Current Treasury Secretary Paulson is now encouraging major banks, led by Citigroup, JP Morgan and Bank of America, to establish a financial superfund of perhaps as much as $100 billion to deal with toxic financil derivative products, often called SIV’s. The biggest beneficiary would be the biggest issuer of SIV’s, Citigroup and its Vice Chairman Robert Rubin, often referred to as the godfather of hedge funds in financial circles.
The idea is, well, patenly absurd and would involve banks contributing to the fund which would buy back these SIV’s and ultimately resell them to investors. Perhaps the beauty of this financial scam is its transparency up front.
Rubin resigned as Clinton’s Secretary of the Treasury and walked over to Citigroup where he received a $50 million compensation package just for showing up. It now seems somewhat ironic that the current Secretary, Paulson, is now advocating bailing out his predecessor’s firm.
Investors should oppose this bailout bccause it will hurt quality banks and financial firms that play by the rules. A likely reason Citigroup issues so many SIV’s is that they wanted to escape the FASB accounting 115 rule that require banks to mark the market value of their investment portfolios to market on a quarterly basis. This was a great reform put in place by George Bush Sr. that stabilized the banking industry after the S&L crisis by restoring confidence.
The significance of this rule is that if asset write-downs impair capital beyond regulatory limits, regulators can come in and shut down the bank, forcing it to merge its assets with a more stable institution. This has already happened to internet start up Netbank due to losses on its mortgage portfolio and this tough rule is an important part of our free market competitive system.
For comparitive purposes with respect to bailing out Citigroup, who will bail out Etrade if its $22 billion mortgage portfolio is deemed to be worth only 80 cents on the dollar. If forced to take such a write-down due to credit quality issues or simply a rise in long term interest rates of 2 -3 percent, Etrade would clearly be undercapitalized.
Etrade is an institution that issued real loans to real customers, not a cespool of conflicted hedge fund inspired greed issuing massive speculations on subprime mortgages, as was the case with Citigroup. My advice to Treasury Secretary Henry Paulson, SEC Chairman Christopher Cox and Federal Reserve Chairman Bernake is to save those chips for the Etrade and Northern Trust’s, a fine bank, of the world.
Let FASB 115 do its job and stabilize the industry. Sure there will be some loosers, perhaps big ones, yet that comes with the territory of taking such risks.
