Citigroup’s government rescue signals depth of banking woes
San Francisco Business Times - by Mark Calvey
The government’s decision to potentially absorb hundreds of billions of dollars of losses on loans and other assets languishing on Citigroup’s books is a sign that trouble at the nation's largest banks is becoming wider and deeper than regulators initially assumed.
And it's trouble that may get worse before it gets better. The industry’s woes may worsen in the months ahead as the economic downturn takes a greater toll on consumers’ ability to repay loans and the quality of commercial real estate mortgages, which will further erode the value of securities backed by such loans.
Citigroup’s problems have been thinly veiled, given the tap dance the bank and regulators performed in an effort to keep the New York bank’s purchase of Wachovia on track even after a private buyer, Wells Fargo, stepped forward with a higher price as part of an offer that didn’t require assistance from the Federal Deposit Insurance Corp. Citi was also seen by some as the major bank needing government help when the Treasury Department debuted a program in which it required nine major banks to accept direct government investments in their companies.
In addition to loan problems contributing to about $20 billion in losses over the previous four quarters, the bank has deep-rooted problems in integrating the many pieces stitched together over the last decade or so.
With investors pummeling Citibank’s shares toward $2 last week, the government stepped in Sunday night with a plan to rescue what was once the nation’s most powerful bank.
Under the rescue plan unveiled by the Treasury Department, the Federal Reserve and the FDIC, Citigroup (NYSE: C) and the government have targeted a pool of about $306 billion in troubled assets. Citigroup will assume the first $29 billion in losses from the pool and 10 percent of losses beyond that point. Additional losses from the pool will be dumped on the nation’s taxpayers.
The government will also receive warrants to purchase shares in the bank as part of the plan in which it will invest a further $20 billion into Citigroup on top of the $25 billion invested in the bank as part of the Treasury’s direct investment.
“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the Treasury Department, Fed and FDIC said in a joint statement Sunday.
Citigroup’s Citibank is a significant player in the San Francisco Bay Area banking, with about 1,500 employees and 108 branches in the 10-county region. Citi has a total of about 3,100 employees in the Bay Area. San Francisco is also home base for the president of Citibank California, Rebecca Macieira-Kaufmann.
Under the terms of the bailout, Citigroup cannot pay a dividend on its common stock of more than a penny per share per quarter for the next three years.
It would not be surprising to see a public backlash emerge over the Citibank rescue plan, specifically in not requiring a change in the top management nor the sale of parts of the bank. The rescue plan emerged even as General Motors, (NYSE: GM) Ford (NYSE: F) and Chrysler are being criticized for coming to Washington for a federal bailout with no plan in hand for how their businesses will be restructured for long-term survival.
The Citibank rescue is also likely to come under criticism for privatizing profits made from the bank’s high-risk bets, but placing losses on the taxpayers’ shoulders.
President George W. Bush already said Monday that there could be similar plans based on the Citigroup rescue for other financial institutions needing help.
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