President Obama, Let My Citi Sink

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[Genesis Of The Financial Meltdown]

Enough of bailing out Citigroup.

Ever since the 1990s when Citibank was deemed too big to fail, Citibank, now Citigroup, has followed a business path of "Damn the torpedoes. Full Speed ahead," to borrow from David Farragut, Admiral of the United States Navy, at the Battle of Mobile Bay, 1864.

Only Citi, unlike Farragut, hasn’t won the battle. It sank the American economy.

Citi's conduct is not a result of "a lack of moral hazard;" it is far worse. Citi knew that no matter how egregious its misconduct, it would remain in business- that the government would never indict Citi under the provisions of RICO. Even when laundering money for Mexican drug kings, Citi knew that it would never face the consequences of its acts.

There is no excuse. I have a friend, who is a former trader. His math score on the SAT was 430 out of a possible 800 (not 800 out of 800 like the geniuses), who developed Citi's trading strategies. For years he and I have discussed the CMO crisis; that is, we knew years ago that the spiraling upward movement of home prices was unstable and would eventually result in a spiraling downward movement of home prices.

The analogy of a tornado in reverse is appropriate. Prices increase rapidly but gravity eventually forces prices to come back to earth.

Prices of homes rose to unreasonable and unsustainable levels. And prices of homes must crash to reasonable and sustainable levels. My friend and I are not geniuses. We knew that the rocket rise in the price of homes and the price of commercial property was like a rocket rising to the stratosphere and that it would come crashing down.

Citi knew this also. But the profits made by Citi on CMOs and CDOs, the repackaging of home mortgages and commercial mortgages, was too great. So Citi kept selling and repackaging mortgages. And do not believe the lies that by securitizing the loans, the loans were made safer. That is nonsense.

It is a basic principle of finance that the loan is only as viable as the underlying product. By slicing a loan into tranches, you are not creating a less risky product; you are only creating larger fees. And anyone, who tells you otherwise is lying.

With interest rates so low, prices of all assets were pushed to unrealistic levels. With money so cheap, companies went private at prices that had not been seen since the Internet bubble. It was if a child was blowing bubbles and after the surface tension of the bubble was unsustainable, the bubble collapsed.

And just wait until the commercial real estate collapses.

By continuing to bail out Citi and other banks the government is rewarding illegal conduct. Let Citi be taken over by foreign banks if necessary. Better yet, let Citi reorganize as a much smaller bank; as a simple commercial bank. The solution is a smaller and less profit driven environment for Citi. When my family utilized its predecessor, First National City Bank, many decades ago, Citi was more responsible.

The future of Citi should be its dismemberment into smaller parts. And let Citigroup revert to its old name, First National City Bank.

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