What’s that I hear? it’s the big sucking sound created by the Federal Government mucking around in things they know nothing about. First on the list:
AIG, as you may remember, was the first “too big to fail,” after the Feds got nervous after Lehman hit the dust. After two bites at the apple, AIG got a total of $150B government support. Reports are that after several sales of profitable pieces of their company, AIG has gotten their outstanding balance down to $35B. It’s believed that AIG will report the largest loss ever by a US company tomorrow at $60B. Please note that we (and by we I mean the Federal Government) owns 80% of AIG so there should be no surprise when money is “shovel ready” to keep them afloat.
Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.
While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup’s common stock.
Here again, the Fed is already into Citi for $45B. This little ditty has a twist from the others. Citi is spinning this saying “it won’t cost the taxpayers a dime!” Oh lucky us, not exactly.
You see, nearly all accounting and investing rules will tell you that at 40% ownership you effectively control the company. Once you own the company, you are responsible for it. Once you’re responsible for it, if the company should need additional capital, you as the major shareholder will be put in the position of either putting up that capital or diluting your ownership. For an entity that can just run an inkjet to get the additional capital, the answer is easy.
Oh, and the part about not costing the taxpayers anything, not so much. The preferred stock that we currently have gets periodic interest payments. It is also in a senior position to common shareholders should the company go bankrupt. By converting to common stock the interest payments will go away. Thus, at the very least it will cost the taxpayer something short term and if the company ultimately fails or needs more money, it will definitely cost more.
Finally thought on this one; even though the Obama administration’s spokes person said just 3 days ago:
“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government”
Don’t “bank that!” Remember, all Obama positions have expiration dates.
Bringing it all together:
Remember that the automakers are back talking about plans for their future support. If any of you believe that just one more government infusion will get the automakers back to a point where they’ll be able to function on their own please take note of what’s happening in the financial industry. When it comes to government “help,” it’s fair to say:
In for a penny, in for a pound!