Citigroup bailout: leaving the incompetents in charge
So, now it’s Citi’s turn to get bailed out. The plan is to take on Citi’s losses beyond a certain (still undetermined) level. If the government does so, Citi will give it either warrants (the right to purchase shares later) or preferred shares. Shares are better for taxpayers. At the least what should happen is Buffett Shares: preferred shares with warrants as well.
When Switzerland did this for UBS, their agreement got them 6 billion of shares for 60 billion dollars of purchasing crap, with the debt held in a seperate entity, so that if it all goes down, UBS won’t take the losses. Good deal, if you can get it.
The rule here continues to be the same as it has been throughout this crisis: the people who caused the crisis must be left in charge of the organizations, the executive class running financial institutions must not be significantly harmed.
Because these folks are not competent, this is clearly the wrong decision, yet again. If they were capable of managing Citigroup properly, they would have done so. They didn’t because they aren’t able to do so. The correct decision is to simply nationalize the firm and replace the key executives. Then, in the case of Citigroup, which is too large to be effectively managed, it should be broken up.
I note that Citi was the bank the FDIC wanted to have take over Wachovia, instead of Wells Fargo. The FDIC was very insistent on that despite Wells Fargo making a far better offer and not needing government help. Citi now being in trouble proves what many of us noted then, that Citi was not the best candidate and that the FDIC’s insistence was very odd, raising questions of improper influence or incompetence.
Citi may be "too big to fail" but it’s not too big to take over. Let’s hope that the FDIC and other key regulators stop protecting the executives of these firms and start protecting the taxpayer properly. At the least they should get Buffett Shares equal to whatever injection of capital they give, but ideally they should simply take Citi over.