Citigroup – Bank of America: Stimulus Programs Used for Overseas Investments

By William Hawkins l December 9, 2008

A Government Accountability Office report released December 2nd raised concerns about the lack of oversight of the financial sector bailout program being administered by the Treasury Department. Three days later, House Financial Services Committee Chairman Barney Frank (D-Mass) said, “When GAO asked Treasury about monitoring, its response was that it had no way of measuring whether the banks receiving the capital infusion were going to increase their lending activity.” So far, Treasury has allocated $150 billion in funds to buy large minority stakes in financial institutions, and has committed another $180 billion to other banks.

The intended purpose of the financial rescue program was to provide banks with the means and the confidence to lend money into the real economy to slow America’s slide into recession, and then to speed recovery. As Interim Assistant Treasury Secretary Neel Kashkari said December 8th, “Treasury expects banks to increase their lending as a result of these investments.” Some of the banks that have gotten the most government aid from Washington would, however, rather invest overseas to help other countries weather the storm.

For example, on November 17th, Bank of America announced it would exercise its option to invest more in the China Construction Bank (CCB), the third largest bank in China whose majority owner is the Beijing regime. Bank of America already owned nearly 11 percent of CCB, but wants to spend $7 billion to up its stake to 19.1 percent. The Chinese government does not allow foreign ownership to exceed 20 percent in any of its state-run financial institutions. Bank of America hopes to share in the profits made by the CCB, which is expected to benefit from the large stimulus program the Chinese government has announced to fund infrastructure projects. The U.S. Treasury has provided Bank of America with $15 billion from the Troubled Asset Relief Program (TARP) in hopes of stimulating the American economy and another $10 billion to Merrill Lynch, which Bank of America is buying.

Citigroup has gotten even more money from Washington than has Bank of America. On November 23rd, the Treasury Department announced a $20 billion capital injection into Citigroup, and agreed to shoulder most of the bank’s losses on a $306 billion portfolio of potentially troubled assets. The fresh infusion of capital came after a $25 billion injection in October.

On December 1st, Citigroup announced that its Citi Infrastructure Partners division was spending $3.6 billion to buy the Spanish toll road operator Itinere Infraestructuras from its parent construction group Sacyr Vallehermoso, headquartered in Madrid. Itinere holds concessions on toll roads in seven countries: Spain, Chile, Portugal, Brazil, Costa Rica, Ireland and Bulgaria. Additionally, it is engaged in the construction of hospitals, airports and transport hub operations, involving public-private partnership (PPP) financing. Citigroup reached a separate agreement to resell some Itinere concessions in Spain, Portugal, Brazil and Chile to infrastructure firms Abertis of Spain and Atlantia of Italy. In the end, however, Citigroup will have increased its overseas holdings.

The Citi-Itinere deal may presage another angle that the bank may play to further divert public funding to private gain. Citigroup had a prior connection with Itinere on a highway project in Virginia. Citigroup was the financial advisor for Itinere’s bid to develop, build, operate and maintain a new 55 mile, 4-lane divided limited access segment of US Route 460 in Prince George County between Petersburg and Suffolk. It would be a toll road which Itinere would get to operate for 60 years. Its parent Sacyr Vallehermoso would be the prime contractor for the highway’s construction.

The Itinere proposal estimated a cost of $1.55 billion, of which $1.06 billion would come from the taxpayer in the form of state and local government funds. Another $621 million would be borrowed with public backing. There would be an equity investment of only $98 million. The planned toll on the road would be 14 cents a mile. There has been a strong push for such PPPs in recent years. The objective is for state and local governments, often urged on by the Federal government, to give up their responsibility to provide “public” infrastructure traditionally financed by gas-tax revenues, instead turning it over to private enterprise to operate at a profit. In the short term, government budgets look better, but in the long run the public pays more for the service because the private half of the PPP has to earn a return on the investment.

This return can be very high, because of the quasi-monopoly power that the enterprise gains from the transfer of taxing authority from the public sector to private interests for a period of decades. Tolls are a form of taxation. Itinere’s main rival for the US Route 460 bid is another Spanish firm already operating PPP toll roads in Chicago, Indiana and Texas, Cintra Concesiones de Infraestructuras de Transporte. Itinere has described its corporate strategy as follows: “the new projects in which it invests have a low profile of risk; freeways of toll and parking; public services lent in a regime of limited competition, with stable and predictable income and expenses.”  At a November 1, 2006 meeting of the US Route 460 Communications Committee chaired by Virginia House of Delegates member Leo Wardrup (R.-Virginia Beach) several members suggested that the Metropolitan Planning Organization (MPO) estimate of the maximum toll that could be imposed might be too conservative, though it was suggested that residents of the area might be charged a lower toll to drive in their own neighborhoods!

In addition to tolls, the private developers expect to profit from setting up concessions such as food, fuel and commercial ventures in the limited access road areas. The land for such operations would be acquired for the enterprise by the state government under the laws of eminent domain. Such projects tend to be very unpopular, so the US Route 460 proposal calls for “a significant public information and outreach program” to gain public acceptance of the project. A July 19, 2007 resolution from the Virginia Commonwealth Transportation Board also urged “the proposers to develop incentive options to encourage freight and through traffic to utilize the new Route 460.”

President-elect Barack Obama announced on December 6th that he would honor his campaign pledge to undertake the largest infrastructure program since President Dwight Eisenhower launched the Interstate Highway System. Obama’s program would cover a variety of areas, including work on schools, sewer systems, mass transit, electrical grids, dams and other public utilities, including alternative fuels. But building and repairing roads and bridges will be a major part of that effort because, as Obama put it, many states have such programs “shovel ready” and can move ahead quickly to put people to work. On December 5th, the American Association of State Highway and Transportation Officials (AASHTO) released their wish list of $64.3 billion worth of highway projects “ready to go” if federal funding was forthcoming. This was followed by a Capitol Hill press conference Dec. 8th, at which the U.S. Conference of Mayors claimed to have $73 billion worth of local projects ready to go.

In the effort to stimulate the economy, officials must not forget to do their duty to safeguard the long term public interest. Oversight of multi-billion dollar loans and construction projects to prevent the misuse or diversion of taxpayer money is crucial. So is avoiding the temptation to surrender public authority to private interests, as in the so-called “public-private partnerships.” PPPs or P3s, as they have become known, can end up costing the general public more money, as the provision of what have always been considered public services for the common good become corporate monopolies for private profit.

William R. Hawkins, a former economics professor and Congressional staffer, is a consultant specializing in international economics and national security issues. He is a contributor to

SFPPR News & Analysis.