Adam Smith first talked about the invisible hand in his polemic against mercantile political economy “Wealth of Nations”, expressing the view that by and large, competitive markets that are relatively free of government guidance, do a better job of allocating resources than occurs when governments play a dominant role.
Stephen LeRoy, professor emeritus at UC Santa Barbara, and visiting scholar at the Federal Reserve Bank of San Francisco, opens with this well-known economic premise in his Economic Letter which has just been published by the FRBSF.
He notes that Smith’s view held a lot of credence as seen in the deregulation of financial and non-financial markets in the 1980s and subsequent decades. However, the current credit crisis has led many to revisit this question. Financial markets in recent years have appeared dysfunctional to an extent never previously imagined, raising the question as to whether Adam Smith got it wrong about private markets.
LeRoy then takes us on a tour that starts with Smith and follows through to Pareto, Arrow and Hayek, and notes that Pareto efficiency often does not survive in settings that allow for asymmetric information. So the balance between reliance on markets and government intervention is very much at the forefront of current debate.
According to an article in the Washington Post, the Federal Government is preparing to sell its stake in Citigroup. That sounds like good news – right? Well, let’s not be too hasty in applauding the exit of Uncle Sam. Certainly Citi’s board would like to be free of TARP restrictions, but how about someone tells ‘em to STFU, sit down and listen to the business case here. It is rather compelling once you start doing the numbers….
Based upon Citi’s market cap, which currently stands at $122 billion, the taxpayer stake is currently valued at around $33 billion. That’s one helluva chunk of stock to unload at one time, and as WP points out, with the exception of Nippon Telegraph and Telephone offering of almost $37 billion in 1987, this is the largest deal in history.
The stock closed at $4.31 on Friday, well below its 52 week high of $5.43, and an exit at this point would be shortchanging the taxpayers quite severely. Various bank analysts have pointed out that bank stocks will quadruple in value by 2012, and that’s not unrealistic optimism. I find myself in broad agreement with the bank analysts here, and I concede that’s unusual in itself. Their opinion is arrived at by calculating aggregate reduction in loan losses. When it comes to bank stocks, there is no other measure investors care about.
If the Government waited this thing out until such time as the stock was hovering around $15, the taxpayer stake would be around $131 billion. That would mean that the taxpayer’s return on the government investment would be leveraged even higher than a four fold increase in the value of the public shares.
If the Federal Government was a fund manager, I would demanding his head on a plate for a miscalculation of such magnitude.
The government’s argument for selling the shares now may be that future events could take Citi’s share lower. But the Fed and Treasury know more about the Citi balance sheet than analysts or investors, so a sale now is tantamount to a vote of “no confidence” in the bank – and the credit markets as a whole. What the hell kind of message is that to be sending in the middle of a fragile recovery phase?
Treasury has the opportunity to wait two years until Citi’s earnings have rebounded completely. A sale which brings the taxpayers $130 billion from Citi’s shares, less the government’s initial investment, and a significant portion of the entire investment made by the TARP into American banks.
This is all wrong. Fed and Treasury officials freely concede that they would like markets to stabilize, and would prefer investors to actually INVEST. In other words, “buy and hold”. Waiting is not only good business, but sends the right kind of signal to the markets. If Uncle Sam can’t “buy and hold” then who the hell else will want to pursue that (most important) longer term view.
Oh yes, one final hypothetical here. If the CEO and members of the board were really focused on their fiduciary responsibilities towards shareholders, then management itself should be addressing their largest single “institutional investor” and advising them to sit tight and not contemplate baling out prematurely.
In prepared testimony before the House Financial Services Committee in Washington DC today, Fed Chairman Ben Bernanke laid out his views on ongoing efforts towards regulatory reform, and focused on what he described as “consolidated supervision of systemically important financial institutions”
His testimony can be viewed on the Federal Reserve Board of Governors website here
House Financial Services Committee Chairman Rep. Barney Frank answers a question about HR 1207, a piece of legislation to audit the Federal Reserve. To say this is controversial is a masterpiece of understatement.
Ben spanks AIG in testimony before the Senate Budget Committee
Timmy spanks AIG and tells the Senate Ways and Means committee that AIG needed (but didn’t have) “adult supervision”.
Politicians piss, moan, and grumble, but our dynamic duo hold firm to their line and deal with legislators in a dignified and respectful manner.
In today’s episode: “The Destruction of Value”
AIG 4th quarter 2008 loss: $62 billion. That’s the single largest quarterly loss by any company in a single quarter in history. Nothing else even comes close.
This took AIG’s total loss for 2008 toa breathtaking$99 billion.
“Ninety Nine Billion Freakin Dollars” That’s a jaw dropping number. To put it into some horrifying perspective: the 2008 loss by AIG was around (according to the IMF) half the annual GDP of Ireland ($198 billion)and Israel ($195 billion) and greater than the annual GDP of more that 100 other sovereign states, including countries such as;
Federal Reserve Chairman Ben Bernanke tore into insurance giant AIG in testimony before the Senate Budget Committe yesterday. “If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG, ” Bernanke told committe members. AIG “exploited a huge gap in the regulatory system.”
In a separate (yet clearly coordinated) statement Timmy also took an elephant gun and let loose a few rounds of his own in written testimony before the Ways and Means Committee; “AIG is a huge, complex, global insurance company attached to a very complicated investment bank, hedge fund that was allowed to build up without any adult supervision,”
“Adult Supervision?” WTF? It’s most unusual that a sitting Treasury Secretary uses terminology of that nature in Congressional testimony, but quite obviously AIG has ignited extreme ire at the Fed and Treasury. Small wonder considering just how much money has been pumped into this company yet still it bleeds. What must be a bitter pill to swallow is that the Fed and Treasury have to constantly inject capital into this company since it would precipitate a complete meltdown and collapse of the financial system if it were permitted to fail.
To be fair, Ben & Timmy are setting the stage for much needed oversight reform. These are the opening shots designed to soften up potential (lobbyist) opposition to upcoming proposals to regulate the financial markets more stringently – and we all hope – effectively.
Federal Reserve Chairman Ben Bernanke tore into insurance giant AIG in