Obama coddling bankers indeed
It was predicted in this space just two weeks ago: “Obama to coddle bankers.” Now we’ve got official confirmation of this from one of the prime coddle-ees: Citigroup. An analysis of the Treasury’s plan produced by two Citi analysts, Ryan O’Connell and Jerry Dorost, begins with this headline:
New Treasury Stress Test Guidelines Do Not Appear Onerous
and continues in this vein. The plan is “bank-friendly and investor-friendly.” The goal is to increase bank capital “while minimizing the amount and duration of any government’s direct ownership of common stock.”
The stress tests aren’t very stresssful, either: neither “onerous or draconian.” That is, the economic parameters for the “more adverse” scenario are not much worse than the consensus forecast for what the economy is likely to do over the next year. The baseline is for –2.0% GDP growth this year and +2.1% in 2010; an unemployment rate of 8.4% this year and 8.8% next; and another 18% decline in house prices. The “adverse” alternative is for –3.3% on GDP this year and +0.5% next year; unemployment of 8.9% in 2009 and 10.3% in 2010; and another 29% decline in house prices. To me, the baseline looks optimistic, and the adverse, slightly on the dark side of realistic.
And the gov will be very indulgent if banks look “stressed,” even by these friendly criteria. Banks will be given six months to raise private capital (good luck with that, guys!). If they fail, the Treasury will buy preferred stock, which can be converted into common at a 10% discount to the stock price on February 9. The choice of date looks to be no accident; as the Citi analysts comment, “This provision appears intended to reduce the potential dilution to equity holders, since banks’ stock prices were generally higher at that time.” (Using a lower price would give the government a bigger share at the expense of existing stockholders.) To take a nonrandom example, Citigroup’s stock closed at 3.95 on February 9; as this is posted, it’s 2.51, 36% lower. (Current quote).
To use the Japan vs. Sweden model that Obama himself used, this is a lot closer to Japan than Sweden. Anything but nationalization!
LBO News from Doug Henwood 
Hello,
Since Geithner/Obama’s not going to nationalize the banks, anyone care to estimate the chances of the U.S. entering a full-blown, 1930s type of Depression? Mr. Henwood, Roubini, Martin Wolf, and others used to say 10 or 30% if I remember correctly.
Haha, call me an optimist, but as of today I would put the probablity at a near certainty, with an optimistic outcome being Japan in the 1990s, if we’re lucky.
By the way, this whole thing is not a Black Swan, since this financial/economic crisis was entirely predictable given all the deregulation going on over the past thirty years. (Some blogger made a passing comment about the Black Swan thing, I just can’t remember who).
So, when will we be able to say that we’re in a Depression? Anyone comment on that?
Sincerely,
Ed Beaugard
Oh, by the way, I was first!
Why aren’t we diluting the hell out of the shareholders? Isn’t that the point of flooding them with money, to force the shareholders to accept the failure of the company? Considering how much of the banks we own, management should get forced out by the legisltature and executive and judiciary, by hand–because if not, it’s likely to happen by pitchfork and torch!
@ Ed:
I think looking at the figures on wages, for most of America, we’ve been in a depression for a while. It’s a recovery on paper–productivity’s doubled since the ’70s–but that paper, my critical thinking tells me, is the public face of our overlords. Totally sane “conspiracy theorist” Peter Dale Scott said it quite well when he pointed out that income for the top 30,000 has increased something like 400-fold since the ’70s, so no wonder we see this public looting.
I wish I could see things getting better, because I don’t want to be a doomsayer predicting a sort of technocratic neoliberal neofeudalism, but that doesn’t seem unlikely. I’m reminded of the laws of unintended consequences–thirty years of reckless excess simply can’t continue much further without the pendulum reversing its course–but I see no sign of that happening. Ostensibly Obama’s election could be the far end of that reversal, with a center-right neoliberal realist taking the place of a slightly-farther-right neoliberal neocon. But that’s little comfort.
X-(
I’d like to hear Doug’s take on a prescription for getting us out of this maddening situation where clearly the wolves are running the henhouse. I know he mostly focuses on the analysis side of things but even some naive optimism would be appreciated considering that, in all likelihood, on the other side of this recession all the same broken ideas and people will still be calling the shots.
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