systemic risk

The Story of Citigroup's Extraordinary Financial Assistance

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SIGTARP released a new audit report, Extraordinary Financial Assistance Provided to Citigroup which should shock and awe.
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Citigroup was bailed out in November 2008, with $20 billion dollars plus $301 billion in asset guarantees. Now the Special Inspector General of TARP has gone back and done an audit, a forensic accounting of what really happened.

It appears Citigroup poses systemic risk was just screamed from the roof tops like Chicken Little and the solution was to throw money at it. No one bothered to check if this was even true, that Citigroup presented a systemic collapse of the global financial system if it failed. Even worse, while systemic risk is so complex, kind of a domino theory of multi-dimensions, yet to ascertain the possibility, it was implied why bother? From the report:

First, the conclusion of the various Government actors that Citigroup had to be saved was strikingly ad hoc. While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria. Given the urgent nature of the crisis surrounding Citigroup, the ad hoc character of the systemic risk determination is not surprising, and SIGTARP found no evidence that the determination was incorrect.

The Ostriches in the Sand - Regulation Hearings & Frameworks

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The Obama administration is pre-announcing the regulatory reforms announcements (see their outline below), so much so one might miss what is coming out of Congressional hearings on the topic.

From the Systemic Risk and Insurance hearing, subcommittee chair Kanjorski said:

I believe that only ostriches can now deny the need for establishing a federal insurance resource center and a basic federal insurance regulatory structure.

Geither's response? Let's ignore the entire insurance industry. What's in a name? (AIG)

Systemic Risk - The New WMD

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Securitization was based on the premise that a “fool was born every minute.” - Joseph Stiglitz in congressional testimony, Financial Regulation, October 21, 2008.

Even Adam Smith recognized that unregulated markets will try to restrict competition, and
without strong competition markets will not be efficient. More recent research has shown that
markets often fail to produce efficient outcomes (let alone fair or socially just outcomes) when
information is imperfect or asymmetric—but information imperfections and asymmetries are at
the center of financial markets. That is what they are about. Our financial markets have even
worked hard to exacerbate these problems; as we have noted, they created non-transparent
products that were so complex that not even those who created them fully understood the risks to
which they gave rise.