Yesterday was another watershed day for New York and for American financial capitalism.
Last night, the US government — through the Fed, the Treasury, and the FDIC — came to a historic agreement to bail out Citigroup*. The feds have essentially engineered an FDIC transfer of Citi to a more solid entity, as it often does with flailing banks, except for this time, the government skipped the transfer part. Citigroup will stay Citigroup, with its current management, at least for now, but the government is transferring the bank’s biggest risks to the taxpayer. In exchange for a bigger stake in the bank and for ongoing management and compensation oversight, the feds will take responsibility for up to hundreds of billions of dollars in future losses on Citi’s asset-related loan and bond portfolios.
New York and its economic engine have been through so much this year. But it’s important to take a moment and digest what this particular event means. It is, officially, the end of an era. Citigroup was easily the global emblem of American financial capitalism. To the world, Citigroup and its home base are now emblems of the failure of the millennial financial model: the idea that any loan, bond or other bank asset could be sliced up and turned into an instantly liquid, price-able, and trade-able security, with all of its many risks engineered away. Now, because of the abject failure of that business model, Citigroup must depend on the US government’s explicit willingness to prop it up to save it from oblivion.
Optimistically, though, Citigroup’s fate is a testament to the power of markets. Starting 13 months ago, Citigroup and other banks, in concert with the government, began an effort to hide the very real losses that were starting to seep through the financial industry’s balance sheets and toward the government’s books. Their efforts — first the October 2007 idea to sequester what was thought to be the financial industry’s $100 billion or so in bad assets in an “off-balance-sheet vehicle” jointly owned by three big banks — couldn’t work, as was obvious from the beginning. The markets, themselves recovering from years of irrationality, knew, despite the soothing words from both big finance and big government, that something was very rotten at companies like Bear Stearns, Lehman Brothers, Merrill Lynch, and Citi. As financial and government executives insisted that everything was under control, the markets themselves became more and more insistent — forcing firm after firm to capitulate to reality. Because of the relative strength of our markets, despite everything, the biggest financial and political powers in the world could not hide the truth.
The government itself was the last such entity to capitulate. In September and early October 2008, it still thought, oddly, that it could continue to hide the extent of the financial system’s catastrophic losses through its plan to purchase bad assets from financial firms under the “Troubled Asset Relief Program” (Tarp). A few weeks later, after the markets had killed that idea, the government still thought that by handing out capital to a big group of big banks and guaranteeing some bank debt, it could hide which banks were actually desperate for the money. It couldn’t. The markets zeroed in on Citigroup until it had forced the government to admit explicitly that Citi, specifically, desperately needed outside help.
Markets are not perfect, and they badly need rational, countercyclical government regulations to save them from their own cyclical irrationality. But in the end, they work. If the nation and the city don’t lose sight of that fact, New York can regain its position as at least one of the big financial capitals of the world. But, sadly, the firms that defined the last 25 years of financial capitalism to the world won’t be leading the way. It will be hard to recover without them, but it would have been much harder, even impossible, to recover with them.
*The author has a small financial interest in Citi relative to a diversified investment portfolio.
You may also like
A grim toll gets worse
The full toll of the coronavirus pandemic in New York is likely thousands higher than the official death tallies, according to newly released federal data. Read More
NY outlook: worse than 2008-09
#NYcoronavirus: The outlook for New York's economy is the grimmest on record, according to the first post-pandemic lockdown round of credible economic surveys and forecasts.
Start with the Federal Reserve Bank of New York, whose regional economists today issued a notably pessimistic report based on their monthly Empire State Manufacturing Survey and a broader Business Leaders Survey that take sin the northern New Jersey and metropolitan New York. Read More
Why New York?
#NYCoronavirus: It's increasingly apparent that New York is suffering more severely from the coronavirus pandemic than any other part of the U.S. and most of the rest of the world – raising stark questions for city and state leaders.
What is it about New York, and especially New York City, that made it especially vulnerable to infection and death? And how can that be changed before the next virus breaks loose? Read More
Session’s end clobbers NY economy
The closing days and hours of New York State’s 2019 legislative session were easily among the most economically consequential in Albany’s recent history—but not in a positive sense. Read More
NY’s ominous new rent regs
New York City's World War II-rooted "housing emergency" is now officially indefinite—and has spread, potentially, to every corner of New York State.
But the potential negative impacts of the law won't be limited to the Big Apple. The law is likely to have a chilling effect on prospects for multifamily investment and development in struggling communities across New York—especially upstate. Read More
A first look at de Blasio care
New York City Mayor Bill de Blasio made a splash this morning by announcing a plan "to guarantee health care" for every city resident. Although his office called it "the largest, most comprehensive plan in the nation," the proposal appears – based on limited details provided so far – to be a relatively modest expansion of existing safety-net programs. Read More
Single payer, double standard
The New York City Council's vote of support on Tuesday for a statewide single-payer health plan showed curious timing from a fiscal point of view. Two weeks before, sponsors of the New York Health Act told union officials that they were changing the bill in ways that could cost the city billions of dollars per year. Details of these high-stakes changes won't be available until next month, yet Council members chose to back the measure anyway – effectively endorsing a blank check. Read More
Key Cuomo budget update late—again
How big are the fiscal challenges faced by New York State in second half of its 2019 fiscal year? Are tax receipts and spending living up with projections? What's the outlook for the next few years?
We don't know—because, for an eighth consecutive year, Governor Andrew Cuomo has missed the statutory deadline for producing a Mid-Year Financial Plan Update. Read More