The Other Side Of The Ledger

My chief complaint against modern economics is they don’t know anything about accounting. It has become a form of alchemy. Instead of turning lead into gold, they make the trade-offs in public policy disappear. The phrase “all upside” somehow oozed over from the sharpies in the money game into what was a branch of practical arithmetic.

A good example is the bank bailouts. The argument was this. The cost of letting them fail was too high. They were too big to fail, which really meant too big to let fail. The claim was the cost of letting them fail was higher than the cost of bailing them out with money stolen from janitors and plumbers.

Here we are and the most egregious offender is no better off today than when they were saved by their friends in government.

Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Bank of America Corp. won approval for its first dividend increase since the financial crisis.

Lenders announced more than $60 billion of dividends and stock buybacks after the Fed approved capital plans for 25 of the 30 banks in its annual exam. Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of concerns about the quality of their processes, the central bank said yesterday in a statement. Zions Bancorporation failed after its capital fell below Fed minimums in a simulation of a severe economic slump.

Why is this bank still in business? The first mistake, bailing out what was nothing more than a bust-out operation, can be forgiven. Politicians are stupid and when panicked, they can be outlandishly stupid. Here we are in the cool calm of recovery and we’re still letting this sham of a bank stagger on? it should be broken up starting tomorrow. The senior leaders as well as the board should be thrown in jail and perhaps hung.

That sounds rough, but sometimes the point of a life is to be a warning to others.

The central bank found defects in Citigroup’s planning practices that included areas the Fed flagged before. The regulator expressed concern with the New York-based company’s ability to project losses in “material parts of its global operations” and to reflect all business exposures in its internal stress test.

“Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process,” the Fed said of the third-largest U.S. bank.

Mike Corbat, the bank’s chief executive officer, said in a statement that Citigroup is “deeply disappointed” by the rejection and will “work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations.” The timing of any resubmission hasn’t been decided, he said.

If Mikey had issued his statement from the gallows, I bet it would have more resonance to the rest of them.

The point here is the cost of bailing out these banks could not be lower than letting them fail. That is a mathematical impossibility. It is the logical equivalent of saying a pound of feathers is lighter than a pound of lead. What was really going on is the cost of bailing out Citi was lower to the politicians and their friends at Citi in 2008, than leaving a bigger mess for whoever was in charge down the line. What they did was book the benefit in 2008 and push the corresponding costs off into the future. At some point, every accrual reverses out.

Axiomatically, that was true of all the bank bailouts. If I borrow a million dollars today so I can live like a king for a year, I will have to repay the loan in future years. That means I will be correspondingly poorer. Precisely, I will be one million dollars poorer in future years plus the interest. That’s what happened with these bank bailouts. Our politicians opted to impoverish future share holders, customers and citizens so they and their banker buddies could live in the moment.

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But you have to take into account the indirect benefits of the bailout. The bailout stopped the bleeding. The nominal amount of the bailout isn’t too important in the scope of the entire global economy.