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  1. Wealth
December 3, 2008

Are the world's banks bust?

By Spear's

If you had put $100,000 into Citigroup on November 17, it was worth only $50,000 a week later.

If you had put $100,000 into Citigroup on Monday 17 November 2008, it was worth only $50,000 a week later on Friday 21 November, and half your loss was on that Friday.

If you had put your $100,000 into Citigroup a year earlier, it would have been worth just $9,000 on that Friday. This is definitely not what one expects when one puts one’s money into a bank, that it “evaporates” quite like that.

Of course, we’re talking money into shares here, not deposits; but where the shares go, could it be that the deposits are bound to follow? Well, that’s an interesting question, and it’s throwing up a whole startling new equation in this all-so-revealing global depression. (Yes, we’re talking the ‘D’ word now…)

This new equation is starkly expressed as follows: is the banking sector bigger than the rest of your country’s economy? Answer ‘Yes’, your country has a problem; Answer ‘No’, your country may have a solution.

Let me explain: when the banking sector outgrows the size of its domestic economy, it has gone overseas for deposits and lending opportunities, and if it then encounters problems, the domestic economy is not big enough to mount a rescue. So what happens?

Answer: the foreign depositors are the first losers, but the domestic depositors can’t get their money out quick either. This is what has happened with Iceland. So what happens next? Answer: those who live in melting igloos cut hole in ice and put worm on end of fishing-line and dangle same in front of IMF, hoping for bite…

Now, the collapse of Citigroup’s share price is indicating that it’s bust, but as it’s so big Uncle Sam can’t afford to let it go bust. The good news is that the rest of Uncle Sam’s economy is bigger than its banks, much, much bigger, so it can save Citigroup, but at a cost. Who pays for the bail-out? Why, Uncle Sam’s captive audience, his taxpayers, Stupid!

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The bail-out package for Citigroup has an interesting structure: $20 billion follows an earlier $25 billion from the TARP Fund, and the US Government takes $7 billion of extra equity at 8% p.a., while the existing dividend is pegged at a penny per share; there is a pool of toxic mortgages of $300 billion identified, on which the bank takes the first $29 billion of losses, plus 10% of any excess, and the bank agrees to extend better terms to these debtors.

That’s a whole better deal for the taxpayer than the first proposal for the Government to buy out toxic assets from the banks, which is why Citigroup’s share price collapsed last week. Uncle Sam may suffer a lost year or two of economic growth, but Citigroup will definitely live to grow again another day.

Now, what about Gordon Brown’s Britain? Well, the big problem is that the rest of the economy is smaller than the banks, which is hardly surprising as Gordon has overseen the loss of 750,000 jobs in manufacturing and replaced them with 750,000 worthless jobs in bureaucracy, which the Government has to pay for, year-in-year-out, which means… O! What the hell, you get the point, don’t you?

Now, Barclays Bank has debts which are twice as big as Gordon’s… Need I go on? And Britain is not alone in this new equation with just Iceland for company, there’s Switzerland in the same boat as well.

Switzerland?! Oh, Yes! Switzerland is too, and the price of all the second-hand cuckoo-clocks isn’t worth a dime, when your biggest and best bank that was is bust and the rest of your economy is much smaller than the banking sector…

So what would happen if Barclays or HBOS or RBS (that’s RBS, but it could be UBS if you’re Swiss) goes broke? HMG cannot bail out any of their total liabilities. All HMG can do is guarantee their Sterling transactions – an Icelandic moment for Gordon for sure – otherwise there will be a run on the Pound and Gordon will be off to Washington to see the IMF.

The IMF hasn’t got the money Gordon might need either, but it does have a lot of gold, and by now the price of gold will be soaring. How wise of Congress to resist all those requests over the years from the IMF to sell its gold, and how stupid of Gordon to sell the UK’s gold at the all-time low in the market.

Well, there’s nothing to do, but “sit and see, and mind true things by what their mockeries be…” The thought does occur, however, that if gold does the decent thing and does soar, then the IMF could liquidate its gold for US Treasury Bills by doing a deal with the Chinese, whose economy is much, much bigger than its precarious banking sector…

And then? All’s well that ends well, but it doesn’t look that easy as things stand today.

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