Citigroup earnings rise 74 percent, to $3.8 billion

I'm not anti-capitalism, I'm not anti-corporation nor am I anti-business. What I like to consider myself to be is pragmatic. With the economy in a tailspin and unemployment hovering around 9% corporate earnings are setting records and CEO compensation is going through the roof.

I guess the question is, where is the breaking point?

http://www.syracuse.com/news/index.ssf/2011/10/citigroup_earnings_rise_74_per.html

Bugs me, too. Had to look around to find this:

wsjonline wrote:

Citi's third-quarter statement included a $1.9 billion gain from a widening in its credit-default swap spreads over the period. The adjustments let banks record gains when the cost of protecting their own debt with credit default spreads rises, reflecting a higher probability of default on derivatives contracts and other obligations.

The cost of the protection using credit default swaps is measured as a percentage of the amount insured.

As a firm's derivatives liabilities move in its favor, accounting rules consider the effect to be similar to a loan by its trading counterparts, so the counterparties record a loss and the firm records a gain.

But the firms could never realize these gains unless they were to default on their obligations, said David Kelly, director in credit product development at derivatives solutions specialist Quantifi Inc. Moreover, if a firm's credit spreads improve in the fourth quarter, the gains would be reversed.

Without that adjustment, apparently they would have recorded an 8% decrease in revenue year-over-year.

It seems like a catch-22 based on the article, as they have to account for a loss once confidence in the company improves. Basically they can 'loan' themselves money on paper when they look bad, and when they look good the earnings should outweigh the negative adjustment from the 'loan' being called in. Makes it seem to me that they will look good on paper until they day they truly default.

Bear wrote:

I guess the question is, where is the breaking point?

The kneecaps?

Right, and knowing that Uncle Sam will bail them out, if they jack up their profit in the short term, they can pay huge bonuses, and then skate laughing while the taxpayer covers all the risk they got paid to take.

Too Big To Fail is an idea so toxic that either we abandon it, or America itself will eventually fail as a going concern. That's already highly likely just based on our other stupidities, but Too Big To Fail could kill us all by itself.

An argument for regulation if I have ever seen one. A "Who is John Gault" groupie tried to spin this as a problem inherent with market regulations, and I'm still trying to figure out how he went from "Point A" to f*cking Mars.

But anyway, yes, Too Big Too Fail is (among other things) a fear of short-term problems over long-term, chronic issues. If they go under, it'll cause turmoil and make some waves in the market. But feeding the monster like this will have far more drastic consequences, as we are seeing.

I dont often agree with Malor but he's dead on here.. its fairly simple really but greed and favoritism ran rampart and its still going.. basically those who can will and really dont want to musical chairs to stop on their watch.. screw everyone else.. they will pull out as much $$ as they can to ride out the crash in comfort and style with their immediate family well cared for.

Heh, and to think I got to keep a couple hundred dollars from my last paycheck all to myself.

I guess this is proof that when interest rates double, everyone wins...oh wait.

If any of these big banks gets into a position where they need a bailout the Fed should seize them and sell off the parts. The only way to restore market forces is to let some shareholders take a bath.

bandit0013 wrote:

If any of these big banks gets into a position where they need a bailout the Fed should seize them and sell off the parts. The only way to restore market forces is to let some shareholders take a bath.

Can 2011 bandit go tell 2008 Bush/Obama?

Seth wrote:
bandit0013 wrote:

If any of these big banks gets into a position where they need a bailout the Fed should seize them and sell off the parts. The only way to restore market forces is to let some shareholders take a bath.

Can 2011 bandit go tell 2008 Bush/Obama? :)

Heck, we all knew it--in fact, didn't we put 20 billion into a company we could have bought on the open market for only 12 billion?

Couldn't do that though--that would be SOCIALISM!

So is it possible for the government to invalidate the extreme executive compensation contracts at citi? I may be short sighted about the possible ramifications of such an act and hopefully a more saavy gwjer will point them out to me. But to me this is concrete evidence of criminal activity.

Then arrest them for the criminal activity. Nulling their private contracts has nothing to do with it.

But then the flow of campaign contributions would dry up, and we obviously can't have that.

Nicholaas wrote:

An argument for regulation if I have ever seen one.

By whom? The same people who bailed them out? I'm fairly certain that's not a recipe for regulatory success. In fact, no regulation was required - all the government had to do was ... nothing. If anything, this is a poster child for market regulation, not government regulation. The market tried to put these banks out of business, which they richly deserved. The only reason we're even having this discussion is because the "regulators" took a bunch of money from taxpayers, created and borrowed a lot more, and then gave it to them.

Aetius wrote:
Nicholaas wrote:

An argument for regulation if I have ever seen one.

By whom? The same people who bailed them out? I'm fairly certain that's not a recipe for regulatory success. In fact, no regulation was required - all the government had to do was ... nothing. If anything, this is a poster child for market regulation, not government regulation. The market tried to put these banks out of business, which they richly deserved. The only reason we're even having this discussion is because the "regulators" took a bunch of money from taxpayers, created and borrowed a lot more, and then gave it to them.

If we don't regulate it these same people will just start new companies, and do the same thing again. They might be forced to rebrand themselves and call their ponzi schemes something different. What we need are regulators with teeth. Like Nate Dogg

When Warren G innocently went to the crap game he was unaware that it was rigged and that they were going to take everything he had. Luckily Nate Dogg shows up and shoots all the busters and then provides Warren with hoes. Which is what the government should have done!

NathanialG wrote:

If we don't regulate it these same people will just start new companies, and do the same thing again.

If we do regulate them and grant the government the power to influence the market, they don't need to start new companies, as the old ones will be protected and bailed out. Which scenario is better? I vote for the one where they lose all their money and don't get to use taxpayers as patsies. You?

Let's assume that everyone involved is simply greedy. That being the case, who would trust them with the money to start a new company when they made such a mess of the last one? And who would we trust to be the regulator? That's the problem with the regulation scenario - it requires too many people to be honest and have integrity, and the process is systemically vulnerable to an amoral few. And that's ignoring the winnowing effects of the high-school popularity contests we call elections.

The market tried to put these banks out of business, which they richly deserved.

The market's been trying to correct the system since the early 90s, and we have resolutely fought it with every tool in the policy arsenal. So the problems keep accumulating, and the total necessary system adjustment has gone from annoying to severe to catastrophic to, if we keep on this path, potentially civilization-wrecking.

It's not lack of regulation directly that caused this problem, it's active attempts at management of the economy by the Federal Reserve. Without the constant bailouts, the really bad ideas would have been weeded out long ago.

There's probably some good ideas, somewhere in the derivative mess, but it's nearly impossible to figure out which they are.

What we have now is a system where the giant brains of the economy are focused on looting as much value out of it as possible, backstopped by unlimited supplies of cash from nothing anytime there's a problem. Without bailouts and central management, those big brains would be focused on regulating themselves, because they'd know that nobody would be riding to the rescue if they got in trouble. Those massive intelligences would be more often deployed to PROTECT the economy instead of EXPLOITING it.

Lack of regulation plus bailouts is just about the worst possible policy response.