WASHINGTON: America woke up yesterday to the news that, for the third time in just two months, the US government is helping another financial group that is on the brink of collapse. The $20 billion cash infusion into Citigroup comes on top of a $25 billion injection the bank received last month under the Troubled Asset Relief Program that was passed by Congress to shore up the financial industry.
The rescue plan came together after a weekend of intensive negotiations involving the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation. The announcement was made late on Sunday night. “With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy,” the three agencies said. “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.”
The regulators stepped in to protect Citigroup from losses on a $306 billion pile of troubled US home loans, commercial mortgages, subprime bonds and corporate loans when the firm’s tumbling share price sparked concern that depositors might pull their money and destabilize the company, which has $2 trillion of assets and operations in more than 100 countries. As foreclosures on those mortgages spiked, it left Citigroup and other financial companies racking up huge losses on soured investments. The company has failed to turn a profit during the past four quarters.
“If anybody’s too big to fail from the financial system’s point of view, it is Citigroup,” said Brian Barish of Cambiar Investments in Denver, which manages about $6 billion and doesn’t own Citigroup stock. “The government doesn’t need to be in this to make money. If they lose a few bucks on this, but save the system, it’ll be worth it.”
Citigroup was once the largest and most powerful banks in the country until the credit crunch. The group is a large, interconnected player in the financial system. Analysts say it would wreak havoc on the already fragile financial and economic conditions, if it collapsed. Citigroup is the world’s largest provider of credit cards and was once America’s largest bank as it pioneered the one-stop-shop model combining business and consumer financial services.
Citigroup shares rocketed more than 60 percent yesterday after the rescue was announced. Its stock had dropped more than 60 percent in the past week to a 16-year low, and had lost $160 billion of market capitalization in the past year.
According to analysts, Citigroup is the most vulnerable among the major US banks — especially after it failed to acquire Wachovia Bank, which was bought instead by Wells Fargo Bank.
That was a missed opportunity for Citigroup to get its hands on much-needed US deposits that would bolster its cash position. Citigroup was especially hard hit by the meltdown in risky, sub-prime mortgages made to people with tarnished credit or low incomes.
