Colossal Financial Collapse:
The Truth behind the Citigroup Bank "Nationalization"
F. William Engdahl
Nov 26, 2008
On Friday November 21, the
world came within a hair's breadth of the most colossal financial
collapse in history according to bankers on the inside of events
with whom we have contact. The trigger was the bank which only
two years ago was America's largest, Citigroup. The size of the
US Government de facto nationalization of the $2 trillion banking
institution is an indication of shocks yet to come in other major
US and perhaps European banks thought to be 'too big to fail.'
The clumsy way in which US
Treasury Secretary Henry Paulson - himself not a banker but a
Wall Street 'investment banker', whose experience has been in
the quite different world of buying and selling stocks or bonds
or underwriting and selling same - has handled the unfolding
crisis has been worse than incompetent. It has made a grave situation
into a globally alarming one.
'Spitting into the wind'
A case in point is the secretive
manner in which Paulson has used the $700 billion in taxpayer
funds voted him by a labile Congress in September. Early on,
Paulson put $125 billion in the nine largest banks, including
$10 billion for his old firm, Goldman Sachs. However, if we compare
the value of the equity share that $125 billion bought with the
market price of those banks' stock, US taxpayers have paid $125
billion for bank stock that a private investor could have bought
for $62.5 billion, according to a detailed analysis from Ron
W. Bloom, economist with the US United Steelworkers union, whose
members as well as pension fund face devastating losses were
GM to fail.
That means half of the public's
money was a gift to Paulson's Wall Street cronies. Now, only
weeks later, the Treasury is forced to intervene to de facto
nationalize Citigroup. It won't be the last.
Paulson demanded, and got from
a labile US Congress, Democrat as well as Republican, sole discretion
over how and where he can invest the $700 billion, to date with
no effective oversight. It amounts to the Treasury Secretary
in effect 'spitting into the wind' in terms of resolving the
It should be clear to any serious
analyst by now that the September decision by Paulson to defer
to rigid financial ideology and let the fourth largest US investment
bank, Lehman Brothers fail, was the proximate trigger for the
present global crisis. Lehman Bros.' surprise collapse triggered
the current global crisis of confidence. It was simply not clear
to the rest of the banking world which US financial institution
bank might be saved and which not, after the Government had earlier
saved the far smaller Bear Stearns, while letting the larger,
far more strategic Lehman Bros. fail.
Some Citigroup details
The most alarming aspect of
the crisis is the fact that we are in an inter-regnum period
when the next President has been elected but cannot act on the
situation until after January 20, 2009 when he is sworn in.
Consider the details of the
latest Citigroup government de facto nationalization (for ideological
reasons Paulson and the Bush Administration hysterically avoid
admitting they are in the process of nationalizing key banks).
Citigroup has more than $2 trillion of assets, dwarfing companies
such as American International Group Inc. that got some $150
billion in US taxpayer funds in the past two months. Ironically,
only eight weeks before, the Government had designated Citigroup
to take over the failing Wachovia Bank. Normally authorities
have an ailing bank absorbed by a stronger one. In this instance
the opposite seems to have been the case. Now it is clear that
the Citigroup was in deeper trouble than Wachovia. In a matter
of hours in the week before the US Government nationalization
was announced, the stock value of Citibank plunged to $3.77 in
New York, giving the company a market value of about $21 billion.
The market value of Citigroup stock in December 2006 had been
$247 billion. Two days before the bank nationalization the CEO,
Vikram Pandit had announced a huge 52,000 job slashing plan.
It did nothing to stop the slide.
The scale of the hidden losses
of perhaps the twenty largest US banks is so enormous that if
not before, the first Presidential decree of President Barack
Obama will likely have to be declaration of a US 'Bank Holiday'
and the full nationalization of the major banks, taking on the
toxic assets and losses until the economy can again function
with credit flowing to industry once more.
Citigroup and the government
have identified a pool of about $306 billion in troubled assets.
Citigroup will absorb the first $29 billion in losses. After
that, remaining losses will be split between Citigroup and the
government, with the bank absorbing 10% and the government absorbing
90%. The US Treasury Department will use its $700 billion TARP
or Troubled Asset Recovery Program bailout fund, to assume up
to $5 billion of losses. If necessary, the Government's Federal
Deposit Insurance Corporation (FDIC) will bear the next $10 billion
of losses. Beyond that, the Federal Reserve will guarantee any
additional losses. The measures are without precedent in US financial
history. It's by no means certain they will salvage the dollar
The situation is so intertwined,
with six US major banks holding the vast bulk of worldwide financial
derivatives exposure, that the failure of a single major US financial
institution could result in losses to the OTC derivatives market
of $300-$400 billion, a new IMF working paper finds. What's more,
since such a failure would likely cause cascading failures of
other institutions. Total global financial system losses could
exceed another $1,500 billion according to an IMF study by Singh
The madness over a Detroit GM rescue
The health of Citigroup is
not the only gripping crisis that must be dealt with. At this
point, political and ideological bickering in the US Congress
has so far prevented a simple emergency $25 billion loan extension
to General Motors and other of the US Big Three automakers-Ford
and Chrysler. The absurd spectacle of US Congressmen attacking
the chairmen of the Big Three for flying to the emergency Congressional
hearings on a rescue loan in their private company jets while
largely ignoring the issue of consequences to the economy of
a GM failure underscores the utter lack of touch with reality
that has overwhelmed Washington in recent years.
For GM to go into bankruptcy
risks a disaster of colossal proportions. Although Lehman Bros.,
the biggest bankruptcy in US history, appears to have had an
orderly settlement of its credit defaults swaps, the disruption
occurred before-hand, as protection writers had to post additional
collateral prior to settlement. That was a major factor in the
dramatic global market selloff in October. GM is bigger by far,
meaning bigger collateral damage, and this would take place when
the financial system is even weaker than when Lehman failed.
In addition, a second, and
potentially far more damaging issue, has been largely ignored.
The advocates of letting GM go bankrupt argue that it can go
into Chapter 11 just like other big companies that get themselves
in trouble. That may not happen however, and a Chapter 7 or liquidation
of GM that would then result would be a tectonic event.
The problem is that under Chapter
11 US law, it takes time for the company to get the protection
of a bankruptcy court. Until that time, which may be weeks or
months, the company would need urgently 'bridge financing' to
continue operating. This is known as 'Debtor-in-Possession or
DIP financing. DIP is essential for most Chapter 11 bankruptcies,
as it takes time to get the plan of reorganization approved by
creditors and the courts. Most companies, like GM today, go to
bankruptcy court when they are at the end of their liquidity.
DIP is specifically for companies
in, or on the verge of bankruptcy, and the debt is generally
senior to other outstanding creditor claims. So it is actually
very low risk, as the amount spent is usually not large, relatively
speaking. But DIP lending is being severely curtailed right now,
just when it is most needed, as healthier banks drastically cut
loans in the severe credit crunch situation.
Without access to DIP bridge
financing, GM would be forced into a partial, or even a full
liquidation. The ramifications are horrendous. Aside from loss
of 100,000 jobs at GM itself, GM is critical to keep many US
auto suppliers in business. If GM failed soon most, possibly
even all of the US and even foreign auto suppliers will go under.
Those parts suppliers are important to other auto makers. Many
foreign car factories would be forced to close due to loss of
suppliers. Some analysts put 2009 job losses from a GM failure
as high as 2.5 million jobs due to the follow-on effects. If
the impact of that 2.5 million job loss is seen in terms of the
overall losses to the economy of non-auto jobs such as services,
home foreclosures caused and such, some estimate total impact
would be more than 15 million jobs.
So far in the face of this
staggering prospect, the members of the US Congress have chosen
to focus on the fact the GM chief, Rick Wagoner, flew in his
private company jet to Washington. The Congressional charade
conjures up the image of Nero playing his fiddle as Rome goes
up in flames. It should not be surprising that at the recent
EU-Asian Summit in Beijing, Chinese officials mooted the idea
of trading between the EU and Asian nations such as China in
Euro, Renminbi, Yen or other national currencies other than the
dollar. The Citigroup bailout and GM debacle has confirmed the
death of the post-1944 Bretton Woods Dollar System.
The real truth behind Citigroup bailout
What neither Paulson nor anyone
in Washington is willing to reveal is the real truth behind the
Citigroup bailout. By his and the Republican Bush Administration's
adamant earlier refusal to take an initial resolute action to
immediately nationalize the nine or so largest troubled banks,
he has created the present debacle. By refusing on ideological
grounds to instead reorganize the banks' assets into some form
of 'good bank' and 'bad bank,' similar to what the Government
of Sweden did with what it called Securum, during its banking
crisis in the early 1990's, Paulson and company have created
a global financial structure on the brink.
A Securum or similar temporary
nationalization would have allowed the healthy banks to continue
lending to the real economy so the economy could continue operating,
while the State merely sat on the undervalued real estate assets
of the Swedish banks for some months until the recovering economy
made the assets again marketable to the private sector. Instead,
Paulson and his 'crony capitalists' in Washington have turned
a bad situation into a globally catastrophic one.
His apparent realization of
the error of his initial refusal to nationalize came too late.
When Paulson reversed policy on September 19 and presented the
nine largest banks with an ultimatum to accept partial Government
equity ownership, abandoning his original bizarre plan to merely
buy up the toxic waste asset-backed securities of the banks with
his $700 billion TARP taxpayer money, he never revealed why.
Under the original Paulson
Plan, as Dimitri B. Papadimitriou and L. Randall Wray of the
Jerome Levy Institute at Bard College in New York point out,
Paulson sought to create a situation in which the US 'Treasury
would become an owner of troubled financial institutions in exchange
for a capital injection-but without exercising any ownership
rights, such as replacing the management that created the mess.
The bailout would be used as an opportunity to consolidate control
of the nation's financial system in the hands of a few large
(Wall Street) banks, with government funds subsidizing purchases
of troubled banks by "healthy" ones.'
Paulson soon realized the scale
of crisis, largely triggered by his inept handling of the Lehman
Brothers case, had created an impossible situation. Were Paulson
to use the $700 billion to buy up toxic waste ABS assets from
the select banks at today's market price, the $700 billion would
be far too little to take an estimated $2 trillion ($2,000 billion)
in Asset Backed Securities off the books of the banks.
The Levy Economics Institute
economists state, 'It is probable that many and perhaps most
financial institutions are insolvent today -- with a black hole
of negative net worth that would swallow Paulson's entire $700
billion in one gulp.'
That reality is the real reason
Paulson was forced to abandon his original 'crony bailout' TARP
plan and opt to use some of his money to buy equity shares in
the nine largest banks.
That scheme as well is 'dead
on arrival' as the latest Citigroup nationalization scheme underscores.
The dilemma Paulson has created with his inept handling of the
crisis is simple: If the US Government paid the true value for
these nearly worthless assets, the banks would have to write
down huge losses, and, as Levy economists put it, 'announce to
the world that they are insolvent.' On the other hand, if Paulson
raised the toxic waste purchase price high enough to protect
the banks from losses, $700 billion 'will buy only a tiny fraction
of the 'troubled' assets.' That is what the latest nationalization
of Citigroup is about.
It is only the beginning.
The 2009 year will be one of titanic shocks and changes to the
global order of a scale perhaps not experienced in the past five
centuries. This is why we should speak of the end of the American
Century and its Dollar System.
How destructive that process
will be to the citizens of the United States who are the prime
victims of Paulson's crony capitalists, as well as to the rest
of the world depends now on the urgency and resoluteness with
which heads of national Governments in Germany, the EU, China,
Russia and the rest of the non-US world react. It is no time
for ideological sentimentality and nostalgia of the postwar old
order. That collapsed this past September along with Lehman Brothers
and the Republican Presidency. Waiting for a 'miracle' from an
Obama Presidency is no longer an option for the rest of the world.
F. William Engdahl
F. William Engdahl is
the author of Seeds
The Hidden Agenda of Genetic Manipulation.
THIS BOOK NOW.
He also authored
Century of War:
Anglo-American Oil Politics,'
Pluto Press Ltd.
He may be contacted
at his website, www.engdahl.oilgeopolitics.net.