Government Exit Strategy: Like a Snake Eating Its Own Head 1 comment | by: Russ Winter September 26, 2010
The dance of the trying to exit its holdings (long after the supposed end of the recession) continues on. Now the size of the Government Motors offering has been reduced [Bloomberg: GM Reduces IPO]. This whole transaction is like a snake trying to eat its own head. That is because any "merit" GM has today is caused by the direct $49.5 billion government involvement. Once the government "bailout nation" involvement gets removed in any serious way, the investment "merit" disappears. Heck, they might even have to change the name from Government Motors back to General Motors, and who wants to be a shareholder in the latter?
In fact, who wants to be an investor in the real economy period, when you have the "sterling backed" government bailout economy. But still the government wants to look good on its involvements for political reasons, so as to deflect the criticism that they have lost hundreds of billions if not trillions in these various schemes. What this should suggest to thinking people is that the markets in general are fictitious and thus will be continually subjected to snake eating exercises. For instance, the government is supposed to be exiting its Citigroup (C) position this year, but so far this has been tentative [Bloomberg]. This makes these follies essential to follow.
The "government economy" is absolutely dominant. The largest 1% of banks now control 80% of bank assets ($10.3 trillion) . A large portion of those assets are either guaranteed or directly owned by the government. The government "regulates" this by permitting the banks to engage in a valuation method that both takes into account snake eating its own head dynamics, and also pretends that the economic rout of the last several years was some kind of temporary bad dream and not reality. The problem with that is that the wealth or collateral backing the aforementioned bank assets has eroded significantly. The $10.7 trillion drop in household assets since 2007 is understated (government statistics I remind you), and also propped by government involvement [CNBC: US Household Wealth Drops].
Since the "government economy" is where the game is planned, it seemed natural for the banks, and especially the Too Big to Fails, to heavily finance the government itself. In effect they have taken Aunt Millie's deposits and redirected them into an enormous (and massively expanding) government securities bubble.
This would seem to seal the deal on the TBTF-government you scratch our backs and we scratch yours alliance. Perversely the banks can then truly claim to be doing God's work when the clean up of the bond bubbles comes back to haunt them and the government. No doubt that will grant the banksters leeway to ask for even more bailouts. The problem is that both would have eaten each other's heads in the process, leading to the logical question: Who finances both the banks and the government and who bails them out? I suspect that the answer is nobody.
Disclosure: No positions About the author: Russ Winter
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