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Citi Saved by Uncle Sam
Citigroup, which almost went bust back in the 1980s with too many bad Latin American loams on the books, appears to have learned little in the last quarter of a century. It has had to negotiate a deal with the US government to save it from all the bad loans currently on its books. The only difference this time is the debtors appear to be Yankees rather than South Americans.
Reuters summed up the key points as follows:
- Treasury says it and the Federal Deposit Insurance Corp. will provide protection against losses in a pool of about $306-billion worth of loans and securities on Citigroup's balance sheet.
- Treasury to invest $20 bln in Citigroup exchange for preferred stocks
- Treasury says Federal Reserve ready to backstop any additional risk in asset pool through an offer of a non-recourse loan.
Citi's stock price fell 60% last week including a 20% drop on Friday alone – trading at a miserable $3.77 a share. That made the market value of the company $20.5 billion, and two years ago it was $270 billion. Worse, the bailout effectively prohibits Citi from paying a dividend worth mentioning. Again, Reuters said, “The bank cannot pay out more than 1 cent per share per quarter over the next three years without government consent. The quarterly dividend is now 16 cents.” The dividend was one of the most attractive things about a Citi investment by shareholders.
What is unique about Citi is its global reach. It has operations in more than 100 countries, and a bankruptcy or failure would have global consequences far beyond anything one would happily imagine. Traders appeared relieved at the news as Asian markets trimmed losses, and Citi's shares rose over 40% on the Frankfurt exchange.
This bailout is necessary, but at the same time, it is unwelcome. The lesson is the same as that of the other financial bailouts of the last few weeks. When an institution becomes too big to fail, market regulators need to step in and change that status. No institution should be that big. Otherwise, the world will be right back at it again in 25 years.
© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.
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