U.S. Weighs Further Steps for Citi
The banking system in the US have been seeing detrimental times and they need help. What is now happening is the Federal Gov’t is stepping in to give these banks much needed aid. What lots of people don’t understand is that they’re not just giving money away. They are actually investing in these failing companies and becoming part owner of them. Everytime the Federal Government buys stock in these companies, the actual worth of the stock declines. At the beginning of the year, Citi was trading at $7. a share. Now its at almost $1. a share. The article from the New York times is described as very hard to read or as Yves put it, reading the article is hard because it ” is so thick that parsing it is like wading through mud.”
“Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.
Federal officials describe the discussions, which are wide-ranging and preliminary, as “contingency planning.” Regulators are trying to ensure that they are prepared if Citigroup takes a sudden turn for the worse, which they aren’t expecting, these people say.”
First of all, this company has already been rescued 3 times!!! It now seems like the goal of the Federal Gov’t is to keep Citi alive at all costs. According to this excerpt, the Federal Gov’t is already expecting Citi to fail. One argument that can arrive from this is, Why keep bailing out Citi, if it’s done again, then it will be done another time. The issue that comes along with this that the article doesn’t explain is that everytime Citi gets bailed out, the stock holders lost their money and the Gov’t owns more and more of the bank. At this rate, how long would it actually take for Citi to become nationalized and a Government run Institution?
“Citi executives said they haven’t detected signs of corporate clients or trading partners withdrawing their business, even though the New York company’s shares are hovering near $1 apiece — closing Monday at $1.05 on the New York Stock Exchange. Citigroup says it has a strong liquidity position and that its capital levels are among the highest in the banking industry.”
Here we have Citi executives telling everyone the things they need to hear. They are giving hope to the customers that the company is still in good standing with lots of capital and share-holders although the price of the common stock doesn’t reflect a “strong position,” it is true that Citi has lots of investors and capital, but since the Gov’t started buying up Citi Stock as a form of bailout or assistance for these companies, the value of the stock has dropped tremendously, which now has investors comparing Citi to the other financial giants that hit rock bottom last year. At this point, Citi is hoping that their customers have a sort of renewed belief that the company will prosper without any more government aid.
“Also complicating matters, U.S. officials don’t have a template for winding down a company of Citigroup’s size and complexity, which Federal Reserve Chairman Ben Bernanke made clear at a Senate hearing last week.”
This statement taken from Ben Bernanke shows the current state of the US economy in a strange way. It shows that they never had a specific plan or way with dealing with any company as big as Citi. This to me is a another shot at showing Citi shareholders that the company is simply too huge to actually fail like other institutions did. It also shows that now emergency planning is being done but its late in the game. This also shows how the Government is in the the position where they have to help the financial giant because there’s no other alternative that makes sense.
To better understand Bank Nationalization, check revolutionaryrob’s and jcajuste’s posts about what Professor Roubini talks about.
