Yesterday Clusterstock’s John Carney had a chat wtih Kai Ryssdal of American Public Radio’s Market Place about the Citi bailout and the state of banking. He tried not to sound too negative. For instance, he managed to never once say, “Why does everyone assume the Great Depression marks the absolute economic bottom?”
Still, a few really downer bits slipped in. For instance, he called for balance sheets to be written down to absolute market levels. “And until we really settle down to realise that banks have to write everything down to an actual market level, people aren’t going to be confident that the banks are healthy again,” he said. We’re not sure, but that kind of irresponsible talk may be illegal these days.
Below is a full transcript of the talk. But to really get the flavour, click here for the audio.
Kai Ryssdal: Citigroup’s the latest brand name bank brought low by its exposure to subprime mortgages. The deal to save it that was announced last night is complicated. But there are two key points that’ll put it in perspective for you. ne, the bank gets another $20 billion of fresh capital. That’s on top of the $25 billion it got from the Treasury Department a month and half ago. In return, and point number two, taxpayers are on the hook for most of the losses generated by some of Citi’s toxic assets–those mortgage backed securities we’ve all come to know and love. John Carney’s the editor of the business website clusterstock.com. John, good to talk to you.
John Carney: Thanks for having me.
Ryssdal: Let me walk you through this sequence of events here. First we had the TARP, they were going to buy up toxic assets. And then we didn’t, it was going to be capital injections. Now we’re back to the TARP again right?
Carney: They’ve really sort of tried to be agile all along the way. And it seems like what Henry Paulson is doing is trying to be the same kind of agile regulator that he was when he was an investment banker.
Ryssdal: Is that agility doing what it needs to be done to help Citigroup in this case? Is this a good plan?
Carney: I think in Citigroup’s case they needed to do something to reassure the markets that it wasn’t going to consistently been hit by owning all these assets that everybody feared was worthless. But it’s having a negative effect on the markets too. That nobody can predict what the market is going to do week to week.
Ryssdal: This was another last minute rescue effort by the Treasury Department. Here we are again waiting on Sunday night to figure out what everybody’s going to do.
Carney: I think actually it puts a lot of fear into the markets. Everybody sits there on Friday and says, is my position safe, since I can’t tell what the government’s going to do over the weekend.
Ryssdal: Let me ask you about the specifics of this plan. As part of it we learned that Citigroup has at least $306 billion of these toxic assets. Is it fair to assume that’s part of the reason that Paulson backed away from the toxic asset purchase plan in the first place. Because if Citigroup’s got $306 billion, about half the plan, is it fair to assume that everybody else has billions and billions more?
Carney: Absolutely, I think that initially they underestimated the total size of the bad assets that were on the bank’s balance sheet. I think they figured out very quickly that what they thought was a large number, $700 billion, turned out not to be anywhere near large enough.
Ryssdal: Clearly what Secretary Paulson is trying to do with this plan and everything else he’s done so far, is to restore faith in the financial system and in the banks. Is he doing that?
Carney: I don’t think that it’s succeeding because there’s a fatal flaw, which is, all along, what got Citigroup in trouble and what got everybody else in trouble was the idea that we were having a temporary market downturn. That the assets were being priced irrationally low. That the market market was just illiquid for a short time. But that’s been going on now for over a year. What really happened is the underlying assets, the mortgages and the home prices, have become worth a lot less than everybody thought they were when they got into these investments. And until we really settle down to realise that banks have to write everything down to an actual market level, people aren’t going to be confident that the banks are healthy again.
Ryssdal: Last March we had Bear Stearns, it got rescued. Then in September we had Lehman, it didn’t get rescued. Is this in how the deciding vote, two out of three votes, say, yeah let’s rescue?
Carney: They tried not to rescue Lehman in an attempt to say, these have too bad of an effect on the market. That it had the danger of allowing people to think they could engage in as risky investments as they wanted to and the government would come bail them out. With Bear Stearns they wanted to calculate the idea of putting risk back into the market and making people be more cautious both about their equity investments, buying stock in investment banks, and the investment banks themselves behaving better. But the fallout from Lehman is widely considered to have been so financially devastating that they’ve now decided that they’re not going to let any sizeable, well-connected firm go under.
Ryssdal: John Carney he’s the editor at clusterstock.com. John thanks a lot for your time.
Carney: And thank you for having me.
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