November 24th, 2008
07:25 PM ET

CitiGroup gets your money

[cnn-photo-caption image=http://i.l.cnn.net/cnn/2007/BUSINESS/10/11/gulf.inflation/art.dollar.bill.gi.jpg]Program Note: Be sure to tune in to watch Ali's full report on breaking news on the government's economic rescue effort tonight on AC360 at 10pm.

Ali Velshi | Bio
CNN Senior Business Correspondent

Back after Hurricane Katrina – after covering so many stories about how the insurance companies seemed to be deliberately trying to find ways to not pay the legitimate claims of insured hurricane victims, I embarked on a mission to find someone who had a good plan to work around the insurance companies. A way to insure your home against risk without going through one of the big, heartless companies. Know what I found?


In fact, there's no way to spread risk without pooling it. And insurance companies are the very pooling of that risk. As unsavory as it is, they do it, and the only reason they engage in the risky business, is because there's a promise of a good reward.

Its the same thing with banking. There are few ways to make money more easily than paying someone a little bit to hold their money, and then lending that same money to someone else for more money. The risk is that the person you loaned it to doesn't pay you back, and the person who loaned YOU the money wants it back. Someone's legs are going to get broken in the process. It's a risky business, but if someone doesn’t do it, people won't be able to borrow money to take their own risks – risks that could make them rich, and employ other people.

Because of these risks, companies who engage in them, at the highest and most important levels, are called "systemically important financial institutions." That includes AIG, and Citigroup. And its why they got bailouts. Many people point to the failure of Lehman brothers as the turning point in this financial crisis, but Lehman was an investment bank – not considered "systemically important." In other words, if Lehman simply disappeared, would it have a disproportionate impact on the economy? Probably not – or at least that's what we thought at the time.

So is GM "systemically important?" If it fails, tens and possibly hundreds of thousands could be out of work. But do its tentacles expend so far that it will trigger failures across the economy? Many say no – you'll still be able to buy a car.

For that matter, are YOU systemically important? if you lose your house, how does it affect anyone else? Inititially, it doesn't. But when enough of us lose our houses, our banks can fail (making it harder or more expensive for others to get loans), as neighbors, our own home prices are lower, because there are more houses available for sale, etc. In an of yourself, you are not "systemically important." But collectively, you are.

Feel free to use this argument when negotiating with your bank. Or if you feel like asking the government for a bailout.

Filed under: Ali Velshi • Bailout Turmoil • Economy • Raw Politics
soundoff (5 Responses)
  1. Dorothy Matthews

    The auto industry should be required to go to the oil companies for at least a portion of their bail out.

    December 3, 2008 at 10:37 pm |
  2. Eascogal

    While the government is bailing out corporations and banks to start afresh....why shouldn't the people be bailout too by pardoning bad debts?

    November 25, 2008 at 10:48 am |
  3. Teresa, OH

    Ali, you have a wonderful and simple way of explaining things and it is much appreciated.

    While I will be able to buy "a car" ... will I be able to buy an american made car whose company is owned primarily by americans?

    November 24, 2008 at 8:06 pm |
  4. Cindy

    I think that it's ridiculous that we are bailing out even more banks and businesses! They made the poor business decisions and if it wasn't for so many people going to lose their jobs and everything that they own I'd say let them fold!

    What I don't understand is why bail out Citicorp but not the automakers. That makes no sense. They all made ridiculous business decisions and had money hungry tyrants running them. There is no difference in the two. If either fold many people lose everything.

    The only thing I hear is the automakers don't have a plan...well does Citicorp!? Did AIG!? I mean we have kept on and on bailing them out. And just because they do have a plan doesn't mean that they have to follow it once they get the money.


    November 24, 2008 at 7:51 pm |
  5. Max

    Yeah ... I am sure those EXECs that ran them into the GROUND were HARD done BY in their LIVES!!!!


    November 24, 2008 at 7:28 pm |

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