Last Call

K Drum on Plan N:

So: the FDIC can't run Citigroup and nobody in their right mind wants to buy them. On the other hand, with Citi's stock hovering around a dollar, their shareholders have already lost nearly their entire investment. Allowing Citi to fail would hardly cause them any more damage than they've already suffered. So why not just let them go under, as Shelby wants?

The answer is that we could do this. This was the gamble Ben Bernanke and Henry Paulson took last September when they allowed Lehman Brothers to fail — dammit, it's time to enforce some market discipline on these guys! — and their gamble failed spectacularly. The global financial system nearly collapsed even though Lehman wasn't all that big.

But hey — maybe Lehman taught everyone a lesson. Maybe all of Citgroup's creditors and counterparties have already priced in the possibility of default. You never know. And maybe if Citigroup fails, and they all end up with a bunch of worthless notes, they'll just shrug and go about their business.

Then again, maybe not. Maybe Citigroup really is too big to fail. And maybe if they fail, and all their creditors and noteholders and counterparties are stiffed, maybe they'll all fail too. And then all of their creditors and noteholders and counterparties will also fail. Etc. And then it's back to the dark ages for all of us.

Which is it? I don't know. All I can say is: Richard Shelby has way bigger balls than I do. Call me a wuss if you must, but I'm really not willing to gamble on nuclear meltdown, especially since I think the odds are pretty strongly in favor of Citigroup having the ability to take all the rest of us down with them if they collapse. Shelby, however, the ranking Republican member of the Senate Banking Committee, guardian of the nation's financial health, is apparently willing to just say "fuck it," roll the dice, and hope against hope for snake eyes.

Of course, this is precisely the kind of imbecilic, high-stakes gambling that got us into this mess in the first place. Maybe Shelby ought to think twice before deciding that the hair of the dog might get us out.

The really scary part is not that Kevin is right, it's that the time is rapidly approaching where we won't be able to save Citigroup, AIG, GM, GE, Bank of America, etc. and will indeed have to let them fail.

The spectacularly scary part is most likely a major counter-party bank in Europe is going to fail first, saving us the trouble of letting Shelby push the Big Red Button. The tsunami from the European banking system going under will then force Obama's hand one way or another. After all, AIG had to be saved because if it didn't, Europe would have folded and we would have followed.

But the banks are dying. They will not survive the year assuredly, and odds are pretty good they won't make it to July 4th. Many of those European banks are going to collapse sooner. They will take many of ours with it. It's just a matter of time, now. Europe, especially Eastern Europe and the Mediterranean countries like Italy and Greece, are on the verge of complete financial collapse. With one of those countries with the Euro as currency goes under, the Euro goes along with it, the European banks with the Euro, and then the whole ball of wax.

Checkmate.