The Banking and Strategy Initiative

Chillin' out till it needs to be funded

The Financial Crisis, Bailouts and the ‘Risk Fee’

The Citigroup bailout itself cost the government $42 billion but it has already earned more than $8 billion in fee and interest.

President Obama Speaks To Business Council On Economic Stimulus Bill

While JP Morgan and Goldman Sachs were the earliest to pay out the Government infused cash, $32 billion equity ( preferred is being /has been converted to Common Equity) from Citi, $6 bn till now in GMAC and $45 Billion equity in AIG is on the verge of being sold if the government has its way but Obama is unlikely to find it easy.

The Government feeling uneasy with the holdings, plans to sell it as early as possible. It has already been paid back by Bank of America and Wachovia walked to a deal with Wells Fargo, foregoing substantial aid. The holdings cannot be sold because of two reasons:

  1. Even though the government may wish to forego profit, its selling out at a low price may induce a downward spiral in these banks that is a remote and unlikely possibility. But the amount of equity on sale has already been rejected by the markets in December and AIG’s own Asian units and the American Life Insurance unit that have sold ( to Metlife and Prudential UK) for $52 billion ( for repaying a part of the Debt component) could not sell their equity ever since that fateful week in September.
  2. A lot more private enterprise is getting access to the IPO market in large public offerings across the globe with providers in Tokyo life insurance and Hongkong real estate on fire, the equity markets are rebounding after a long time and do not foresee such public debates creating anything but uncertainity for them. i.e. government would be a very unwelcome seller
  3. The SEC action against Goldman Sachs may very well raise issues of why the Government did not do anything back in 2005
  4. The continuing existence of GSEs Freddie Mac and Fannie Mae still remains an unsolved riddle with Trillions in Mortgage Insurance at stake and any amount of capitalization for the GSEs unlikely to be enough
  5. Most critical is the fact that the Government is worse than the Big Four when it comes to PR and is at the losing end in all its interaction with these bankc and the very banks it financed.

The Bonus Tax and the resultant Compensation ratios of 30-35% are an eye opener for free markets proponents when not so much was expected so soon, but without muddying the water further for a government that went thru stewardship change just when one team ha completedly understood the magnitude of the problem. While most of the intervention has been done, the government wants to walk away with a positive take away in the election year and the new risk fee may definitely come in useful.

This summary may not reflect some of the author’s views on how the sale could be managed, but then it does seem more feasible for the government to watch and get out at a good profit when it is unlikely to cause a jump down for the markets. In an era of inflation induced growth when more than 45% of the population is likely to remain unemployed an invisible government can better operationalize its decided path(s) of action


This entry was posted on April 17, 2010 by in Financial Markets, Obamanomics, Uncategorized.


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