Why is bailing out Citigroup a priority, but not GM or Ford

[pscot]

This has been bothering me. It turns out it has also been bothering Robert Reich. Check it out at TPM. The comments are worthwhile.

http://tpmcafe.talkingpointsmemo.com/2008/11/22/why_were_rescuing_wall_street/




Viewed from Wall Street, Citi is too big and important to be allowed to fail while GM is simply a big, clunky old manufacturing company that can go into chapter 11 and reorganize itself. The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman's demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe -- a mistake that must not occur again. So, by this view, the government must do everything and anything to keep Citi alive. But GM? GM is just ... jobs and communities.

The Street's view of the world is fundamentally flawed. Banks are important to the economy because they're financial "intermediaries." They connect savers with investors and borrowers. This is a vital function, but there's nothing magical about it. At any given time the world contains a vast pool of money that can be put to all sorts of uses. Financial intermediaries simply link the pool to the uses.
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Before the asset bubbles burst, financial institutions were generating whopping profits, so naturally they attracted many investors and creditors. After the burst, the profits disappeared and their share prices plunged. These days, you'd be hard pressed to find many people who want to invest in or lend to financial institutions. So what? You'd be just as hard pressed to find people wanting to invest or lend to the auto companies. Lehman's demise cost many investors and creditors lots of money, but they were investors and creditors in Lehman, not in the real economy. Citigroup had a market value of $274 billion at the end of 2006. Now its value is about $21 billion. That's awful news for Citi, its executives and traders, and its investors and creditors. But it's not necessarily awful news for the economy as a whole. Even if Citigroup were to go belly up, the real economy would not be seriously harmed. The funds overseen by Citi would be remain; fund managers would shift them to other banks.

So Citigroup is not much different from General Motors. It's a company that once made lots of money but, through a series of management blunders, is now losing money big time. Citi's shareholders and creditors are taking a beating, just like the shareholders and creditors of GM.

So why save Citi and not GM? It's not at all clear. In fact, there may be more reason to do the reverse. GM has a far greater impact on jobs and communities. Add parts suppliers and their employees, and the number of middle-class and blue-collar jobs dependent on GM is many multiples that of Citi. And the potential social costs of GM's demise, or even major shrinkage, is much larger than Citi's -- including everything from unemployment insurance to lost tax revenues to families suddenly without health insurance to entire communities whose infrastructure and housing may become nearly worthless. I'm not arguing that GM should be bailed out; as I've noted elsewhere, GM's creditors, shareholders, executives, and workers should have to make substantial sacrifices before taxpayers should be expected to sacrifice as well.

Nonetheless, Citi is about to be bailed out while GM is allowed to languish. That's because Wall Street's self-serving view of the unique role of financial institutions is mirrored in the two agencies that run the American economy -- the Treasury and the Fed. Their job, as they see it, is to keep the financial economy "sound," by which they mean keeping Wall Street's own investors and creditors reasonably happy.

Because the public doesn't understand the intricacies of finance, it's easily persuaded that this is definition of "soundness" is the same as keeping savings flowing to the banks so that the banks can lend to them to Main Street. That's why the public and its representatives have committed $700 billion of taxpayer money to Wall Street and another $500 to $600 billion of subsidized loans to the Street from the Fed -- bailing out the investors and creditors of every major bank, including , any moment, Citi -- only to discover, at the end of this frantic and unbelievably expensive exercise, that American jobs and communities are more endangered than they were at the start.

[muntrv]

1. No union workers at Citi. Letting Detroit 3 fall is a chance for the righties to bust the UAW.

[leftofthedial]

8. bingo.

The tattered shreds of what little has survived of American unions is all that stands between the corporatists of both "parties" (Republican and "democrat"-aka Republican Junior Varsity) and their goal of complete concentration of wealth.

[rhett o rick]

20. Second BINGO nm

[ben_meyers]

2. Because if Citi(credit markets) isn't saved

then car dealers can't floorplan(finance their inventory from the manufacturer) and consumers can't purchase (car loans) and GM and Ford can build all the cars they want, and they will just sit in the factories back lots. If we were to wait until everyone saved up the cash to buy a car, well I think it is obvious what would happen.

I'm a little surprised that Reich doesn't understand this, and more disturbed that he may be advising Obama.

[pscot]

5. But Reich makes the point

that Citi is just a middle-man, one of many. If Citi goes away, the money will be handled by someone else. GM and Ford handle a lot of their own credit. My credit union tskes deposits and make car loans, just as they always did. I read somewhere that in 2007, credit default swaps and their derivatives comprised almost 70% of our export trade. The Wall Street bankers were given free rein, and they turned the financial markets into a giant Ponzi scheme. These schmucks don't deserve a bail-out. They should be doing time in Raiford or Folsom or some other federal resort specializing in hard core criminals.

[Gman]

3. Citigroup is non-union

that's it.

[sandnsea]

4. investors vs laborers

And I have no hope that laborers will wake up in time to save themselves, given the number that are still enamored with Sarah Palin.

[bluecollarcharlie]

7. Not all of us.

[JDPriestly]

6. I feel confident that GM will be given the loan it is requesting.

I think Congress requests not having demanded more information about how the bank bail-out money would be used. Paulson demand absolute control over that money and abused that control. This time Congress is going to make sure that it knows where the money is going, what the money will be used for and how it will get the money back for the taxpayers. That seems fair and reasonable to me. Congress is right to ask for some commitments from GM about how the money will be used. Any lender would demand as much.

I can't go to the bank and borrow a few hundred dollars to buy a house and then spend the money in Las Vegas. It seems that is kind of what the banks have done. And AIG? It's just chasing its tail. Never again.

[abelenkpe]

10. I heard on the radio

listening to Mike Malloy I believe that GM has already notified it's operations in Brazil that it will be receiving a billion dollars to expand it's plant down there and that they are confident that they will receive bailout money from the government. I have not seen this anywhere else though. If that's true, that really sucks. It's like saying their plan to return to profit is to benefit workers elsewhere and continue to pressure union workers here. Again showing that in the current schme of things what benefits wall street and big business is not what is good for main street usa. If I were in congress and that was part of the business plan set forth my GM as they asked for funds I'd send them back to the drawing board until they came up with a plan that showed workers here in the US would benefit.

[rhett o rick]

23. GM will go bankrupt first and renegotiate their union contracts and probably get out of their

retirement obligations. Then the government will loan them the money.

[abelenkpe]

9. We passed the huge bailout

to prevent a 'crash' and the market is down almost 3000 points. The Treasury department has been shoveling money at financial institutions like citibank who then turns around and announces 53,000 layoffs. So 53,000 more workers will be out of work cutting back on spending and needing to draw on unemployment. This helps the economy how? If these bailouts (handouts) are supposed to be strengthening the economy they have not been successful. We should not be bailing out anyone. If a company is really too big to fail why not nationalize it, do away with the management that drove the company into the ground, take it off the stock market, retain the rank and file workers, and once it has grown back to producing a profit privatize it once again. That way the bulk of the workers retain their pay checks and health care benefits and it doesn't lead to a downward spiral effecting the larger economy and community as a whole. All those banks and insurance companies and the auto companies have spent the past twenty years worrying more about shareholders and short term profits than the community at large. Things need to change.
I think Robert Reich is simply pointing out that throwing money at companies is not working, that the money we are giving away is not being used to protect workers and is being used to prop up the very policies that got us into this mess.
It is hypocritical of our government to provide a no strings attached infusion of cash to wall street and deny it to the auto makers, thus endangering the union. But realistically we shouldn't be handing out cash to anyone without a viable business plan and clear cut idea on how this benefits workers.

[JohnWxy]

11. the failure of Citibank would not wipe out the entire banking industry as would the loss of GM.

recommended!

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x48248

[girl gone mad]

12. Citigroup is well connected.

They have Clinton's treasury sec. on the board (they've made him a wealthy man) and Obama's new treasury sec. studied under Rubin and was very close to him. They are owned by one of Bush's shady Saudi Prince pals. They bought and paid for power.

[JohnWxy]

13. Auto Industry Gives Sparingly to a Skeptical Congress - (link)

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x48385

[gravity]

14. A Citi failure would lead to the Great Depression 2

A GM failure would cause a deep recession, but Citi could bring down the whole financial system with it.

[fasttense]

15. There are many other middle men like Citi who can pick up the

work/investing that Citi will lose. How is that more likely to cause another Republicon Great Depression than all the US auto makers going out of business?

Seems to me losing our American manufacturing capability in automobiles is a much more significant loss than losing one of many financial firms.

[gravity]

16. Citi can cause an immediate collapse in the financial system

Citi has over $2 trillion in assets to unwind which can't be done in a short period of time. This will cause a run on the banks and a complete freeze from the financial system, which will bring GM down with it.

It is true that another bank can take the place of Citi, but there isn't any other players out there who could pick up the huge load from Citi right away, and other banks are worried about their own problems.

The loss of GM would be very significant, but at least money will still be moving through the economy.

[rhett o rick]

21. In other words Citi has a bazooka aimed at our head while GM has a 22 cal aimed at our knee. I feel

so much better.

[The Stranger]

17. Because the Pelosi Traitor has fucked her own again (again).

[tama]

18. Because

it's (the whole banking business) a pyramid scam of global proportion. And Fed at the top is dr. Evil. Seriously.

[marketcrazy1]

19. we have been lied to

this entire mess in the banking industry CAN be solved, but the RIGHT solution would cost the banks and their investors trillions, the pain on "main street" would have been severe but no less than what we now face.. make no mistake people, down this road depression lies, we will not see the abject poverty of the thirties due to social programs which we now have that they did not have then, banks will fail en mass next year but we have the FDIC this time. we WILL have a depression if we keep following this bailout path and it will look very different from the thirties but it will still be very BAD!! you should really think about preparations.. ( reduce your debt, save your cash, get out of the market by FEB of 09 and mend fences with family members )

[rhett o rick]

22. OK OK I with you all the way except the mending fence part.

But seriously how does one protect against hyperinflation.