This report, published Jan. 2 by the US Treasury makes for interesting reading.
It’s on the government’s November decision to rescue Citigroup by helping to absorb losses on its toxic assets — the Asset Guarantee Programme (AGP), part of the Emergency Economic Stabilisation Act (EESA). As the report notes:
The objective of this program is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security. In an environment of high volatility and severe financial market strains, the loss of confidence in a financial institution could result in significant market disruptions that threaten the financial strength of similarly situated financial institutions and thus impair broader financial markets and pose a threat to the overall economy. The resulting financial strains could threaten the viability of otherwise financially sound businesses, institutions, and municipalities, resulting in adverse spillovers on employment, output, and incomes.
And despite the report claiming it’s “not anticipated that the program will be made widely available” we’re given a range of criteria for potential future participants. It’s fairly basic stuff, things like how important is the financial institution to the rest of the system, how much access does it have to other sources of capital etc. — all of which in the current environment would seem to fit most banks, suggesting that further asset guarantees are a definite possibility.
The best, or at least most blatant, parts of the report though, are the submissions from market participants themselves — a parade of self-serving suggestions.
Treasury received 85 responses to the Request for Comments from a wide variety of respondents, including individuals, academics, financial institutions, municipalities, and trade groups. Many submissions chose to urge the eligibility of the represented group to EESA-related programs rather than to outline an insurance program structure.
Also mentioned,
Respondents uniformly agreed that – no matter which assets are insured in this program – pricing is a monumental task that will almost certainly have to be contracted out. Respondents suggested that Treasury use the methods and models standard in the industry to determine risk. No feasible alternative to individually pricing the assets was offered.
Pimco, Blackrock and Goldman, we would note, have already been hired by the Fed to price $500bn in agency MBS. No wonder Pimco head Bill Gross was so outspoken on the issue back in September. More pricing contracts would mean more work for such companies — again.
And not surprisingly, in relation to the actual payout of the guarantee programme:
Most respondents suggested paying out 100 percent of principal and expected interest, or some portion thereof.
Because of course:
The higher the guarantee the government provides, the more liquidity and confidence will be restored to the market.
It’s not really wrong per se — Citigroup’s shares have rallied somewhat since the bank’s November bailout. But as we’ve noted before, there are better ways of helping the system. In any case, a key question — touched upon by Meredith Whitney in yesterday’s research note, is as Option ARMageddon’s Rolfe Winkler asks:
… will the Federal Reserve be able to inflate the nominal price of assets fast enough to “heal” the banks’ balance sheets?
Related links:
Report to Congress – Treasury
Whitney: Tarp funds go down the downgrade drain – FT Alphaville
Citi of over-leveraging – FT Alphaville