The Citi Never Sleeps In Making Bad Loans

The monetary estimate of bad decisions on Citibank's balance sheet is indeed staggering. The bank that advertises itself as the financial firm that never sleeps, certainly must have worked around the clock to accumulate nearly 3 trillion dollars of bad assets.

Of course, the underlying problem at Citi was greed without any apparent understanding of risk. The problem was summed up in the following quote from a recent New York Times article.

"Many Citigroup insider's say the bank's risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgement, the very people charged with overseeing deal makers, eager to increase short term earnings and executives multi million dollar bonuses failed to rein them in, these insiders say. While much of the damage inflicted on Citibank and the broader economy was caused by errant, high octane trading, and lax oversight, critics say, blame also reaches to the highest level of the bank."

The problems at Citibank were common at many other major financial institutions as well. The truth is that the Fed, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Office of Thrift Supervision were all negligent in not doing their job of financial oversight.

Meanwhile, the ratings agencies added to the problem and gave all these bad mortgage loans their highest (AAA) rating. It may be a result of corruption or just plain incompetence. Some rating agencies may have even assumed that the national average house price would not decline.

In fact, Citibank has a long history of making bad mortgage loans. In the early 1990s the company nearly went under thanks to taking on lots of real estate risk in the wrong markets. Last week, the firm was on the brink of the financial abyss once again.

After Citi's shares plummeted 60% amid mounting concerns about its viability, the U.S. Treasury and the Federal Deposit Insurance Corp moved to save the firm. The terms of the bailout provided protection against the possibility of "unusually large losses" on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate, which will remain on Citigroup's balance sheet.

The Treasury will also inject another $20 billion in capital into Citigroup through the Troubled Asset Relief Program, receiving preferring stock that will yield 8%. Under the terms of the deal, Citigroup will absorb up to $29 billion in losses on the $306 billion portfolio of risky property-related assets; the government will eat 90% of any further losses, with Citigroup shouldering 10%.

The Citi never sleeps in making bad loans and it is apparent that they were not alone. Unfortunately, the American taxpayer will now pay a very steep price. In Sweden, the total bailout cost to solve a similar problem was twenty percent of GDP. That makes the 700 billion dollar taxpayer funded bailout bill passed by the United States Congress, a quarter of what will eventually be needed for our national financial repair.

Bailout Bill Disaster Was A Failure Of Leadership

The reason why only 9% of the American public approves the performance of the 110th United States Congress (according to the latest Rasmussen public opinion poll) was on full display yesterday.

After working for days on a financial bailout bill proposed by the Bush Administration and Treasury Secretary Henry Paulson in an apparent attempt to save the country from the financial abyss, the House voted 228-205 against the compromise bill.

Every Congressional politician from both political party's during the last week had the same talking points. Something had to be done right away about this financial crisis and a failure to act was not an option. Of course, a failure to act was indeed the option chosen yesterday and now the House Of Representatives will not vote again on any bailout plan until at least Thursday.

So what happened to this critical financial bailout plan? The answer can be found in a recent USA Today/Gallup poll. The poll found that just 22 percent of Americans said that they wanted Congress to "pass a plan similar to what the Bush Administration has proposed", while 56 percent wanted Congress to pass something "different" , and 11 percent wanted Congress to take no action at all.

The plan that was subject to a vote yesterday was not very different from the original plan submitted by Treasury Secretary Henry Paulson. The plan went down because it did not have voter support in an election year. An alternative bailout plan from the Republican Party was never actually proposed.

In addition, the sad truth is that this entire financial crisis is exposing an even bigger problem for the American voter. It is now apparent that there is no political leadership in Washington, D.C. .

President George Bush, who in his eight years in office has never seen a spending bill that he would actually veto, endorsed the bill but never really sold it to a skeptical American public.

Consider that House Speaker Nancy Pelosi made a partisan speech to blame this mess on Republicans even as she was trying to get Republican support to pass a bi-partisan bailout bill.

Then after the vote fails, the House Republican leadership indicates members changed their vote due to Pelosi's partisan attacks. Its all about politics but what ever happened to voting on the merits of the legislation?

The fact is that 40% of Democrats voted against this bill and the bill could have passed without any Republican support since Democrats are the majority party in the House. So, the real question here is if this is a good bill, why could the majority party not pass it?

Meanwhile, both of our Presidential candidates, Republican John McCain and Democrat Barack Obama have gone AWOl. Its hard to understand what bailout bill they actually support. They appear to be awaiting passage of any bailout bill and a test of public opinion before they climb aboard the financial crisis bailout bandwagon.

The truth is that Barack Obama is hiding out on the campaign trail and is voting "present" on this difficult issue as he has often done throughout his political career. John McCain's response has been inconsistent and erratic. In fact, one of McCain's advisers told The Washington Post last week: "you've got to get it [the financial crisis] over with and start having a normal campaign."

The definition of leadership is the ability to affect human behavior to accomplish a mission. It requires the ability to rally and influence people to complete an important goal . It is difficult to achieve a positive result as a leader when you are afraid of the political risk and attempt to lead from behind. Yesterday's bailout bill disaster was a result of a failure of leadership.

The Crisis Presidency Of George Walker Bush

President George Bush said in his televised speech to the nation last night: "We are in the midst of a serious financial crisis and the federal government is responding with decisive action."

Of course, the decisive action he is talking about is trying to convince skeptical members of Congress to give away 700 billion taxpayer dollars to bailout the financial services sector.

The problem for George Bush is credibility due to the fact that the word "crisis" has appeared in his speeches very frequently during the last eight years.

There was the crisis of the terrorist attacks of September 11, 2001. The crisis of Osama Bin Laden and the Taliban leading to the war in Afghanistan. The crisis of weapons of mass destruction that were never found in Iraq. The crisis of an internal civil war in Iraq that could have lead to American failure. The crisis of the subsequent troop surge in Iraq to prevent the crisis of failure in that country. The crisis of Iran and their acquisition of a future nuclear capability that apparently will not be handled under this Administration's watch.

Indeed, the list goes on and on: The crisis concerning the handling of Hurricane Katrina, the economic crisis of deep recession that led to those tax rebate checks drawn from the Federal Treasury several months ago, and now finally this serious financial crisis involving sub-prime mortgage loans.

The Bush solution to all of these crisis events is usually the same. Throw billions and billions of taxpayer dollars at the problem and try and make it all go away. Unfortunately, it is the solution of the reactive manager, not the proactive planner.

In retrospect, many of these crisis could have been avoided. The war in Iraq lacked proper planning ( See : "There never Was An Iraq Exit Strategy" on eWorldvu.com) and the success of the troop surge confirmed that there were not enough "boots" on the ground from the beginning. Afghanistan is a mess and soon will become the next crisis, because it was left to an ineffective NATO and subsequently ignored.

Today's financial crisis and the problems of Hurricane Katrina were really failures of government oversight and leadership. Henry Paulson was hired to lead the Treasury from Goldman Sachs two years ago but never saw this crisis that would lead us to the brink of the financial abyss.

Also, Paulson's reaction to this crisis over the last several weeks has been to guarantee a bailout of Bear Sterns, refuse to bail out Lehman Brothers,and then to bailout Aig, Fannie Mae and Freddie Mac. Finally, with his 700 billion dollar plan , he now wants the taxpayer to bail out everyone. It certainly can be argued that Paulson's erratic policy led to so much confusion and uncertainty in the Financial markets that confidence in the Treasury was lost.

In addition, it was only one week ago that John McCain said he would fire Securities and Exchange Commission Chairman Christopher Cox and accused government regulators of being "asleep at the switch'' during this market turmoil. It should be remembered that Cox took over from the previous SEC Chairman Harvey Pitt. Both Pitt and his predeccesor, Arthur Levitt were in charge of the SEC during the Enron fiasco of several years ago.

We need to remember that a Senate investigation would accuse the SEC and Wall Street research analysts of allowing "the greed of a few" at Enron to go "unchecked and unchallenged. The investigation revealed a story of "systemic and catastrophic failure, a failure of all the watchdogs to properly discharge their appointed responsibilities". This is the SEC that Cox would inherit in 2005. It doesn't really seem to have changed very much , does it? Only now the scale of the problem may be much larger.

An effective President should hire the people necessary to set a proactive, agressive tone in managing the day to day business of the federal government. A reactive firefighter to put out the latest crisis is not what this country needs in the Oval office.

A President' slogan like any competent executive should be that the best crisis is the one that you can manage to avoid.