Commissars in the Back Room at Citi

citigroup

One of the more troubling aspects of the structure of the TARP bailouts is the potential to have government officials and their political agendas influence the day-to-day operations of the corporations who received funds. Already we hear threats from politicians demanding that TARP funds be spent in certain ways. Now we see signs of actual influence in company operations. From yesterday’s Financial Times web article “Treasury pushes Citi to cancel jet order,”

The US financial sector’s new political masters began exerting their influence on Tuesday as Citigroup was forced to scrap the purchase of a $50m executive jet that was seen as a misuse of money at a time when the bank is reliant on public support.

Only a day earlier, Citi had insisted it would complete the acquisition of the aircraft. But it backed down after officials acting for Tim Geithner, the new Treasury secretary, expressed strong opposition to the move…

Mr Geithner and his colleagues know that any full-scale overhaul of the financial sector will almost certainly require more funds from Congress. So their immediate priority is to restore confidence in the recapitalisation process, which polls suggest is deeply unpopular. An essential element of this is convincing the public that the money is being used in ways that benefit the wider economy.

As originally pitched, the government stakes were to be in the form of preferred stock and warrants, and these stakes were intended to be temporary. Normally, a stock or bond position does not entitle the bearer to manage day to day operations of a firm. It is an ownership stake whose influence on the company is through a board of directors. The government holds no board seats, but instead has a team of managers behind the scenes looking out for the taxpayer’s interest. It appears that government intends to exert its influence directly.

Expect a slippery slope of increasing involvement in the firm’s management. What was to have been an arm’s length temporary capital injection may soon become a direct, controlling role in the firm’s operation. The original ownership structures will turn out to be nothing more than a thin veneer, conferring respectability upon what may soon become a back room of Commissars directing the operations of financial institutions based upon political agendas.

In the case of Citi, Treasury’s agenda is clear [bold mine].

The Obama team wants to move forward with a comprehensive bank clean-up and recapitalisation programme. Senior Wall Street executives said yesterday that they had been sounded out on plans for an “aggregator bank” that would purchase toxic assets from banks.

Under one of the plans discussed, toxic assets would be valued by an independent third party. Where assets are purchased at prices below their book values, the government might then inject common equity into the banks to make up for capital wiped out by the sales.

Mr Geithner and his colleagues know that any full-scale overhaul of the financial sector will almost certainly require more funds from Congress. So their immediate priority is to restore confidence in the recapitalisation process, which polls suggest is deeply unpopular. An essential element of this is convincing the public that the money is being used in ways that benefit the wider economy.

So, this move becomes part of a public relations campaign to try to sell additional government involvement in the financial sector to an already suspicious public. It doesn’t matter in fact if the cash flow is material to Citi’s survival. It doesn’t matter if the asset will yield potential benefit to Citi. These are the types of things that Citi executives might consider, and things which would be weighed according to their interests. However, their interests no longer matter. It is the interest of “benefiting the wider economy” that must take precedent.

It is sad to see executives compromise the principles of free enterprise and volunteer to be shackled to political interests. They may have saved their jobs, which would surely have been at risk in bankruptcy, but they have lost their liberty, and their dignity in the process.

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