Friday 03 Apr 2020 | 01:03 | SYDNEY
Friday 03 Apr 2020 | 01:03 | SYDNEY

Crony capitalism


Mark Thirlwell

25 November 2008 15:58

Another week, another bailout. 

Citigroup has become the latest US financial institution to benefit from US taxpayer support. After the so-called megabank incurred more than US$65 billion in losses, write-downs for troubled assets and charges to account for future losses, Washington agreed to back US$306 billion of loans and securities as well as directly invest US$20 billion in Citigroup. 

This comes on top of some US$25 billion already pledged by the US Treasury. With more than US$2 trillion in assets and operations in more than 100 countries, Citigroup is one more institution that has been deemed too big to fail. A key lesson for financial institutions from the current crisis is that bigger is better: the bigger you are, the more you can rely on a government bailout when things go wrong.

What went wrong with Citigroup?  This NY Times piece points to the risks created by Citigroup’s holdings of US$43 billion of mortgage-related assets. Brad de Long thinks the NY Times account fails to explain fully why US$43 billion of dodgy assets ended up destroying US$224 billion of value, and provides an explanation of his own. John Hempton at Bronte Capital provides an alternative answer.

Meanwhile, the verdict is in on the details of the bailout, and it is far from good. As this round-up of posts from the excellent Economists View makes clear, this is certainly not a good deal for the increasingly put-upon US taxpayer. So how come the taxpayer is getting stiffed? Perhaps it has something to do with Citigroup’s long-running success in lobbying the US government. As this blog post at the Wall Street Journal points out, Washington lobbying seems to be one investment on which Citigroup is still making a good return.

Photo by Flickr user H2S04, used under a Creative Commons license.