Roger Ehrenberg thinks it’s long past time for Treasury to bite the bullet on Citi:
What if, just what if, Treasury (together with the SEC) had said four months ago – game over, guys. Employ FAS 157 across your asset portfolios, show us exactly how broke you are, hand us the keys, we’ll settle accounts with those who are owed money and say too bad to those who aren’t (common stockholders and unsecured debtholders), sell of the good assets and warehouse the bad at marked-down levels. The Government could have worked out illiquid derivatives positions over time without causing a market cataclysm. Oh, and Management and the Board, don’t let the doorknob hit you in the butt on your way out. You’ll be hearing from a few lawyers any day now. These decisive actions would have saved taxpayers tens if not hundreds of billions of dollars, yet we still have the good ol’ Citi management at the helm steering the ship.
I actually asked Hank Paulson in early December why Treasury hadn’t done this, although I did in far more mealy-mouthed language than Ehrenberg. Here’s the excerpt from the transcript:
Q: A thought experiment that I’ve seen a lot of people making with AIG and with Citi … the conservatorship route, there’s this cleanless to it: “Okay it’s over, you guys are out. We’ll take it public again in a few years.”
A: Every criticism I agree with in terms of the problem. The question is, I ask myself what would I have done differently. With Fannie and Freddie we had conservatorship because it was in the law. People just sort of accept that right now. That was such a stretch, and so heroic as far as I’m concerned to get there a couple weeks ahead of the Lehman earnings, which we knew were coming.
AIG, there was essentially no regulator at the federal level. The New York Fed learned about this the same time I did, that there was pending failure. They were told that New York state’s got it under control, the insurance regulator. It was the weekend we were dealing with Lehman Brothers, there was no TARP at that time. Fortunately the Fed was able to make determination that there were the hard assets to do the loan against. So that was done that way. I still believe that the government owning the vast majority of that was warranted by the circumstances. So remember, this is a breakup strategy in terms of selling off pieces that is totally different than Citi, which is a very systemically important bank and we were dealing with severe stress in the markets. But clearly it’s important that private capital be welcomed, be encouraged, that government doesn’t have the capability to run a business like that for a long period of time.
I think he’s sort of missing the point there, and I wish I had pressed him further. Nobody thinks the government is brilliant at running banks. But right now you have situation where taxpayers have put a lot of money into Citi (and other banks), but the people running those banks are still answerable not to taxpayers but to the shareholders at large. The taxpayers are shareholders too, but they’re minority shareholders, and they’re stuck with liabilities if the bank fails that other shareholders don’t have to worry about.
If everything works out for the best and the bank quickly recovers, it’s smiles all around. But if the troubles continue you’ve got a bank management looking out for the interests of limited-liability shareholders (not to mention its own interests), who are generally going to be much less risk-averse than the taxpayers (because they won’t be stuck with the bill if all goes pear shaped). It’s an agency problem.
How do you attack that agency problem? You give control to a government-appointed conservator, who isn’t necessarily going to be any smarter than existing bank management, but will have minimizing taxpayer losses as a first priority. After that’s taken care of, then you can start thinking about how to get private capital back in.