Wednesday, March 18, 2009

Short-Term Gain for Long-Term Pain

Author and National Review commentator Jonah Goldberg writes that he’s bullish on Citibank, despite the company’s recent well-publicized financial problems. Goldberg knows politics and, better yet, understands the notion that markets laid bare to bailout fever are ripe for arbitrage. Over the last week or so, he’s purchased 1,500 shares of Citibank stock for as little a dollar a share, betting that government aid and building momentum will buoy the stock and return a handsome profit. Others have placed the same wager. A good bet? That depends on your perspective.

The key lies in the federal government’s subsidy of large ailing banks like Citibank. And if the government continues to prop up Citibank, as it surely will, it is highly likely that the bank will break out of its historically low trading range. Moreover, since Federal Reserve Chairman Ben Bernanke has on several occasions reaffirmed a pledge that the government simply won’t let big banks fail, the downside risk on this sort of short-term trade seems rather small.

But the scenario presents a decidedly more bearish outlook for our economy. The idea that the billions spent on failing enterprises like Citibank won’t end up hurting the economy by saddling future generations with enormous debt, while simultaneously redirecting capital that might otherwise spur the sort of innovation and growth that could help bring us out of this recession and strengthen our economy in the years ahead, might not be readily apparent. But, the federal government cannot get us out of this recession with more government spending. The money has to come from somewhere, and in this case much of it will be at the expense of current and future innovators, start-up companies and entrepreneurs, and proven industry leaders.

Sadly, a profit turned on a well-timed trade of Citibank stock will have hidden costs that dwarf any such short-term gain.

John C. Kalitka

1 comment:

Anonymous said...

What's VERY disconcerting are the two executives at CITIBANK who have been identified so far who bought millions of dollars of Citibank shares just 2 days before CEO Vikram Pandit announced that Citi was turning a profit in Jan and Feb of 2009. Have these people NOT heard of insider trading? Why are these earnings not being stripped. Frankly, the uptick in Citibank's price as well as the market in general in the last week is based on hype, delusion and desperation because there has been no fundamental change in the underlying toxic assets at Citi or any other bank that caused this financial meltdown. So, if the media and desperation can float the market high enough, there's short term money to be made, but frankly, it's the kind of illusory value and prosperity that Americans have too long filled their 401k's and counted their paper gains as real. Until we have serious changes and a Treasury rescue plan, this is all overleveraged hype! Kimberly Wilcox

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