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Posted by on Nov 24, 2008 in Economy, Politics, Society | 4 comments

Citigroup Bailout and the Chance to Change US for the Better

[UPDATE: Please note that I neither endorse nor condemn the Citi bailout here, only comment on the opportunities presented by the financial crisis we now face.]

My grandfather, a small business entrepreneur, used to say, “Borrow a thousand dollars from the bank and the bank owns you; borrow a hundred thousand from the bank and you own the bank.”

The times were simpler then. But if you add a few zeroes, as represented in the sometimes shaky yet astronomical loans made by major US lending houses over the past decade-and-a-half, you get some sense of why after lengthy, tense negotiations, the US Treasury Department, the Federal Reserve, and the FDIC agreed to bailout troubled banking giant Citigroup late on Sunday. In a phrase that seems to be gaining currency, whether applied to Citigroup or by some, to Detroit’s Big Three automakers, this company was too large to be allowed to die.

CNN explains how the bailout is to work:

The plan has two key features:

First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets.

Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.

In return for the latest intervention, the government will receive an additional batch of preferred shares – $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.

The government will impose other restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share and will face limits on executive compensation. Plus, it will be expected to adjust mortgages for troubled borrowers, according to procedures outlined by the FDIC.

For years, both home mortgage loans and property were overvalued, based on the lending industry’s bet that property valuation would always inevitably increase. Those who, in this largely unregulated period, bought with no down or with little capacity for keeping up with payments, were convinced by lenders and, possibly their own wishful thinking, that property value increases would grow them out of debt. This would allow them, or so it was thought, to refinance and boom their way out from under their mortgage obligations. That set of tall assumptions has suddenly come to roost, impacting millions of home-buyers, investors, and the entire economy.

The assumptions of an endless real estate cash cow proved wrong and so property that was grossly overvalued just a few months ago may actually be undervalued now. Citigroup, holder of a great chunk of mortgage paper, has seen its own value more than halved in the past year.

So, is this bailout plan justified?

Because of my position as a pastor, readers will know, I don’t express opinions on such political matters.

But I can tell you, I have been chagrined by some of the psychology surrounding the current crisis, which has also seen the devaluation of stocks and mutual funds, on which many current and future retirees depend.

I have also been saddened to see more than 1.2-billion Americans lose their jobs.

Above all though, I think that this crisis presents the US economy with an enormous opportunity to retool itself, beginning with how we think about money, finances, and the economy. It has the potential of helping us to do so in ways that we might have found impossible to consider just last year. What chages are needed in our thinking?

First, we need to change our expectations about consumer spending. On the NBC Nightly Report with Lester Holt on Sunday, a reporter rattled off the percentage decreases of consumer spending on men’s and women’s clothing, major electronics items, and other merchandise. Over against spending in these categories during the first two weeks of November, 2007, spending went down about 20% for the same period this November. The information was given in foreboding tones.

But changes in consumer spending doesn’t seem horrible to me, even if we weren’t facing a recession. For decades now, economists have been warning Americans that Chinese and Japanese consumers are better at saving than we are. That has helped fuel China as a major insurer for US private and public spending, including US spending on the prosecution of the Iraq War. Over the long haul, national and economic security probably hinge on Americans exercising self-discipline over our spending and refusing to overuse credit. We already seem to be starting to exhibit these traits. If this recession gets us into the healthy habit of thriftiness, that would be a great thing for lots of reasons.

Second, we need to demonstrate less fear. In his 1933 Inaugural Address, new President Franklin Roosevelt noted that “the only thing we have to feat is fear itself.” The market is so dependent on emotion and for over a month now, the prevailing emotions have been those of fear and apprehension. In fact, I would say panic has prevailed.

But when I talk with bankers and businesspeople or when I go to the malls, the indications are that consumers are spending. They’re not doing so at the rate we would ordinarily expect and unemployment is, of course, unacceptably high. But we’re nowhere near Depression-era levels of 25% unemployment. Caution seems warranted under current circumstances. So does a willingness to let the incoming President and Congress experiment, employing a spaghetti method–tossing up all sorts of attempts to stimulate the economy, and seeing what sticks, not worrying about what doesn’t. And we need get over our fear.

In fact, the fears incited by our current economic failures should be seen as unique opportunities. In the history of the world, it’s those vanquished by economic or military experiences who bounce back stronger. Once failure has smacked us down, we’re open to finding new ways of doing things, no longer encumbered by a mindless faith in the old routines and orthodoxies.

The failures of Citigroup, other financial institutions, and other large corporations now mean that they know lots of things that don’t work. They’re free to innovate. The number one cause of failure, as these fat cow corporations have learned, is success. But the number one cause of success is failure and the mind-clearing openness to experimentation and risk that it fosters.

The Citigroup agreement appears to impose some rules on the bank, rules that would curb executive compensation and restructure the payback timetables for consumers currently in trouble with their Citigroup creditors.

That’s to the good, but I also harbor the hope that, as was true of my grandparents’ and parents’ generations in the face of the Great Depression, we will be chastened into exercising greater self-discipline.

But I also hope that the tide of new home construction, the building of behemoth structures erected in increasingly remote exurbs around our major cities, will come to an end in the United States.

I’d love to see the federal government impose outer circle boundaries around our major metropolitan areas. Within those circles, developers could put up new residential and commercial properties.

More importantly, the developers could also redevelop usable housing stock in our core city center areas and their first and second-ring suburban communities. Cheap credit has for a decade-and-a-half now, allowed people to buy McMansions in new suburbs where once there was arable farmland and thriving small communities. Even in a Third Wave world, no country would want to forgo also possessing robust, affordable, good-paying First and Second Wave economies.*

The added benefit of placing geographic restrictions on exurban sprawl is that it will help us to address our energy crisis, acting as a catalyst for what I would call the immediately needed “bridge technology” of cars and trucks that can take us shorter distances, while we await vehicles that will go farther and faster between cities.

Back in the 1970s, under Republican governor Tom McCall, Oregon imposed such a limit growth on Portland. There have been employment, environmental, and property value gains from this approach.

For the short-term, people a lot smarter than me believe in my grandfather’s maxim: Some large businesses may simply be too large for the federal government to allow them to fail.

But if we don’t use this crisis to change the way we spend, save, fuel our cars, and enhance the quality and diversities of our cities, we will have missed a great opportunity.

[Please check out my series of blog posts on the financial crisis from a Christian perspective, linked below:
Part 1
Part 2
Part 3
Part 4
Part 5]

*The waves, from Alvin Toffler’s Third Wave, are in order: agriculture, industry, information

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Copyright 2008 The Moderate Voice
  • greenschemes

    My experience with Citigroup.

    I own or owned a visa card from them. I charged up $4000 worth of stuff.

    I had a 7 percent rate. I was 4 days late paying the payment. Rate went to 32.20 percent the next month. I called. Raised hell. Rate dropped back to 7 percent. I paid several months. was late with another payment by 5 or 6 days. Rate went to 28.80 percent. I called and wanted to pay them off by check by phone. They refused to let me pay the balance off. Sent me back and forth between 3 or 4 different people trying to convince me to accept their 7 percent rate. I finally conceded. Went several more months was finally late with a payment by a couple more days and yep here comes my credit card bill with my new 28.8 percent interest rate. Oh and incidently they give no grace period and about every third or fourth month I would not receive a bill at all.

    I tried to set up a payment to be drawn from my bank and that gave me ulcers before I finally gave up on that.

    AFter several months of smooth sailing I was a few days late again and yep you guessed it back goes my credit card to 28.8 percent along with of course each time they charged me a 39 late fee for being a couple days past the due date. This was the last straw. I called and wanted to pay them off. The girl who could barely speak english said no. We will offer you 3.99 percent interest. NO I want to pay this off and close the account. Well let me transfer you. NO I want to pay you off by check by phone. NO….YES……NO. I cant do that. WHY NOT? Cause I have to let you talk to an account specialist to pay off your account and close it.

    Fine…….Account specialist belittles and berates me for wanting to pay off my account instead of accepting his fine outstanding offer of 3.99 percent interest rate. FINE Ill accept it if you guarantee in writing that if Im a few days late you wont raise my rate to 28.80 percent. No sir you should pay your bills on time.

    Listen you dumbshit. I am calling to pay this off. I want to give you a check by phone and pay this account off and close it, not get a lecture on how I should pay my bill. ON an on. Well your an idiot for not accepting my gracious terms of 3.99 percent. Guarantee it. NO… must pay your bills on time. LIFE happens. Occassionally something comes up and your a few days late. Not our problem we have our GREEDY, AVARICE driven POLICY of gouging, screwing and otherwise pillaging our stupid ass customers.

    What part of this dont you understand. CLOSE my account and accept this payment by phone. Fine. Thank you good bye.

    HUH? He hung up on me. Im trying to PAY THEM OFF AND HE HUNG UP ON ME.

    I call back. I get another girl who wants to xfer me to another account specialist.

    I hang up. I call back this time Im smily, friendly and simply tell the girl I want to make a payment. I can do that she replies. How much you want to pay? How much do I owe? She tells me. I say thats how much I want to pay. Will this pay off the account in full? No.

    Why not. I cant tell you how much you owe? You cant? No their are more finanace charges that will accrue. There is? Even after I pay off the entire balance? Yes. Explain that please. She gives me some lame excuse. Fine let me just make a payment. PUHLEASE.

    Okay I can take that information. Fine this is a savings account. Do you take payments from savings accounts? Yes. Okay heres my numbers. Fine thank you have a good day.

    10 days later I get a call. Your account is past due and you owe 206.87 cents. Livid I call customer service. Well sorry we dont take payments from savings accounts.

    So after more discussion they decide to WAIVE the 39 late fee. the 15 dollar bounced check fee and the additonal accrued interest if I make a check my phone. Ill call back. I have to go get the money from my savings account and put in my checking account. 2 different accounts. I do. Call back. She takes the payment and tells me that I will still owe more money. Why cant I just pay you what I owe you today and be done with it. Well you just cant.

    Okay I want to pay more then what I owe…you cant. Sir My manager wants to talk with you. Fine. Hello Mr. So and So. We trust that your experience with Citi has been favorable.

    You are a cancer. Once I have you card in my wallet I need radical proceedures to remove you from my life.

    CITI……….I hope of all the companies in this country that they go under and go under with a bang. They are the classic example of whats wrong with American businesses today. Inept and unable due to overwhelming desire to gouge the customer instead of engage in customer satisfaction above all else.

    My vote? LET THEM BURN.

    • StockBoySF

      greenschemes: I know your pain. Banks try to keep customers on their books. One strategy of banks is that it’s easier to retain current custoemrs and sell them more products than it is to lure new customers.

      I had a credit card at a different institution which I called to close my account about six months ago. I didn’t have a balance, but I was paying an annual fee. The other reason I wanted to cancel the card is because I did not want the credit line out there. There was no reason for me to keep it open. Well, the first cust. service rep. transferred me to an account specialist (both were in India) who tried their best to get me to stay…. I think most people would have relented and kept their account open just so they wouldn’t have to go back and forth with the account specialist. But I can be single-minded at times and so there was no giving up for me.

      I think the next time I cancel some banking relationship I’ll just tell them that I’m unemployeed and wanted to close the account rather than run up a balance that I wouldn’t be able to pay off later….. I should actually try that out and see what happens.

  • mikkel

    Mark, you’re right on about everything. The only minor quibble I have is the part about fear. I would argue that the fear is very rational and actually in the large scheme of things is actually beneficial. The reason why is that as you mention in the rest of your post, there are some severe changes that must be made, and until we actively work on those then allocating resources in the exact same fashion we have been is a waste. The fear is simply a realization that the old regime is dead and there is no new one…and ironically, fear is a great friend of transferring over.

    This is where leadership comes in. Our leadership needs to accept the fundamental truths of our challenges and seek to guide our country along a new direction. Once there is acceptance, sacrifice and resolve, we can start expending energy and resources in ways that are sustainable and will help us in the future. It’s at that point that excess fear is detrimental.

  • StockBoySF

    “Over the long haul, national and economic security probably hinges on Americans imposing the kinds of self-discipline on spending and the sort of refusal to overuse credit which they already seem to be exhibiting. If this recession gets us into the healthy habit of thriftiness, that would be a great thing for lots of reasons.”

    It seems that each successive generation further from the Great Depression spends more freely and takes risks. This includes individual consumers and business leaders. The only quibble (to use mikkel’s word) I have with your post is this (and perhaps you can consider it as a different angle on your take):

    “The failures of Citigroup, other financial institutions, and other large corporations now mean that they know lots of things that don’t work. They’re free to innovate. The number one cause of failure, as these fat cow corporations have learned, is success. But the number one cause of success is failure and the mind-clearing openness to experimentation and risk that it fosters.”

    While I agree with the underlying philosophy, the fact of the matter is that Citi (and many other institutions) took unnecessary risks, which is what started this downward spiral they are in. Citi was greedy and wanted to generate profits for its shareholders.

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