Monday, February 23, 2009

Citi and Car Makers in the Headlines, Again

So many big problems, so little time.  Although the banking sector is supposedly getting a rigorous stress test, Citi seems to be running out of time and is jumping the gun.  How about bolstering its tangible common equity before the stress test by swapping the government's preferred shares into common stock equal to a 40% stake?  This is the latest rumor floating around and reported in the Financial Times and the Wall Street Journal.  The market seems to like this news, as equity futures reversed a decline last night after the Journal reported the "talks."  Really, I have a better idea though.  What if the government just forked over an additional $10 billion (because really, what's another $10 billion at this point?) and bought 100% of Citigroup?  After all, this is the current market cap of the bank.  So really, why settle for a 40% stake?  It seems as if the administration is attempting to avoid the appearance of out-right nationalization at all cost.  Whether this strategy will work or is just an attempt to keep markets trading until the stress tests are under way on Wednesday, giving the government a little time to think of a better idea, remains to be seen.

Meanwhile, outside advisors to the US Treasury have begun lining up the largest bankruptcy loan ever to the car makers with banks and other lenders.  The financing package would amount to at least $40 billion for GM and Chrysler.  You know, "just in case."  It sort of makes you wonder why Congress didn't bring in the automakers and the bank CEOs at the same time to testify.  Then the awkward conversations before Congress could've been combined into the following snippet: 

Congressman: (to Rick Wagoner)  Why did you fly here on your private jet? You fat cat!
Wagoner:  (with head bowed) Can we borrow $40 billion?
Pandit:  We sold our jet, Mr. Congressman!  And I'm only accepting $1 in pay this year.  Did you hear that?  I'm only getting paid $1.  
Congressman:  Shut up!  You're a fat cat too!  Now since the taxpayers own you, I demand that you lend money!  Lend Lend!  Give the car companies a $40 billion loan.
Pandit:  Yes, of course, absolutely!  Whatever you say.
Congressman:  So then you will do it?
Pandit:  Yes, but there's a small matter of, um.
Congressman: Speak!
Pandit:  Can we borrow $40 billion?

See, wasn't that so much more efficient than the three days of painful testimony we were subjected to?  In any event, every option for the car makers is still on the table, even Chapter 11.  Again, the somewhat amusing part is that government officials are trying to browbeat the biggest banks, whom they accuse of not lending to consumers, aka Citi and JP Morgan, to use their capital to participate in the largest DIP financing of all time.  The government is looking at ways the Treasury could "prime" other banks making DIP loans so the government could be paid back before the private creditors.  Naturally, the banks are crying foul, while GM and Chrysler both insist they can avoid bankruptcy.  Certainly they can avoid bankruptcy, if the they can just get another $24 billion or so from the government.  But this is the last time.  No really, they mean it.  In any event, it should be understandable, given the questions of solvency of our banking and manufacturing sectors, that the market has taken it on the chin lately.  A tidy resolution to the whole mess would be welcome.  But really, that would be asking too much. 


1 comment:

Mr Wrightwood said...

How has Wall St. not been forced to pay bonuses in the form of US-made cars yet?