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Did You Hear Anyone Say, "Thank You"?
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| Contributor | Craverguy |
| Last Edited | Craverguy Sep 02, 2009 01:02pm |
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| Category | Commentary |
| Author | Dean Baker |
| News Date | Tuesday, September 1, 2009 06:00:00 PM UTC0:0 |
| Description | Most of us work for a living; the rest are bankers. These days the news is filled with great tales about how the banks are coming back.
Even that giant corpse Citigroup is showing signs of life. Its stock is now selling for more than five times the lows hit earlier this year. Its market capitalization is up near $57 billion, a bit more than the $45 billion that the government lent them through the TARP. Some are even expecting that the government will make a profit on its Citigroup investment.
These hopes are probably somewhat premature. Citigroup still has many bad assets on its books which it has not yet written down. Furthermore, the government is directly on the hook for $300 billion of these bad assets, having offered a guarantee as part of its December Citigroup Rescue Special.
In this case, Citigroup may be able to prevent losses and boost the value of its government-owned stock because the government is picking up its bad debts. This is a case of money going into one pocket but out of the other one; that’s not the way that most investors make money.
In fact, much of the story of the return of bank profitability has this character of money in one pocket and out the other pocket. To make the story as simple as possible, banks can now borrow money short-term at near zero cost from the Federal Reserve Board. The Fed has pushed rates to near zero in order to boost the economy. On the other side, banks can buy up U.S. government bonds that are currently paying around 3.5 percent interest. |
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