I’m starting to think that congress should have approved the $25 billion in loans that the Big Three was asking for a few weeks back, because it seems as though they’ve all huddled back in Detroit and all of a sudden the “emergency aid” requirement is up to about $34 billion. Today’s news even has it that GM will go under without an immediate $4 billion infusion.
In normal times, this might not be such a big deal. Chrysler went into bankruptcy a few decades ago and emerged as a better, stronger company. But, times have changed, and the underlying problem is the same no matter what industry we’re talking about – lenders are remiss to help companies before they get into trouble and even less likely to help those in bankruptcy. Congress seems to be missing these facts as they continue to grill the Big Three, and while I’m not in support of a bailout, it is time to consider a loan or rescue package that will allow these companies to survive.
At what point does a bailout become a lifeline? Is there a point anywhere in there that it becomes another bad idea? The Federal Reserve and Treasury Department got together today and unveiled a new plan to pump upwards of $800 billion more into the struggling US economy. Their hope is that this will jumpstart lending by banks and that suddenly consumers and small businesses will want to use that money.
These plans are as optimistic as TARP, with the Federal Reserve Bank offering as much as $200 billion to purchase securities backed by consumer debt (credit cards, auto loans, student loans, etc.). The Treasury will then insure up to $20 billion against losses (is this confusing yet?) and then the Federal Reserve will purchase up to another $500 billion in mortgage backed securities from Fannie Mae, Freddie Mac and Ginnie Mae (lets call them the three stooges). As if that’s not enough, the Fed will also buy another $100 billion in direct debt issued by those firms. And that’s it for Tuesday.
It’s difficult to imagine a world without Citigroup (Citibank, Citi Cards, Citi Mortgage, Primerica, etc.), but with their stock closing down another 26.41% today, to close at $4.71 (C), it’s also difficult, in these troubled financial times, to imagine a scenario that allows Citigroup to continue operations going in the direction that they are. Once the largest bank in the United States, Citigroup’s assets and market value have fallen over 65% in November alone. As if that isn’t bad enough, the word on the street is that government intervention or outside investment may be necessary for their survival – which is basically the kiss of death in this market.
The biggest problem here today is that Citigroup has both a liquidity and solvency issue. Thy’re working to calm their investors, but the market is already so shell-shocked from the other failures to date that these reassurances are falling on deaf ears. In retrospect, it’s easy to see how big a blow losing the bid for Wachovia was and following that with an announcement announcing the elimaination of 52,000 jobs worldwide compounded the problem from a public relations standpoint.