Who is Paying for the Financial Bailout?

It is frequently said that the taxpayer is paying for the $700b that is being used to stabilize the financial system. In a sense this is true in that the government is incurring debt that will have to be repaid someday. However, taxes have not been raised for anyone to fund the TARP program.

However, savers are the one group who are currently paying real dollars to fund the recapitalization of the financial system. In order to recapitalize the banks to prevent bank failures, the Federal Reserve significantly reduced the federal funds rate. Essentially, this increased the income to the banks by increasing the spread which was accomplished by lowering the interest rate that banks pay to borrow funds.

Total interest, both taxable & tax exempt, reported to the IRS by individual tax payers in 2007 was $347.41b ($268.1b taxable interest). Assuming that interest rates earned by tax filers declined 80% from 2007 and that balances in accounts on which interest is taxable remained constant, reduced interest rates will reduce treasury tax receipts by $56.4b and will reduce the interest income of US taxpayers with savings by $277.93b. This $277.93b is a direct transfer from US taxpayers who are savers to bank balance sheets.

Citigroup Sells Phibro

Citigroup has sold its energy trading division which has had average annual earnings of $375 million over the last 5 years to Occidental Petroleum for $250 million which is less than 1 year's profits for the energy trading hedge fund. Generally, the price of an acquisition if several times the annual earnings of the subsidiary being sold. So, why did Citi sell Phibro for $250 million when the price would typically have been in the area of $1.5b? You may recall that there has been a lot of controversy in the press over the $100 million pay package for Andrew J. Hall who is an energy trader at Phibro. I suspect that Occidental as part of the acquisition agreement has agreed to pay Hall the $100 million bonus that Citi owed Hall. Essentially, I believe that Citi is still effectively paying the bonus funded through a lower than normal sale price of Phibro but since Occidental will be making out the check, the bonus will not be subject to review of the US Government.

The US taxpayer has lent Citi $49 billion and should insist that Citi receive a fair price for the sale of Phibro and block the sale as currently structured. If the $100 million bonus to Andrew Hall was inappropriate then it should be dealt with directly rather than permitting Citi to do an end run. I also find it irritating that the energy trading activities of Phibro have made Citi and Andrew Hall so much money in the past through speculative energy trading which has only resulted in $4 gallon gas and unemployment and higher costs for the rest of us.