CitiPlank Rescue

“I think part of what we’ve seen is confusion on the part of the market sometimes in terms of what the overall direction [of the rescue package] might be. And we want to make sure that we’re providing as much clarity as possible.”

-President-elect Barack Obama, Nov. 24, 2008.

It seems to Wonk the Plank that the latest bailout – Citigroup, this time – does the exact opposite. It admits a ray of hope to shareholders who should be staring into the abyss.

Previous interventions have preserved the solvency of the underlying institutions but crushed shareholders. Hank “Hammer” Paulson hammered them into dust. Not so the rescue of Citigroup.

The important part of the agreement is the government’s guarantee of Citigroup’s $306 billion in dodgy mortgage assets. In return for a mere $7 billion in preferred stock, the government will take 90% of any loss (and there will be plenty of losses) after Citigroup absorbs the first $29 billion.

The news has propelled Citigroup’s stock to a spectacular gain today…up more than 55% as we type this entry.

There now, that doesn't look so bad...

This time, the government has let shareholders keep Citigroup, unlike previous interventions at AIG, Freddie Mac and Fannie Mae.

An AIG shareholder, for example, who went to sleep on Tuesday, Sept. 16, 2008 woke up the next day to learn she owned 1/5th of what she had the day before. Overnight, the government had taken 80% of the company’s equity in exchange for an $85 billion loan with an interest rate that bordered on usurious. If that wasn’t harsh enough, AIG had to pay interest on the entire credit line whether it borrowed the money or not. The “juice would run,” as they say on the Sopranos, on the full amount.

At the time, Wonk the Plank applauded these “delighfully stiff” terms (though they were toned down in October).  Government takeovers should be extremely unattractive to shareholders and companies.

One week, or Wonk the Plank starts breaking things

Why is the latest bailout so troubling to Wonk the Plank? It suggests yet another twist to the government’s efforts to stabilize the markets. The key to stability, we think, is to eliminate the pie-in-the-sky mentality from company boardrooms. Once they understand that vast sums of money aren’t just going to rain down from heaven, they will be more inclined to make the difficult choices that will get them back on track.

So we are alarmed at the mixed signals the latest intervention sends to the markets. It’s a big step backward, all in the name of goosing err…calming…the stock market.

More and more we have been seeing pundits and even respectable news organizations attribute price movements in the Dow Jones Average as the market’s ebullience or dismay with the various policy options on the table. The “wisdom of the market” is not nearly so farsighted, we would caution.

The market is not applauding a prudent governmental solution to all that ails it. It didn’t rally because it saw the light at the end of the fiscal crisis tunnel. It is a simpler beast than that. It jumped because it heard the sweet squeak of the money spigot being turned on.

Ready, Fire, Aim!

A World Famous Plank

Sometimes when we are poking around on the computer investigating wonky things, ModernDomestic bursts into the room and starts begging for permission to use the computer for a few minutes and check her “stats.” She’s talking, of course, about the counter that keeps track of how many people have visited her blog. 

ModernDomestic is badly obsessed with this counter. Seeing a new high will send her into shrieking paroxysms of delight…but she’ll pout for hours over a slow day. Sometimes ModernDomestic will “check the stats” several times a day, or even hourly.

Our “stats” are a lot more modest than hers, because her posts are more frequent and of higher quality than ours…and also because our chosen subject matter is much more boring.  

We often tease her for “obsessing over the stats” but could it be that Wonk the Plank grumbles because we secretly resents how much higher her “stats” are? 

We say this all as mere preamble, reader, just to drive home how humble our little corner of the World Wide Web truly is. Even 20 views, which would send ModernDomestic into a prolonged sulk, is a remarkable achievement for Wonk the Plank. We toil along in our modest Planky way, but until this weekend, we had our doubts that anyone was consistently reading Wonk the Plank. 

You see, this weekend we visited New Jersey to attend the wedding of ModernDomestic’s uncle. It was the first time we were meeting many of ModernDomestic’s relatives…but it wasn’t the first time they were meeting Wonk the Plank. A sizable fraction of the Wonk the Plank readership, we discovered, consists entirely of ModernDomestic’s aunts. 

“Look who it is!” they would fuss happily when we walked into the room. “Wonk the Plank!” 

“Hey Wonk the Plank,” they would ask, “can you give me some advice on my 401(k)?”

We are delighted to learn about this unexpected niche audience. We are glad you are enjoying the blog, although a little concerned that you have learned Wonk the Plank’s secret real life identity.

An Inconvenient Post

Consumers are not a terribly rational bunch.

We were reminded of that yesterday when we learned that TicketMaster is finally selling concert tickets without the hated “convenience fee.”

Rejoicing? Dancing Wonks in the streets?  No, we realize, as the Rocky Mountain News did, that those fees don’t just go away, they just aren’t as visible under “all-in” ticket pricing. A ticket that used to cost $100 plus an $18 fee now just costs $118.

TicketMaster has been a little slow to figure out consumer psychology. If we were in charge, not only would we drop the convenience fees, we’d jack up ticket prices by 20% and then pass out coupons like hotcakes.

Convenience Discount