Obama’s Speech Avoids Using the “N” Word…

(This is the article I wrote the night President Obama gave his first speech on how his administration would handle the financial crisis.)

I will admit that President Barack Obama is facing challenges that appear near impossible to solve.  And, even though I realize that his speech the other night was intended to be more State-of-the-Union-like than a presentation of specific solutions, I still came away feeling a bit like a Christian Scientist with appendicitis.

America’s banks are, in large part, insolvent. But, with the TARP widely perceived as having accomplished nothing, American taxpayers have no appetite for further bailouts. Americans are losing homes to foreclosure at a pace not seen since the Great Depression of the 1930s. But American taxpayers are sharply divided as to how to solve the problem, with many believing that any financial rescue would be tantamount to rewarding irresponsible behavior.

American credit markets are broken. Our banks are unable or unwilling to lend, and only the government is capable of stepping in to provide capital. And yet, as General Motors learned at the end of 2008, there is little support for such lending.

Most recently, unemployment is increasing at the rate of more than 500,000 jobs a month, but one side sees only only tax cuts as having the potential to solve the problem, while the other has pegged its hopes almost exclusively on government spending.

America is deeply divided, and we all know the old adage about the benefits of being united and the downside of division.

Tonight President Obama was to speak to the American people, and clearly his speech was intended to cheer America up. Whether it did or didn’t, I have no idea. Our politicians looked pretty cheered up, I’ll say that. Why? I have no idea.

For the record, I thought the speech was very uplifting. And were I in the mood to attend a motivational seminar, perhaps I would have been cheering right along. But I’m not in that sort of mood, in fact I’m a long way from being in that sort of mood. After eight years of Bush, and an economy that promises nothing but dread for the foreseeable future, I’m only in the mood to hear specifically how our government plans to fix what they allowed to break in the first place.

In tonight’s speech I didn’t need to hear about how the government plans to handle health care. I didn’t need to hear about what they plan to do about energy. I didn’t need to hear about goals for fixing education in this country. And by the time I heard the President assure me that our nation doesn’t torture… all I could do was say to myself: “Really? Well, you’re torturing me right now.”

A few weeks ago I watched Republicans vote in unison against the president’s economic stimulus plan, and they’ve done nothing but play politics in opposition to the administration ever since. Yet, they stood up and applauded the president tonight on numerous occasions. Why? The cameras were rolling, that’s why. It certainly couldn’t be because they now plan to support the president’s agenda, because the only specific that President Obama offered was that we should all be specifically hopeful about our collective future.

If I believed that starting tomorrow morning the Republicans would be on the team, ready and willing to row in the same direction, I suppose I could celebrate the moment as some kind of turning point. But I don’t even believe that a little bit.

Why? Because it’s horse sh#t, that’s why. And if you have any doubt about this, you obviously changed the channel prior to hearing Louisiana’s Governor, Bobby Jindal deliver the Republican response to the president’s speech.

Jindal has spent the last week or more appearing on talk shows, bragging about how he would not accept some of the money President Obama’s stimulus bill provides for Louisiana. How much of the money, you ask? Well, instead of taking the roughly $4 billion that would be available from the stimulus spending, Jindal is only going to take about $3.9 billion. Once again, Republicans are treating me like I’m an idiot, and frankly I’ve had about enough of that.

The issue that needed to be addressed, in my mind anyway, is what we’re going to do about our insolvent banks. Are we going to bail them out again? Are we going to allow them to default and be taken over by the FDIC? Or, are we going to start using the “N” word… Nationalization.

Citigroup, as just one example, has been in negotiation with the administration since at least this past weekend, according to published reports. As a bank, in terms of capital adequacy, they’re dead man walking. Capital adequacy, in broad terms, is the ratio between some measure of capital to a bank’s total assets. Don’t worry… I’ll explain…

To keep things simple, let’s say a hypothetical bank has $100 in assets, and $90 in debt. That means the bank has $10 in capital or equity, and the bank’s capital adequacy ratio is 10%. Now, assets as we’ve all learned the hard way, can go up or down. A capital adequacy ratio of 10% means that the value of the bank’s assets could fall by up to 10%, and the bank would still have enough money to pay back its depositors.

But what if our hypothetical bank had debt of $99. Then the bank’s capital adequacy ratio would be 1%, and that would mean that if the bank’s assets fell in value by more than 1%, the bank wouldn’t be able to repay its depositors… it would be insolvent, and the FDIC would take it over and pay the depositors the guaranteed amounts. By taking the bank over as soon as its capital adequacy ratio falls below accepted levels, the FDIC does so with the minimum amount of risk.

So, without getting into a discussion over what capital adequacy ratios are, you should be able to see clearly why such a ratio matters so much.

There are, however, different types of “capital”. There are preferred shares, common shares, and believe it or not, deferred tax credits can be included in a bank’s capital. Deferred tax credits occur when a bank loses money in one year, and they can be applied against taxes due in future profitable years.

One measure of capital is called Tier One Capital, and it allows for common shares, preferred shares, and deferred tax credits to ALL be included in a bank’s capital. The other measure of bank capital is called Tangible Common Equity or TCE, and this methodology only allows common shares to be included.

Obviously, a TCE calculation results in a lower capital adequacy ratio than if Tier One was used, and Treasury Secretary Tim Geithner has said that the bank “stress tests,” that begin tomorrow will focus on TCE, meaning that only common shares will be included in a bank’s capital calculations.

You see why, right? Because preferred shares are more like debt than equity. Common shares are pure equity. You buy common shares in a company and what you get is the right to control the company by voting for its Board of Directors. As an owner of a company’s common shares, you are in theory entitled to a share of future profits… but the company is under no obligation to share that equity or pay out any dividends. If the stock goes up you may be able to sell your shares at a profit to another investor, but other than that, any money you receive from the company is at the discretion of the company’s management.

Preferred shares are quite different. Preferred shares are often required to pay dividends, which is a lot like having to pay interest on a debt, and they may come with rules that require the company to buy them back at some point in the future, or in the event of some significant transaction, such as a merger. And, in the event of the company’s bankruptcy, preferred shareholders are repaid from the liquidation of the company’s assets, after the creditors, but before common shareholders.

To-date. the government has given Citigroup $45 billion in cash, and received $52 billion in preferred stock. The $7 billion difference that was paid by the bank can be thought of as an insurance premium, in exchange for roughly $300 billion in government loan guarantees. But to-date, we have only funded Citigroup, and all of the other distressed banks that received TARP funds, through the purchase of non-voting preferred shares of stock that pay an annual dividend of 5-8%, and cannot be converted into common shares… so they cannot dilute the common shareholders share of the bank’s equity. Also, under the preferred shares arrangement, Citigroup is obligated to buy the government’s preferred shares back in five years.

Is it starting to become any clearer? It will in another paragraph or two…

In a TCE calculation of a bank’s capital adequacy ratio, the preferred shares are not included in determining the bank’s capital, but we taxpayers bought preferred shares, so the money we put into the bank… the $45 billion in the case of Citigroup… can’t be included in the bank’s capital adequacy, and that’s why Citigroup now wants the government to convert its preferred shares to common shares. By doing so, the government will:

1. Give up the roughly $3 billion in annual dividends that the government would receive as a preferred shareholder.
2. Lower its position to that of a common shareholder, so if Citigroup does eventually become insolvent, U.S. taxpayers would be paid out dead last… after the bank’s creditors and holders of preferred shares.
3. Give up the guarantee that the preferred shares will be bought back by Citigroup in five years.
4. Gain the right to vote to elect the bank’s Board of Directors, which means the government would be directing the bank’s policies and strategies. (This one may sound okay, but withhold your judgement for a moment.)

Citigroup common shares are worth roughly $12 billion today. So, if you convert the government’s $52 billion investment into the bank’s common stock… the government would own 80% of Citigroup! Remember when I said that the government would gain the right to elect the bank’s Board of Directors as common shareholders… and it didn’t sound like such a bad thing in point number four just above?

Well… my friends and neighbors… that’s not just A VOTE for the Board… that’s THE VOTE. An 80% owner of Citigroup is THE owner of Citigroup. And that, my dear Republicans and Democrats… liberals and conservatives… is NATIONALIZATION… the “N” word… whether President Obama wants to use it or not.

Tonight’s speech was uplifting, I suppose. But we need answers… real solutions… real bipartisanship. I don’t need to see happy legislators applauding a rock star president. I’m sorry President Obama… this isn’t about confidence… it’s not a psychological problem. It’s God damned rock hard real. People all over the country are crying themselves to sleep tonight… and every night… people don’t lack confidence… they’re afraid and they should be.

I won’t stop demanding action until that crying stops. Because I feel I know too much about the people of our nation… and if you don’t take action soon… if too many people continue to fall into the abyss created by this meltdown… I fear we’ll start hearing more people using the “N” word. And it pains me to say that I fear that when desperate people with nothing to lose start saying it… it won’t stand for “Nationalization”.