"IT'S DEJA VU ALL OVER AGAIN"

It appears that Citigroup is now in talks with the federal government. With Citigroup shares selling at $3.87 (from a high of $35.29) the company is looking for a way to stabilize it's position in a turbulent market.

Problems abound because Citigroup has already taken a bite at the bailout apple, securing $25 billion from the feds in October. And let's not forget the $7.5 billion injection (payable at 11%) from the Abu Dhabi Investment Authority (a Sovereign Wealth Fund) that was made last year.

I'm picking up on this story because not only is Citigroup scrambling for solutions this weekend, but I want to point out that this isn't the first time Citigroup has found itself in such dire straits with other financial institutions. As I pointed out in an earlier post, what was then called Citibank found itself in a terrible mess in 1982 when it - along with 9 other U.S. banks - was over exposed to developing countries around the world.

How exposed, you ask?

By 1982 America's 9 largest banks had loaned out more than 350% of total capital on hand (capital is essentially what you have left after you pay off all your debts). Citibank was one of those banks. When one of their clients (Mexico) said, "We're broke and can't pay you" Citibank had a decision to make. They could act like a free market player, and take their lumps for making terrible investment decisions, or they could go to the federal government and ask for help. They went for help. The "free market" oriented Reagan administration obliged.

As I write these words Citigroup is in talks with the federal government, trying to figure out how to save itself. I could be wrong, but I doubt they'll get the Detroit Treatment. Citigroup is simply "too big to fail."

As Yogi Berra might say, "It's Deja Vu all over again."

- Mark

WAKE ME IN NOVEMBER ...

Four days ago I posted this on sovereign wealth funds and the potential future of economic warfare. While Treasury officials in the Bush administration are apparently unconcerned, this article suggests the Europeans are hedging their bets, and are way ahead of us on the issue.

Why am I not surprised?

- Mark

THE FUTURE OF ECONOMIC WARFARE?

Imagine the following scenario ...

The next president of the United States is confronted with an increasingly weakened U.S. economy. Relations have exploded between India and China. China tells the new U.S. president that if the U.S. doesn’t follow China’s lead they will begin dumping dollars and other dollar denominated assets they hold (e.g. treasury notes and U.S. stocks). Who holds the upper hand here?

This is an issue of increasing concern in the U.S. Congress and in the U.S. Department of Treasury as foreigners continue to buy up U.S. assets while continuing to hold on to increasingly weakened U.S. dollars. Former U.S. Treasury Secretary Lawerence Summers asks,

What about the day that a country joins the ‘coalition of the willing’ and asks the U.S. president to support a tax break for a company in which it has invested? Or when a decision has to be made whether to bail out a company, much of who’s debt is held by an ally’s central bank?

Critical here is whether other countries might use their economic weight in the U.S. economy to extract concessions, or compel us to act a certain way. Threats like these have been made in the past. And we should know. We did the threatening.

One of the best examples of this was when the Eisenhower administration threatened to ruin Britain’s currency if they didn’t change course after participating with France and Israel in the Suez Canal events of 1956. It was reported that Britain’s Prime Minister at the time, Anthony Eden, was reduced to tears over the U.S. threat and was, eventually, forced to resign.

While I don’t agree with U.S. Deputy Secretary of the Treasury Robert M. Kimmitt’s assessment (he seems to believe we have nothing to worry about), he brings up several points to ponder.

- Mark