How big is Citigroup, again?

Robert Reich has written a remarkable piece, Why CitiGroup is About to Be Bailed Out and Not General Motors.  (I believe that should be “Citigroup”, not “CitiGroup”.  Please forgive my mild OCD.)

Viewed from Wall Street, Citi is too big and important to be allowed to fail while GM is simply a big, clunky old manufacturing company that can go into chapter 11 and reorganize itself. The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman’s demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe — a mistake that must not occur again.

I like Robert Reich.  I really do.  And he is giving voice to the same outrage that I feel.

But saying something is the “newly conventional wisdom on the Street” is not the same as saying it is wrong.  You need to explain why it is wrong, or at least demonstrate you understand why it has become the conventional wisdom.  Unfortunately, Prof. Reich does neither.

But GM? GM is only jobs and communities. Citi is money.

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So why save Citi and not GM? It’s not clear. In fact, there may be more reason to do the reverse. GM has a far greater impact on jobs and communities.

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Nonetheless, Citi is about to be bailed out while GM is allowed to languish. That’s because Wall Street’s self-serving view of the unique role of financial institutions is mirrored in the two agencies that run the American economy — the Treasury and the Fed. Their job, as they see it, is to keep the financial economy “sound,” by which they mean keeping Wall Street’s own investors and creditors happy.

I think Reich’s view is overly naïve and cynical, and I say that as someone who is usually naïve and always cynical.

At the time of its failure, Lehman Brothers had $640 billion in assets and $613 billion in liabilities, and they were counterparty to $729 billion in derivatives trades.

As of the quarter ended June 30, Citigroup had $2.10 trillion in assets and $1.96 trillion in liabilities, of which $804 billion were deposits. They were counterparty to $38.7 trillion in derivatives trades.  In my post at the time, I said “I suspect the U.S. Government would be allowed to fail” before Citigroup would.  I reiterate that assertion.  Which is not to say the stock cannot go to zero, or whatever AIG trades for these days.

This seems a good time to update the numbers.  As of the most recent quarter (Sept 30), Citigroup has $2.05 trillion in assets and $1.92 trillon in liabilities, of which $780 billion are deposits.  They are now counterparty to $36.8 trillion in derivatives trades.  Good news!  They reduced their derivatives exposure by almost $2 trillion.  Bad news: That is only 5%.

They also lost 3.0% ($24 billion) of their depositor base.  I wonder how October and November are going.

Anyway, the point is this.  If any institution is big enough to threaten the annihilation of the entire financial system, Citigroup is it. Well, except maybe JPMorgan Chase.  Comparing Citi to General Motors is frankly nonsensical.

Institutions like these never should have been allowed to exist.  But they do exist, and they are on the brink of failure, and our government has to decide how to respond.  We have a system where money is credit.  No credit = no money = a deflationary depression.  At least, that is what our Fed and Treasury officials believe.  Unlike myself — and unlike Robert Reich — they have Ph.D.s in economics and vast experience in monetary and fiscal policy.  Maybe they are wrong, maybe they are too “Keynesian”, maybe the cure will be worse than the disease…  But to portray this episode as an example of regulatory capture is grossly unfair, in my opinion.

They are doing the best they can based on what they know (or think they know), paving the road with good intentions.