As Citi Teeters, What Will Happen Next?
Posted: Thursday, January 15, 2009
by Joseph Jagde
As the economic news continues to be fairly dire, there can be an open ended discussion as to what is happening and what is triggering the events as they unfold.
It is pretty clear that major financial staples of the economy are in deep trouble. AIG has been the leading insurance conglomerate and Citigroup has been the largest financial conglomerate.
What is clear is that both companies engaged in substantial risky plays in derivatives of all kinds and had increasing appetites for the most exotic type financial drinks that could be concocted.
This in the boom times had the feel of a party and the excesses that can go with that, and seemingly was stabilized by proud executives who felt they had finger laden touches for anything gold.
As the government comes in as a back up, the major question is how do financial institutions called banks or insurance companies, take in strangers money to safeguard, and store for potential emergencies, create in the background of this a full scale casino of bets that could have been symbiotic with disaster. Yes, there could have been separate firms that specialized in things like this, but there was deep irresponsibility by the managers of these companies who were driven by one p word only which is profits ignoring another P word of protection. Yet they were surely astute in figuring out how to pay themselves.
This class of financial supremacist disregarded trusting fools, who were fed advertising gimmicks from all angles including at major sporting events.
It is galling for example to read that one major Euro based division in AIG and it dealings with things like credit default swaps were enough to sink the whole company as the iceberg, yet why was this allowed given the importance of the gigantic insurer as a and often the insurer of many important enterprises, constituents all over the world? I'm sure they were a lot more diligent in getting these people to join in, sign up, then in the involved part of actually running the business as it was represented. Obviously other cross purposes emerged. A group of executives from this rogue division were demanding a combined 600 million dollars in bonuses, making them essentially the biggest potential robbers in the world and some of the victims of this robbery would be their own co workers in the other honest divisions who were doing their jobs properly.. The scary thing is that these people seem like they are so delusional that they actually think they deserve this money for some sort of so called, what do they call it, work?
The initial bail out was a very squeezed proposition in that it would have had the government taking on toxic securities that they had zero involvement in actually creating, although they had a part in sanctioning through the leadership of such luminaries as Mr. Guru Greenberg. And then the government even holding these securities might give the feel of further pollution reaching the capital, after all these are toxic. But still all in all the government was not the creator of these securities at all. And the question is what if the government also imbibed with this stuff in terms of its creation instead of steadfast treasury securities, then where is the rescue coming from ?
It does seem that at least with Congress the hearings are open and public record while with these corporations who have a real duty to protect the people that are routing money through them, were under as vast veil of secrecy to where astronomical and all the way to the moon bonuses were paid and compensation was near limitless and premise less. Touching the money seemed to mean that part of it was theirs no matter what later outcomes would eventually be. . Using that premise, the guy or girl giving change at the counter should take out some percentage for themselves on the transaction in that they touched the money..
With Congress as the last backer of all this potentially we have some publicly aired out truth about what is going on. While it is for the moment to late to back track and create a national bank for these days ahead, if the banks had been run by the government these over the top risk taking events would have been much, much less and at least publicly debated. . But the government also dealt a bad hand to itself by backing off from regulating industry practices in that now they to a large part are holders of the baggage created and the toxins that have spread widely.All this deference was to one thing and one thing only, the invisible hand of Adam Smith ruling the market. This hand has done for reasons that need to be unearthed, a pretty lousy job. The incentives to be rich on the part of the corporate leaders ironically became a disincentive for anything else.
How did seemingly credible titanic institutions that as it turns out had been implicitly backed by the government run so far ashore of any reasonable checks and balances for care takers of a very wide populace of customers with vital dependencies on the proper functioning of these financial giants?.
The greed frenzy was like a startling yet also continuous feeding frenzy of circling sharks with no pause to consider aspects that had to do with protection for the customer base. Ir was like opening Wal Mart on that famous shopping holiday.
There was a shear lack of logic. It is easy enough to assess that a lot of people don't have the financial acumen to deal with personal finances to the extent that the offers were given on those mortgages and even those with solid records and solid careers would not offer long term automatic income streams in an environment that is still forming as to what jobs will go where and to what countries. It is almost like everybody out there was assumed to have acumen that simply wasn't there. Not everybody can play in the NBA.
For example if someone's annual salary is 100,000 how can that in most cases be projected over the length of a mortgage It is only logical that there are a large number of variables that can creep in this possible scenario in many if not the majority of cases. The scenario for the mortgage holder can change at any point and likely will.
It doesn't take a PHD in economics to know that right up front without using some sort of complex computer generated measurements. There is a visible and knowable logic that could have been easily traced but was apparently easily overlooked because money was flying everywhere..
If these financial giants were running the airlines, they would be taking risky flights and doing things like flying at too high an altitude . The basic implicit trust contract involved in the business transactions were busted many thousands of times over. But it wasn't mostly and always right up front but funneled to the dark side of the corporate structure where these shady deals took place.Some big shoppers brought every derivative in the store, but the real money for this was to a large degree borrowed or leveraged for other sources and with some of international origin and hence the spread..
Has this stopped though?. What is happening now is that banks are still charging outrageous interest premiums on balances for credit card customers, in many cases bringing on a degree of ruin to the customer who could have remained solid in the long run had they not been under the umbrellas of things like this. Thereby the excesses of the banks are ruining or compromising their core customer base .
Now there is talk of recovery, stabilization, but the question is how so? If everything was so credit fueled and now that credit fuel is evaporating how is the jet going to fly now?
What are some of the things you might see?. Some of the very wealthy who have things like yachts may want to convert out of this as they hunker up or may face some losses, yet the buyer base is compromised for the group of people that are going down somewhat.Who do you sell your private jet too now? At the least there will be less bidders.
An example might be someone who is pulling in a million, and now is pulling in only 250,000 a year. If they want to convert holdings like the condo or the big boat, they may have trouble doing that easily so even the adjustment somewhat downward might be harder in this overall environment.
The brush fires out there if they continue to grow might start clipping in to everything.
Another factor is now bad news is drilled like never before, if you hear 50 times a day that the economy is souring, you start to act it, believe it and feel it coming right down the road to where maybe you are.
Hopefully ships will be righted and new leadership will help at all levels.
But there are major questions to consider, should firms be allowed especially in the financial sector to get so large that there errors get amplified all over the world? And then what was this secret society of derivatives that no one can even price them to any reasonably close amount to their current value, yet the money people gave towards these efforts was priced out probably neatly and probably carefully, only to have this dough thrown to the potential fierce and biting winds of the derivatives which kindled many a fire and many a storm that continuous like an unabatted hurricane rising again and again. ,
Now the second part of the bailout will be in question. It is easy to see why there is a backlash from the Senate against this, these people themselves resent sending fortunes down the river to financial miscreants, who may have poured significant sums of the previous bailout money into the bonus pool where it is untraceable now that a percentage of that is in those waters, if that be the case.
If it does go through, the transparency rules will considerably differ. From the new rules, it might be easier to trace ways in which things went wrong with the first round of bailout money.
Indeed we are stuck with these somewhat massive problems, spreading as foreigners were relying on brand U.S.A. which is like a Nike Sneaker or Coca Cola, supposed to be good as advertised and as the entrenched brand and really this brand was exploited in the underpinnings of the financial world where the belief that America emanates and others follow for good, because we are the brand and our accounting methods are the most trustworthy and everybody else needs to be brought up to par with us.. As a result of the misuse of the brand America, many foreigners did buy into toxic securities created in the America and sold widely overseas. They trusted the brand.
It is also partly the fault of people for allowing themselves into being seduced into the financial games that were really out of their league. Warren Buffet always cautioned to stay with what you know. Even if this wasn't followed totally, there was no reason for people to commit life savings to situations where some to even all of the principal amounts could evaporate overnight, even if there weren't misdeeds, as the force of the market can be like a sudden rushing tide that can't be fought against. . You don't clear out your bank account and bet it on a horse that could indeed actually not win the race.
And now the March proceeds and hopefully the tides will turn for better, but if it doesn't another question begs and that is who will even be left to hold the bags?
This Article has been viewed 508 times. (Not updated in real-time.)
No comments yet.We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.