Citigroup Bailout: Saving the Ogre

Lehman Bros. stockholders must be getting ready to file a class-action suite after this morning’s news (from MarketWatch):

Citigroup shares jumped by more than 50% Monday morning after the U.S. government agreed to rescue the nation’s once largest bank and the pioneer of the one-stop-shop for business and consumer financial services in an eleventh-hour, $326 billion plan to avoid financial collapse.
The government agreed to invest $20 billion in Citi and to guarantee as much as $306 billion of Citi’s troubled assets in a deal reached Sunday. The deal also gives the government control of executive bonuses, and limits dividend payments.

Citi’s shares jumped by more than 50% after the news.

WaMu no longer holds the dubious honor of being the biggest bank bailout in history. According to BusinessWeek,

Citi has $2 trillion in assets, or approximately six times more than Washington Mutual’s and three times more than Wachovia’s.

At midyear—June 30, 2008—the Office of the Comptroller of the Currency says, Citi’s primary banking unit, Citibank NA, held $37.1 trillion in total notional value derivatives, including $3.6 trillion in credit default swaps. Those swaps in recent months have proven to be the most dangerous category.

The Bailout Soap Opera, Season 2 has begun. The Citi bailout is a good example of how not to bail out a bank. Rescuing banks takes precedence over other industries–including Detroit. But throwing money with minimal parameters at a bloated, inefficient ogre like Citigroup is a big mistake. The bailout is fine, the method stinks. Arnold Kling says it best:

Maintaining Citi as a zombie bank is not really constructive. I would feel better if it were carved up, with the viable pieces sold to other firms and the remainder wound down by government. In my view, getting the financial sector down to the right size ought to be done sooner, rather than later.

From my perspective, the whole TARP/bailout concept is misconceived. The priority should not be saving firms. The priority should be pruning the industry. Get rid of the weak firms, and make good on deposit insurance. Then let the remaining firms provide the lending that the economy needs.

Exactly! We need to think macro, focusing on aggregate results and industry health rather than investor relations–a concept that now refers to the government as the corporation, the public at large as investors, and the Dow as the index of government success–and pleasing well-connected banks. We have smart energy meters, Smart cars, and smart cards. Why are smart bailouts so difficult?

  • Citi should definitely be nationalized. It can’t run itself and has been in trouble as long as I can remember. Chop it up.

  • NashEntLaw


    Here and elsewhere I’ve heard plenty of folks talking about getting rid of weak banks and supporting stronger ones as a guiding philosophy in revamping the banking industry. However, aren’t mega-huge, “too big to fail” banks mostly responsible for this debacle?

    Rather than a handful of huge banks, let’s say that we still had hundreds (if not thousands) of regional &/or niche banks spread throughout the country. Would all of them have drank from the same sub prime punch? Would they all have issued the same ill-advised CDSs?

    Diversity and broad participation are natural insulators from market disruptions like we’re having today; for the same reason every broker will say diversification is a key component to wise investing, why is it that we’re so willing to put all of our banking eggs into so few baskets? More importantly, why is it that many are advocating for further consolidation? Won’t this put us at greater risk in the future?

  • Drea

    Nash–good points. If Paulson & Co. are committed to transparency on all fronts, big and strong will work. The benefits of big/strong used to be that they were reliable, had more resources than regional banks, more financial power. All of those trust-based assets have been flushed down the toilet. But the monster could still work with proper regulatory mechanisms in place. Whether the gov is capable of that is hard to say.

    What does need to happen is that strong units of big banks remain, and the useless ones get flushed out. The big boys are still pillars of the industry, even if they’ve been discredited for the time being. They evolve, the system stays afloat.

    Consolidation is a bad idea, I agree. We might as well rename the whole shebang Bank of the United States and let it be obvious who’s running it. At the same time–reverting to large numbers of regional/local banks sounds progressive but improbable. What role do the large banks play in supporting smaller banks? What does the model look like? Would removing the big boys create systemic instabilities? Moreover, would politicians and execs be forward-thinking enough to surrender the old model for something that would diffuse their own influence? Finally, would regional banks have enough mettle to take up the roles that big banks used to play?

  • Drea

    Another point–consolidation would put us at risk of a big, clumsy business oligarchy. Wait a sec…we may already be there…

  • so, if Citi goes bankrupt, will that cancel out the small fortune worth’s of debt I have stored up on my trusty Citi-card?

  • When I moved from the West Coast to Minneapolis and forgot to update my online Citi Bank Credit Card Account with a balance of $45.00 escalating interest rates and penalties amounted to over $4000 in a matter of five months with no forwarded paper statement alert. Citi Bank was merciless despite my impeccable credit history. And customer service responded to my pleas for understanding with threats and intimidation. Why should I the taxpayer be required to bail out a predatory inhumane machine?