Monday, March 9, 2009

I get why the administration is so reluctant to take over Citi completely.

From Justin Fox:

Monday, March 9, 2009 at 7:30 am

FDIC chairman Sheila Bair doesn't think a full government takeover of Citigroup and other multinational financial institutions is practical or even possible. Here are her reasons, as summarized by Pete Davis:

1. The legal authority to take over large banks does not currently extend to multinational financial conglomerates;
2. The FDIC lacks the funding to conduct such a massive bailout;
3. Other countries have regulatory oversight of these financial conglomerates too, and they may object to a U.S. takeover.

This made me curious as to how much of Citigroup was a domestic commercial bank that the FDIC could take over, and how much was multinational financial stuff outside the FDIC's jurisdiction. So I took a look at the balance sheet from Citi's new 10K (pdf, with numbers as of Dec. 31, 2008).

First, there's the division between Citigroup and Citibank. Citigroup has assets of $1.938 trillion, and liabilities of $1.797 trillion. Citibank has assets of $1.227 trillion and liabilities of $1.145 trillion. So right there, about 36% of the company's assets and liabilities are outside the bank.

Then there's the bank itself. Its balance sheet separates deposits in U.S. offices, which are insured by the FDIC, from deposits in offices outside the U.S., which aren't. Of $755 billion in deposits, $241 billion are in the U.S. and $515 billion outside (the numbers don't add up because I'm rounding).

The first striking thing there that Citi's U.S. banking operation just isn't all that big: J.P. Morgan Chase has $722 billion in U.S. deposits (and $287 billion outside the country). Washington Mutual, which was not deemed by regulators to be too big too fail, had $182 billion in deposits, in the same territory as Citi's U.S. bank.

The second is that if Citibank's overall business breaks down along domestic/foreign lines pretty much as deposits do (which probably isn't quite the case, but close enough), that gets you to $392 billion in assets and $365 billion in liabilities. That's the part of Citigroup that the FDIC has the authority to take over. I bet the FDIC could handle it, at least if it gets the new $500 billion credit line it wants from Congress. But this would leave an entity (or entities) with about $1.5 trillion in assets and $1.4 trillion in liabilities to be taken over by foreign governments or fail in pretty much the same unruly manner that Lehman Brothers did.

To repeat: Citigroup has liabilities of $1.797 trillion. The deposits that the FDIC has some responsibility for (up to $250,000 per depositor) add up to $241 billion. So we have this reasonably sensible system for winding down troubled banks, but when it comes to the most troubled big banking company in the country, said system only covers a fraction of the overall operation. Which leads to a couple of conclusions:

1. I get why the administration is so reluctant to take over Citi completely.

2. I don't get why we all (I'm including myself in this) thought it was okay to allow the creation and growth of gigantic financial companies for which we had absolutely no plan for winding down in case of trouble."


  1. donthelibertariandemocrat Says: Your comment is awaiting moderation.

    I think it's important to see what Citi's plan actually amounts to:

    " Citigroup Inc (C.N) may explore further asset sales after divesting its Smith Barney retail brokerage unit to Morgan Stanley (MS.N), but the banking giant is likely to have a tough time finding buyers.

    Chief Executive Vikram Pandit is trying to shed hundreds of billions of dollars of assets and reduce risk after Citigroup suffered $20.3 billion of losses in the year ended Sept. 30. The bank is expected to post another loss for the 2008 fourth quarter when it reports results this month.

    Citigroup has considered selling its Banamex Mexican banking unit and Primerica Financial Services, people close to the matter have said. The Wall Street Journal reported on Monday that CitiFinancial, international retail-brokerage operations and the private-label credit-card businesses may also be put on the block. The bank declined to comment."

    So, there plan is to sell many of their assets going forward. They need to do this. More here:

    "TOKYO (Reuters) - Citigroup plans to sell its 26 percent stake in Japanese online broker Monex Group Inc as part of the struggling U.S. bank's efforts to raise cash, the Yomiuri newspaper reported on Friday.

    Shares in Monex, Japan's second-largest online brokerage in terms of customer accounts, fell 8 percent on the report, cutting the value of Citigroup's stake to 14.1 billion yen ($144 million).

    Citigroup, which has received $45 billion of U.S. taxpayer funded capital injections since October, appears to have already sounded out several financial institutions on the Monex stake, the Yomiuri reported.

    Yoshito Shimoyama, a spokesman at Nikko Citi Holdings Inc, Citigroup's holding company in Japan, declined to comment.

    Citigroup is also trying to sell Nikko Cordial, a bricks-and-mortar retail broker with 109 branches across Japan."

    One big problem is that Citi does not want to sell Banamex, its crown jewel. In fact, you could say that we're funding Citi so that it can keep control of Banamex. We're funding Citi so that they don't have to have a fire sale of their assets. Here, from Inca Cola, are a couple of other problems:

    "So here's the question that's been itching at me all weekend: Do Citigroup's intentions regarding Banamex signal that the US Gov't is only (or majority) buying into Citi Holdings, the toxic end of C? "
    "However, if in all likelihood it's not true and the US gov't is getting 36% of the whole shebang, Citigroup is undoubtedly breaking Mexican law by holding onto ownership of Banamex. So either Mexico changes the law to suit present circumstances (possible, though it will be an absolute political field day for Calderon's opposition) or Banamex will have to be sold to a third party, something that Pandit clearly doesn't want to happen."

    These are problems with selling the assets. Even Banamex might be worth only $15 Billion Dollars, which makes me think that this whole thing is a farce.

    Then there's this from Zero Hedge:

    "Citigroup's 10-K filing makes it clear why regulators appear committed to (or perhaps are stuck with) a strategy of supporting the full capital structure (including holding company debt), rather than subjecting the bank to the Lehman treatment. Citigroup has a daunting $1.9 trillion of assets on the balance sheet alone (not counting off-balance sheet exposure). The balance sheet is essentially supported by an uneasy alliance between the U.S. government and the company's depositors and other creditors, since the market value of the equity is so depressed. Deposits totaled $774 billion at year end, including nearly $500 billion outside the U.S. In a liquidation of a U.S. insured depositary institution, the 10-K notes that U.S. deposits would have priority over deposits outside the U.S., as well as over parent company claims. But we can't imagine the new administration will want to precipitate an international crisis over whose-deposits-get-paid-off-first."

    In other words, foreign investors, like China, are claiming that they were also implicitly guaranteed by the US government. This problem seems to be separate from the assets problem.

    Bottom line: an awful mess. The real question is whether or not leaving Citi in charge will make this all worse, by holding on to failing assets or accepting large losses in order to keep Banamex, etc.

    What's clear to me is that Citi could, in fact, make things worse going forward. Yikes.

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