Citi of Death

By John Galt

December 3, 2008

The much heralded return of bailoutmania was greeted with much ceremony and celebration by the hogs as they were fed their slop by the Fed.

So with that much celebrated Sunday evening in November now near and dear to our hearts, let us review a little history as to how Citigroup ended up being the latest in the line of horror to befall the American taxpayer and why the numbers being tossed around by the Federal Reserve are one big fat lie.

If anyone believes the terms of the agreement from November 23, 2008 (Insert PDF link here), then you have to be certifiably insane. The $306 billion guaranteed by the U.S. Government is less than 1% of the real risk associated with Citigroup and the danger lurking with some of the other arranged mergers executed by Hank and the boys thus far.

If you review the true danger, as displayed in the chart below, you begin to realize that the average American citizen has no clue as to just how much leverage will be required and the amount of money the Fed has to print.

(link to chart)

The current reserves as detailed in the weekly report from the Federal Reserve shows approximately $2.2 trillion on the balance sheet. The amount of derivatives exposure that Citigroup alone is $38 trillion plus as the chart from Institutional Risk Analytics reported as of  June 2008.

This means just to create a 10-1 ratio in leverage, the Fed has to create another $1 trillion in reserves. And Citigroup is just the start of the problem. Look at the combined exposure of the new Wachovia-Wells Fargo, Bank of America and JP Morgan Chase.

Then start to think about the exposure.

If the best case scenario of only fifty percent of all of Citigroup’s current derivatives sour, that means the taxpayer will be on the hook for over $19 trillion. That is more than the 2007 GDP of our nation. Add in similar ratios for the other banks on that list and you can see that our nationalization policy for risk has a long way to go and the hopes of just slowly deleveraging the system is the only solution at this time. If the Fed can not create a large enough balance sheet to absorb these losses quarter by quarter instead of a sudden one or two month surge of defaults, then the only answer will be the hyperinflation route, which will create the Weimarica (link to article) I was concerned about in 2007.

Thus why I welcome everyone to the Federal Reserve’s new horror show titled “Citi of Death.”

Because without the commitment to bail out every bank, every key institution, every remaining primary dealer, the entire system will collapse in a matter of weeks or months. Citigroup is but one symptom of a bigger problem and that does not even begin to address the issues overseas banks and sovereign wealth funds have with the various instruments our institutions sold to them.

Our true exposure for those U.S. institutions and the Citi bailout of November 23, 2008 can now be summed up quite simply:

Unlimited until further notice.


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