Ask yourself why the crash happened, and it becomes clear that there was rot in the system. You may agree or disagree with my description of the source of the rot above, but when the facts came to light in late 2008 and 2009, not a single entity, from the regulators to the bankers to the mortgage brokers to the consumer advocates – even to the consumers themselves – came out untarnished.
In my personal opinion, poor monetary policy which led to asset inflation, coupled with the moral hazard inherent in constant government intervention, led to the current crisis. In another’s opinion, perhaps the entire crisis may be laid at the feet of greedy bank executives. But consider this: by bailing out and propping up the system, neither potential problem gets solved. Either the Fed lives to inflate another day, or the Citibank executive rides his golden parachute straight to Boca Raton. Or both.
If we accept that the boom years of roughly 2004 through at least the end of 2007 were nothing more than a castle built on sand, why would we want to rebuild in the same spot?
And that is exactly where those who are presently touting the $12 billion Citibank “profit” have gone wrong. The bubble popped, and it caused massive financial losses and individual suffering; we are still not out of the woods, with unemployment hovering near 10% and millions of homeowners still underwater. The losses from 2007-2008 through today massively outweigh the $12 billion profit announced on Monday. And yet by bailing out the banks in the first place, we are simply reinflating the same bubble. And when it pops again, the resultant losses and suffering will again make $12 billion look like chump change. Perhaps they will be even worse than this time around.
The fact is, whatever paper profit comes from the bailouts will pale in comparison to the losses inflicted by the lack of real correction and real reform in the banking sector. This $12 billion is not evidence that we have cured the rot. Instead, it is an inducement to more complacency – to be followed by more collapse.