Citigroup's Bailout

"The government rescue of Citigroup Inc. reversed the perilous slide of the company's stock, but pressure is mounting on its executives and directors to do even more to stabilize the financial giant. ... Citigroup executives acknowledged Monday that the government made it clear in weekend negotiations that it expects the company to continue to reduce its appetite for risk, and to seriously weigh more drastic actions, including possibly breaking up the company. Gary Crittenden, chief financial officer, said in an interview that Citigroup has no 'preconceptions' about its vast array of businesses. 'The constituent parts could change,' he said. 'We're looking all the time to see it there are possible combination, either buy or sell, that make sense for the organization.' ... The government did not push for the ouster of Citigroup's chief executive, Vikram Pandit, as part of the agreement, as it did with the CEO of American International Group Inc. when it bailed out that company. ... People involved in the frenzied negotiations said in interviews that Citigroup executives realized by the middle of last week that the plunge in the company's shares--they fell 60% last week-posed a major threat to the company's viability. ... The company faces swelling losses on loans that aren't covered under the government's loss-sharing agreement, which amounts to insurance on a $306 billion pool of assets. Under the plan, Citigroup will shoulder the frst $29 billion in losses on that pool. After that, three government agencies will absorb 90% of any remaining losses, which amounts to $249 billion. ... The assets aren't just risky ones; the government insisted that the agreement cover entire asset classes, so that Citigroup couldn't simply dump toxic loans and securities in the lap of taxpayers. Absent from the arrangement are Citigroup's giant credit-card business, where defaults have been rapidly piling up, and its overseas lending operations, which are also showing signs of stresss. ... In exchange for covering hundreds of billions of dollars in potential losses, Citigroup is issuing the government a total of $27 billion in preferred shares, in which the government will receive regular dividends. .... But over the weekend, as they poured through Citigroup's books it became clear to top officials that the company needed government help", my emphasis, David Enrich and Deborah Solomon at the WSJ, 25 November 2008.

"Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. U.S. taxpayers, who injected $25 billion in Citigroup last month, will now pour in another $20 billion in exchange for preferred shares paying an 8% dividend. Taxpayers will also help insure $306 billion of Citi's mortgage-backed securities. ... Dilution for Citigroup investors? Yesterday's 58% pop in the bank's share price suggests the bailout is a good deal for equity holders. For taxpayers, it is another large exposure for uncertain benefits. ... We wish Treasury Secretary Henry Paulson, New York Federal Reserve President Tim Geithner and Fed Chairman Ben Bernanke cared as much about their obligations to U.S. taxpayers as they do about the expectations of Asian investors. Few would argue that a bank with Citi's size and scope wasn't too big to fail, but is it too much to ask Washington to develop a policy that isn't crafted in a scramble of private phone calls? ... The writers at the Deal Journal blog remind us of one particularly egregious massaging, when Mr. [Robert] Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating that Enron deserved. ... While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. ... Citi also needed resusitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s. Such a record of persistent failure suggests a larger--you might even call it 'systemic'--management problem: If taxpayers have to risk so much to save Citigroup, then regulators should at least exert the discipline to break up this behemoth so it is never again to big to succeed, much less to fail". Editorial at the WSJ, 25 November 2008.

Think about this: the fall in Citgroup's stock price, not the composition and value of its assets is what Citigroup executives think threatened its viability. These clowns should all be fired. Why should government officials pour "through Citigroup's books"? What did KPMG get paid $88 million for in 2007? To look the other way when problems arise?

I disagree, Citigroup is not too big to fail. Uncle Sam isn't that big. Kill Citigroup. When a criminal commits three serious felonies, many states habitual offender statutes make the felon's next prison sentence, say 25 to life. The least we can do with Citigroup is carve it up and sell the pieces.