why protect the bond holders of Citi

Citibank's balance sheet as of the third quarter of 2008. The company had about $2 trillion in assets, versus about $132 billion in shareholder equity, for a gross leverage ratio of about 16-to-1. That's not a comfortable figure, because it indicates that a decline of about 6% in those assets would wipe out Citibank's equity and make the bank technically insolvent. Unfortunately, we saw credit default spreads screaming higher last week, while the bank's stock dropped below $2 a share, so evidently the market is deeply concerned about the possible immediacy of that outcome.

But keep looking at the liability side of Citibank's balance sheet. There is over $360 billion in long-term debt to the company's bondholders, and another $200 billion in shorter term borrowings. None of that is customer money. That puts the total capital available to absorb losses at $132 + $360 + $200 = $692 billion, which is about 35% of the $2 trillion in assets carried by Citibank. That's a huge cushion for customers, who are unlikely to lose even if Citibank becomes insolvent. Should that occur, the proper response of government will not be to defend Citi's bondholders at taxpayer expense, but rather, to take Citi into receivership, wipe out the shareholders and most of the bondholders, and sell the assets along with the liabilities to customers to another institution.

Alternatively, the government could hold those assets in receivership, reappoint management in the interim, and eventually IPO the company - now stripped of debt obligations - as a new entity called, say, Citigroup. The proceeds of the issuance would be retained as statutory capital, and a small amount might be paid as a residual to the existing bondholders. That sort temporary "receivership" is the only sense in which the government response could be called “nationalization."

Simply put, institutions that are insolvent and would only avoid continued insolvency by large and continued infusions of taxpayer funds should be allowed to “fail” through the process of government receivership. It is wrong to squander the taxes of ordinary citizens and put a burden of indebtedness on our children in order to protect the bondholders of careless and poorly-managed financial institutions.

所有跟帖： 

• receivership and nationalization -futufutu- ♂ (383 bytes) () 02/23/2009 postreply 14:21:28

• that is right and wrong, not Ideology -futufutu- ♂ (194 bytes) () 02/23/2009 postreply 14:29:00

• there is why GOP and Democrat -futufutu- ♂ (232 bytes) () 02/23/2009 postreply 16:54:51

• 回复：I thought you can mange my own money better. -futufutu- ♂ (166 bytes) () 02/23/2009 postreply 14:24:21

• this idea is better -futufutu- ♂ (129 bytes) () 02/23/2009 postreply 14:35:30