The Right Move And The Wrong Move

Today provides two fine examples of the right and the wrong way to deal with the mess that financial companies have created for themselves. First, the right way. Citigroup has announced that it is splitting itself up and selling off some pieces. Imagine that, it is going to get smaller. Now it may have taken an $8.3 billion loss to push Citigroup in the right direction, but at least it is there now. It is voluntarily taking itself out of the too big to fail category, shaking up its board of directors and taking steps on its own to survive in a smaller form. This, my friends, is excellent news!

I am sure there will be many challenges ahead for Citigroup, not the least of which is getting an acceptable price for the pieces it sells. It may, and likely will, still need further government support during this process, but this is one time where I think government support is money well spent. We need to support those companies making the right move. Too bad they didn't do this a few months ago before we spent tens of billions propping Citigroup up in its current form.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a717rlC3lQd0&refer=home

And then we have a fine example of the wrong move. You know who I am talking about - Bank of America. Here we have a financial institution already too big doing what it can to get even bigger and then finding out it bought into not one but two big messes it should have left alone. Rather than splitting up, selling assets and seeking to survive in a smaller form, it goes running home to Uncle Sam asking for more support, and Uncle Sam is happy to provide it to the tune of $138 billion. I know only $20 billion of that is an actual cash infusion for preferred shares on which we will get 8% and the rest is "just" a back-stop on bad loans and CDSs, but it is still a waste of money. We should be insisting that Bank of America start selling off pieces. Instead, here we are giving it the money to buy more.

Bank of America just posted a fourth quarter loss of $1.79 billion, which does not include another $15.3 billion in losses at Merrill Lynch. Yet it is still going through with the acquisition Merrill Lynch, which we the taxpayers are paying for and more. It fully admits that we should expect more and perhaps bigger losses for quarters to come, surprise, surprise. It is just inexplicable to me that we would support this mess, especially doing so with seemingly few, if any, conditions.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aa4eMvYBBEIw&refer=home

And what is really mind-boggling about this is that we are not only supporting it but seemingly Ben and Henry pushed BofA to go through with the Merrill deal when BofA was having doubts. The Laurel and Hardy of the government bailout efforts apparently feared what would happen if the deal fell through and Merrill went the way of the dodo bird. Yes, there would be major knock-on effects, but what happens now of BofA goes under? Again, folks, this is the wrong move. These institutions need to be broken apart, with certain parts being wound down and others sold.

http://www.nakedcapitalism.com/2009/01/wsj-bank-of-america-to-receive-20.html

The only good news here to me is that BofA had to take its dividend down to a penny, and undoubtedly will get some securities lawsuits from its stockholders for not disclosing the major mess it was getting with Merrill before the stockholders voted on the deal. BofA is laying off 35,000 employees, but unfortunatley CEO Lewis is - not yet - one of them. We can only hope the stockholders show him the door and make it 35,001.