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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Washington in the Obama era seems bent on imposing “solutions” that not only fail to solve Americans’ problems, but make us poorer in the bargain.

In a direct attack on Wall Street, the president and his ally, Sen. Blanche Lincoln (D., Ark.), are bent on imposing the “Volcker rule,” which would prohibit banks from making speculative investments with their own funds, and on requiring banks to divest their derivatives trading desks, or at least put them in a separate subsidiary owned by a parent holding company. Five major banks–Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley–do 90% of U.S. derivatives trading.

This may ultimately make banking less stable, while forcing a good deal of securities trading out of New York to offshore locations.

The recent credit crisis was caused by: 1) banks (small and large) writing shoddy mortgages, and 2) inadequately backed derivatives, called swaps, that insured the mortgage-backed securities that financed those loans.

Money was lent to homeowners who simply did not have the ability to repay their debts–and instead relied on a continuous cycle of refinancing, borrowing more and more as housing prices rose. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Derivatives are as ancient as civilization.

Greek farmers insured crops with investors prepared to speculate on the weather, just as life insurers hedge mortgage-backed securities by purchasing credit default swaps.

When written against real assets, whether farmers’ crops or homes, derivatives spread risk, lower capital costs and foster growth.

Like any other financial contract, derivatives can be abused, and the big-bonus culture on Wall Street has given us some high-profile shenanigans.

How derivatives are regulated or overregulated is central not just to curbing excess, but to ensuring that farmers can plant, home buyers can borrow and businesses can invest.

Continue reading…

By Al Lewis

A DOW JONES NEWSWIRES COLUMN

Terry Smiljanich was an Assistant U.S. Attorney in Tampa, Fla., in the 1970s, prosecuting loan sharks.

“Just like in the movies, guys would come down from New York to collect,” he recalls.

A deadbeat borrower in one of Smiljanich’s cases even survived the cinematic cliche:

“They went into a bar and grabbed him, took him for a little ride, and told him that if he didn’t find a way to pay them off within 24 hours they were going to break his legs.”

High-interest loans with terrifying consequences is such a lucrative business that America’s banking industry lobbied for years to make them legal.

“Bank of America doesn’t break your legs, but they will ruin your credit and they will hound you to death,” Smiljanich said. Continue reading…

By Peter Eavis
    A DOW JONES COLUMN

This Citi needs a better road map.

Citigroup shareholders just got blindsided again, by a dilutive, mishandled capital raising, undertaken to repay $20 billion of the government’s investment under the Troubled Asset Relief Program.

But there is a way for the bank to start mending fences with investors. It should start to provide more disclosure on those operations meant to be leading the bank out of the doldrums.

Barclays Capital analyst Jason Goldberg notes that institutional investors make up 73% of Wells Fargo’s shareholder base vs. 27% at Citi. What’s more, Citi is trading at an estimated 20% below its tangible common equity, compared with an estimated 30% premium for Bank of America.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The Internal Revenue Service is suspending tax rules for Citigroup and other TARP recipients to permit those companies to more rapidly pay back the Treasury what they owe in TARP loans, and to their boost stock prices.

For Citigroup, that means an additional $38 billion in tax deductions to help the beleaguered company pay the Treasury the $20 billion it owes the TARP. In addition, these breaks will juice Citigroup, GM and other TARP recipients’ stock prices, and make TARP’s huge equity positions more valuable.

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By Maxwell Murphy
   A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)–Preferred stock in Citigroup Inc. (C) fell Wednesday as the opportunity to participate in the company’s exchange offer ended, and the only question now is why some classes aren’t making more of a bee line toward zero, because that’s what they are now worth.

Citi’s multi-billion-dollar offer for investors to exchange some issues of existing preferred stock for newly minted common stock expires Friday afternoon. Problem is, trades typically take three days to settle, meaning preferreds purchased Wednesday will be ineligible for tender.

John Feldman, a private investor in Baltimore who is intimately familiar with Citi preferreds and who says he has used several types of sophisticated trades to arbitrage the exchange offer to lock in gains, said he is unsure why at least four series of Citi preferreds haven’t lost most of their value.

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    By Neil King Jr. and Naftali Bendavid
   (From THE WALL STREET JOURNAL)  

  WASHINGTON — The ouster by the government of General Motors Corp. Chief Executive Rick Wagoner could put pressure on the Obama administration to deal more aggressively with the management of banks receiving federal aid.

  Since the financial crisis bloomed in September, the Bush and Obama administrations have replaced management only in cases when they  took control of struggling companies, such as mortgage giants Fannie Mae and Freddie Mac and insurance concern American International Group Inc.

  Citigroup Inc., by contrast, has received three government rescues since October, under which the U.S. will own up to 36% of the company’s stock. Officials have in the past considered removing CEO Vikram Pandit, but demurred, in part because of the paucity of candidates to replace him, people familiar with the matter say. A spokesman for Citigroup couldn’t be immediately reached for comment.

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   By Tomi Kilgore
   A DOW JONES NEWSWIRES COLUMN  

  NEW YORK (Dow Jones)–Higher stock price or not, it still comes down to the fundamentals.

  With the share prices of many well-known companies falling into single-digit territory, any success from Citigroup Inc.’s (C) reverse stock split may prompt others to do the same. But that’s certainly not a given.

  Ashfield Capital Partners portfolio manager Kelli Hill said it’s unlikely the reverse split by itself will be a tailwind for Citigroup. She said it could become a potential catalyst if fundamentals eventually improve, as institutional investors that do have share-price restrictions would then be allowed to participate.

  Citi shares were recently trading around $2.70.

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A Dow Jones Newswires column by John Jannarone stated:

  First, Citigroup (C) burned shareholders. The stock slumped in late February after the bank’s offer to swap $27.5 billion of preferred securities for common stock.

  Thanks to relatively sweet conversion terms, investors holding the preferreds could short the common stock to lock in a likely profit. That lured in a flood of arbitragers and pummeled the shares.

  But now it is short sellers in the hot seat. Citi’s shares have tripled since March 5. Even with shorts now willing to pay through the nose to borrow stock, the supply has virtually dried up.

Continue reading…

In the  Dow Jones Newswire article “In Latest Citi Rescue, Government Spooks Investors With New Shift” by Joe Bel Bruno, Marshall Eckblad
and Jessica Papini, the writers say government’s new blueprint for bailing out crippled banks has investors thinking twice about sinking money into a sector once known for its steady returns and value.

In part:

   NEW YORK — The government’s new blueprint for bailing out crippled banks has investors thinking twice about sinking money into a sector once known for its steady returns and value.

  For weeks, investors expected the government to simply take a larger stake in Citigroup Inc. (C) and dilute common shareholders. But, the decision to stop paying dividends on most of the bank’s preferred shares caught many by surprise. Suddenly, bank preferred shares have lost their aura of safety.

  Investors complain that the latest rescue of Citigroup represents yet another shift in the government’s strategy.