Saturday, August 2, 2014
Inquirer Daily News

The Government and the Mob: Analogies

Is the federal TARP just a ruse to bail out Citigroup? asks Ed Yardeni

The Government and the Mob: Analogies

"Why would anyone, who can avoid it, do business with the US government? It’s like doing business with the Godfather," from Mario Puzo's Mob novel, writes economist Ed Yardeni. "At first, he only wants a small piece of your action in exchange for some help and protection. Then, he tells you how to run your business. Before you know it, he owns you, your business, and your family. Once you join his mob, you can’t leave it--not alive.

"Last year, a couple of days after Lehman and AIG collapsed, Godfather Hank Paulson asked Congress for a $700bn carte blanche to rescue the banks by purchasing toxic assets from them. Congress gave him the money on October 3, 2008. On October 13, the Godfather called a meeting of the nine Goodfellas, who were the bosses of the major banks. He told them that they had to take $125bn and sell him preferred shares representing a small stake in their companies. Only one of the Made Men in the room really needed the dough, namely, his son Freddo, a.k.a., Citigroup. The others were forced to take the cash to hide the identity of the one troubled bank...

"Among the most cooperative bankers in the room at the Treasury on October 13 was BofA CEO Ken Lewis. He was there for the government when Countrywide was on the verge of failing.. He was there for the Godfather when Merrill Lynch needed a buyer... By December, he had second thoughts once he learned that Merrill’s losses were much larger than he realized. He went to see Don Corleone. He was told by Paulson to stuff Merrill into BofA under the original terms and to shut his mouth, or else!

" As consolation, Paulson gave BofA another $20bn, in addition to the $15bn provided in October. That was good cover to give (Citi) another $20bn, bringing its total to $45bn...

"Companies that have taken any TARP money can’t pay dividends to common shareholders, or big bonuses to employees. Top managers are expected to work for a dollar a year for the good of the company. Managers and directors are on notice: The government may decide to fire them at any time. Banks that want to pay back TARP have been told by Tim Geithner, the new Capo di Tutti Capi, that he’ll let them know when and if they can do so. As a result, Morgan Stanley is spinning off its prop desk so that traders can get appropriately paid for their services. Fannie and Freddie are facing management crises losing talented people who don’t see any upside in hanging around.

"TARP has become the rescue program that is suffocating the financial system. It is the (mob hitman) of bailouts." See also the TARP Inspector General's latest report here.

About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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