A Philosopher's Blog

Citigroup

Posted in Business by Michael LaBossiere on February 23, 2009

As the economy continues to flail about, Americans are rather worried. This is hardly surprising, given that each new day brings more bad news. Of course, some people are getting a bit angry over how things are playing out. I must admit, that I am starting to feel a bit angry as well.

I saw today that Citigroup might get additional federal support. While this concerns me as a taxpayer, it also concerns me because they own my mortgage (a sensible fixed rate loan with a great interest rate) and I have one of their credit cards.

My mortgage started out, as most mortgages do, with another company. It was eventually bought by Citigroup. Since the rate and terms were reasonable and set by the original company, I have no real complaints about it. The transition was not quite as effective handled as one might hope (I got “double billed” at the start). However, since I had gotten a fixed rate mortgage, there was not much damage that Citigroup could do to me.

My feeling about my Citigroup credit card is more negative. Like most credit card owners, I’ve experienced the usual rate increases. My response has been to not use the card anymore and I am considering simply canceling it. But, I feel basically the same about all credit cards.

What generates my specific ire about the Citigroup bailout is that in addition to sending them a check each month for my mortgage, they are also getting some of my tax dollars. I do not mind paying off my mortgage-that is a debt I owe and I get something in return (my house). But, handing them my tax dollars does not seem to help me. I do not get any mortgage credit for that. My card’s interest rate has not dropped. I suspect that many people feel the same way and wonder what we are getting in return for our money.

Naturally, If the folks in Washington want to give the folks at Citigroup our money, my thought is that they should take less of my money in tax dollars and encourage me to use that savings to pay off my mortgage faster. That way Citigroup gets money but I also get something as well. I do not think it is unreasonable to get something in return for my money.

It is also somewhat ironic that a company that deals in credit cards is getting a bailout. After all, such companies often tend to be rather rapacious in regards to their fees and their interest rates. Fairness would seem to demand that if they find selves short and unable to pay, they should be subject to fees and their own brand of retaliatory measures.

But, one might say, would not such fees and retalitory measures be hitting them when they are at their weakest, when they are in most need of compassion and mercy? Yes, yes it would. But, that is the way of business, is it not?

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  1. biomass2 said, on February 23, 2009 at 7:09 pm

    Michael,

    Let me preface this by saying I’m not an economist. Feel free to challenge my conclusions or correct any misunderstandings you may find.

    Your fixed-rate mortgage will likely be as safe as it could be in this environment, no matter what befalls Citigroup. Some other entity will be there to buy up your mortgage, much as Citigroup did before.

    I believe the additional monies that may go to Citigroup would come out of the original TARP fund which is only halfway spent. In any case, I had already waved bye-bye to ‘that’ money before the current administration took office. On the bright side, the $400/individual tax breaks in the new stimulus package (What catchy name have they given that?) might help to make up for your money that goes to Citigroup.

    I’m personally much more concerned about two things:

    1/The effect of the collapse of one of the world’s largest banks on the world economy. The Lehman Brothers collapse led directly to widespread panic and the $700B Paulson plan. It’s likely the failure of Citigroup would be taken pretty seriously worldwide and may lead to the wholesale failure of national and international banks.

    2/As an (until recently)Bank of America shareholder , I’ve become aware of the possible effects of nationalization on shareholders. The stock goes to zero and the shareholder is left with nothing. Now, you may not be a BAC shareholder, but you may have money in a 401(k) or a 403(b)plan.It’s highly likely that one or more of the funds you own in that account owns BAC (or C)and you’ve already felt the effect of the mind-numbing drop in market capitalization of those companies. BAC, for example, had a market cap of 195 billion last summer. Its market cap now is—-19B.

    —-

    One problem for many of us seems to be in our inherent inability to take a longer view. Take the foreclosure crisis as another example. Family A on Block A may see Family D on Block A get governmental assistance to avert foreclosure and thinks ,”How unfair it seems that I pay my mortgage; I took out a loan that I could afford. Yet Family B is getting governmental assistance– my tax money.” It may be that an unsuspecting Family D was misled in one or several ways by the lender. Or the unfortunate breadwinner in Family D has been laid off or fired. Or perhaps a greedy Family D was speculating and hoping to flip the property for a nice profit. Of course those possibilities don’t excuse a failure to foresee the future. It is good to hear,however, that the general outline of the new plan provides no aid to those (most likely speculators) whose second or third homes are being foreclosed on. Where FAMILY A loses in any case is that the foreclosure on their block may be just the beginning. And each empty property drives down further the value of Family A’s home.

    I know it may be distasteful to some, but the other side of the sword here is that failure to nationalize or take some truly effective step to save the banks could be catastrophic. Failure to hit at the heart of the foreclosure problems will likely have ruinous effects. But no one–no one– knows for certain. As I’m sure you’ve heard often enough, these are “uncharted waters”. The banking crisis is a black swan; the housing crisis is a black swan. As Taleb points out, one black swan is exceedingly rare. This might be the time to hunker down and throw everything at the problem–damn the cost–full speed ahead and all that. Or maybe not.
    Whether it’s the greedy bank or the greedy homeowner, or an honest homeowner caught in the middle of this economic storm, one thing is certain: Very few of us are economic islands; most of us are “a piece of the (economic) continent”. We can’t let our understandable anger at others’ greed (and/or our desire to protect our own wealth)stand in the way of doing whatever is necessary to meet the challenge.


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