Not Looking Good for Citi

by Dollars and Sense

With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company's executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.

In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup's chief executive, Vikram S. Pandit, or sell all or part of the company.

Other options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.

The course of action, however, remained uncertain on Friday night, these people said, and other options may yet emerge. But after a year of gaping losses and an accelerating decline in share price, Citigroup, which has $2 trillion in assets and operations in scores of countries, is running out of time, analysts said.

After a board meeting early Friday morning, Citigroup's management and some board members held several calls with Henry M. Paulson Jr., the Treasury secretary, and with the president of the Federal Reserve Bank of New York, Timothy F. Geithner, who later emerged as President-elect Barack Obama's choice to be Treasury secretary.

As Citigroup's stock sank during the day, falling 68 cents to close at $3.87, the Federal Reserve was carefully monitoring how much money corporations and other customers were withdrawing from the bank, people involved in the discussions said.

The Fed was trying to ascertain whether the tumult in the stock market could escalate into something worse.

So far, these people said, most customers and clients remained committed to Citigroup.

The market shrugged off the prospect of a Citigroup meltdown and focused instead on the leak that Timothy Geithner was Obama's pick for Treasury Secretary. Citi fell another 20%, its shares dropping below $4. Have banking catastrophes become so routine that it is now assumed that the officialdom will clean up the broken china and put the bill in the post? I recall when Citi nearly failed in the early 1990s (the big culprit then was junior loans on a lot of commercial development in Texas that wound up being see-throughs) and it was white-knuckle time.

However, there is a big difference between this and other financial firm meltdown episodes. Despite the near vertical descent of the stock, there appears to be no run on the bank. And if there is no run on the bank, or flight of counterparties, there is no need for a rescue.

Labels: bailout, Citibank, Citigroup, financial crisis, Naked Capitalism, Yves Smith

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11/22/2008 10:51:00 AM