Citigroup Agony Prolonged

posted by Nima

November 24, 2008 · Posted in Business, Interventionism 

The associated press writes in “Government unveils bold plan to rescue Citigroup”:

The government unveiled a bold plan Sunday to rescue Citigroup, injecting a fresh $20 billion into the troubled firm as well as guaranteeing hundreds of billions of dollars in risky assets.

There is nothing bold about injecting $20 billion and guaranteeing hundreds of billions. It’s what we have been doing, keep doing, and will be doing until we’re broke.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

Its collapse would wreak havoc? Like the havoc that we have been seeing since we started to bail out one failing business after another with billions of dollars?

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

There is nothing sweeping about this plan. The stock has been hammered because the company isn’t worth a dime

“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 three agencies said in a statement issued late Sunday night. “We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks.”

How are we protecting the U.S. taxpayer by taking their money and throwing at failed business operations. This is so far from reality, if it wasn’t so sad I would say it’s laughable.

The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief also participated.

This gives us a preview of the “Change” that Mr. Obama is about to bring: The person who will lead the bailout scams will have a different name. That’s about it.

Vikram S. Pandit, Citi’s chief executive officer, welcomed the action. “We appreciate the tremendous effort by the government to assure market stability,” he said in a statement.

Of course he does. Who doesn’t like getting rewarded handsomely for being a miserable failure.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government also received an ownership stake.

…and which of course didn’t resolve anything at all. The new $20 billion will accomplish just as much.

As part of the plan, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

These number are insane. Yet, they don’t match the insanity going on at Citi. This bank has $1.1 trillion in off-balance sheet assets alone. That is only on top of all the defaulting loans already on their balance sheet. $306 billion will be of help for a few months to a year. They will do nothing but postpone judgment day.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

Among all the nonsense I am surprised to actually find something that makes sense.

Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.

…which of course means that the underlying mortgages will have to be adjusted on the books (as they should). More write downs ahead…

Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail. The company has operations stretching around the globe in more than 100 countries.

…and that’s precisely why we should NOT bail them out as I explained in The Economics of Coporate Bailouts.

Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up huge losses on the soured investments. The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs.

…but what they are not telling us is that Citi will pretty soon be writing down massive amounts of simple consumer credit, credit card debt. This appears to be an issue that the media and government don’t even want to hint at.

Again: Citi is a lost cause. Stop throwing more bodies onto the pile. It won’t work. Advertisement: Get your shortlink before someone else does at

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2 Responses to “Citigroup Agony Prolonged”

  1. Thang D. on November 25th, 2008 3:12 am

    I was thinking about buying a Citigroup share today but went for the $5 SUBWAY® sandwich instead… more bang for the buck ;-)

  2. Nima on November 25th, 2008 3:20 am

    True, much more nutritious and no phony bullshit… :)

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