For me, it seems that structured finance and globalization boosted by computer technology started to reverse. I can’t see where the growth will come from in the near future.

There needs to have global rules that govern such mega banks if capitalism wants to survive the downside. I guess most people will opt to scale back finance and let creditors and shareholders to take a hit as RR suggested.

In my opinion, there also needs industry policies that govern what kinds of products can be produced and what is promoted to produce to save the environment. We can’t leave these decisions entirely for the private sector.

The federal government is under strong pressure from the bankers to decide
what to do about AIG and Citigroup. They want a template, a guide to future
governmental action.

Continuity with the past should be maintained, where possible. All the
contracts on the books of these two companies that were entered into as a
part of the regulated banking system should be treated exactly as the FDIC
would treat similar contracts when smaller banks go under. Equity holders
will be wiped out. Bondholders should be treated exactly as they would be
in the case of a smaller firm. The federal government should use its
resources to insure that AIG and Citigroup are not too big to fail by
backstopping them as they have historically treated all banks that fail.

On the other hand, all those contracts that were developed outside the
regulated banking system, such as Credit Default Swaps and other derivatives
are a new entity, not entitled to be treated as a part of the historical
regulated system. These contracts were deliberately excluded from Federal
regulation and oversight. They should continue to be outside Federal
jurisdiction. Those non-regulated contracts that cannot be fulfilled by the
private parties that own the contracts will not be fulfilled.

The implications of such a decision would be to allow counterparties to AIG
and Citigroup in the shadow banking system to lose assets with the demise of
AIG and Citigroup.

The main benefit of following this practice would be to eliminate many of
the toxic assets from the books of banks and other financial institutions.

Not true. Citigroup and AIG can be allowed to fail. The counterargument is that Continential Bank of Chicago took seven years to close down and it was much smaller. Time and trouble is not the issue. Fairness to all parties is the issue.

Other nations have a legitimate interest in U.S. policy toward mega banks. But they are only one among many interests. What we need is a forthright statement from the Obama administration of what debts they will guarantee and which they will not. I don’t think the U.S. Treasury should guarantee all debts. But some should be.

These stakes often were structured, I think, as convertible bonds that automatically convert into common equity in the future. Most were not straight equity investments.

Precisely, some were claiming way into late last year that they were still above water in their investments. No doubt it’s been a Big Flood year for some SWFs.

But honestly do you really think that big private investors are completely helpless, particularly those who “own” lobbyists or interest groups close to the powers that be?

If someone else wants to risk tens to hundreds of billions to have a stake in Citi, they can speak up. No one really wants to put money to nationalize a megabank, and the US is only doing so because it doesn’t have much choice.

Ying: Who are the stakeholders and shareholders of citi?

That’s not the big question. The big question is how should the shareholders and stakeholders interact with Citi management.

Bank CEO’s have traditionally been interested in SWF’s because it was felt that they would be hands-off investors. If the US government gets involved, it can’t be hands-off, and if the US government goes hands on, so will the other major holders.

plus, the US has — i think — the lead in regulating citi. again, b/c US taxpayers are the ones on the hook for the downside given the commitment to protect citi’s creditors from losses.