Financial Dialysis

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Citigroup just got the cliff notes for the stress test.

While Bernanke may say the test is not “pass/fail”, the financial markets think otherwise, and Citi was heading into the finals with a D- minus average, at least until this morning.

The capital infusion engineered by the Government (and still subject to the actions of preferred shareholders, who are being effectively crammed into common by the terms announced today), will operate as a cushion against the “worst case scenario” assumptions being used to redetermine Citi’s ability to survive further downturns in the value of its toxic assets.

Effectively, Citi is on financial dialysis provided by the US taxpayers. Why is it in their interest to do so — as they have also already done with AIG?

The fundamental reason has not really been stated by either the Fed Chairman or the Obama Administration — perhaps because that reason may be even more galling to taxpayers than what has been said publicly. Both Citi and AIG are core players in the globalized financial marketplace, intimately linked with the operations of foreign central banks (many of whose Chairs are Citi alumni) — and it is these banks who control the relative-value fate of the US dollar. For them, the stability of Citi is more important than a few more trillions in the official US deficit.

When Treasury Secretary Geithner says he’s for a stong dollar, he really does mean it in the worst way.  If he and the rest of our financial industry overseers were to let Citi go, or directly nationalize its bank subsidiary, like so many cable TV commentators urge — they apparently think they have the chops to be Treasury Secretary because they read financial news —  our distinguished lenders across the globe could come down with a very bad case of cold feet when it comes to holding US dollars.

In that circumstance, the Fed would be forced to buy US Treasuries by the bushel just to keep mortgage rates at something below stratospheric levels.

As Obama has said about this crisis, “it’s all connected”. Just be sure we connect ALL the dots — fundamentally, this calamity is about a  margin call on America from our financial landlords abroad, so we have some things that are pretty ugly EXCEPT when compared with the alternatives. Not everyone on dialysis is a zombie — many indeed live to a ripe old age (or can even hide out in the hills of Pakistan). Citi should be so lucky!

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