Last week, while the federal government continued tossing life jackets to other members of the financial community, Citigroup hit an iceberg. Everyone heard the unique crunching sound that is made when a ship smashes into ice. Then again, maybe it wasn’t ice crunching as much as the cash in our wallets shrinking in value as the feds printed more money to handle the ongoing crisis.
On Tuesday afternoon shares of Citigroup closed at $8.36 on the New York Stock Exchange. By Friday afternoon those same shares were worth just $3.77. Shareholders lost more than 55% in 72 hours. Like investors at other banks and investment firms before them, the investors at Citigroup were shocked to learn that Citigroup had also sunk a lot of money into very risky investments.
Citigroup is in trouble, big trouble. As Congress debated the Great Bailout of 2008, many pundits were asking, “How big must a company be to be ‘too big to fail'”? Apparently, we know the answer to that question. ‘Too big to fail’ is now defined as bigger than Citigroup. We’re just not sure how much bigger.
As late as Sunday afternoon, the White House said they were unaware of any rescue talks, but hours later we learned a deal had been in the works for days. It appears the feds will be investing quite a bit of pocket change in Citigroup to go along with all of the other investments they have made over the course of the past few weeks. But just wait until you hear what the feds have planned to help keep Citigroup from sinking.
Before we get too far ahead of ourselves, let’s look back on the week.
On Wednesday, we saw confidence in Citigroup fade quickly and many questioned whether or not they could survive on their own. Shares closed at $6.40.
Saudi Prince Alwaleed bin Talal announced on Thursday that he was planning to increase his stake in Citigroup to 5 percent. He tried to assure investors that Citigroup shares were dramatically undervalued. Investors didn’t seem to care one bit about the prince or his investment as shares closed down again at $4.71.
While trying to keep a straight face claiming the company could overcome the crisis, executives began looking at other options, such as selling businesses, selling shares, and merging with another firm. By Thursday evening we hadn’t heard the word ‘bailout’ and no one was speaking of selling their first-born children either.
Then, on Friday, realizing the error of their ways, Chief Executive Vikram Pandit tried to downplay speculation that Citigroup might sell major businesses to restore its health and investor confidence. Investors made it very clear that selling businessses would not make them any more confident. Shares closed at $3.77 for the week.
I imagine that watching the news about Citigroup this week was like watching the Titanic sink. It started slowly at first, but then all of a sudden the water poured in and the ship began to list heavily. Only, in our story, news eventually broke that the captain and crew were speaking to the government about a bailout.
Exactly how much water can fill a boat before buckets just won’t help anymore? In real-life, I am not so sure, but in the financial rescue business it appears you can simply transfer the water to another sinking boat. Problem solved.
Citigroup plans to move more than $1.23 trillion of risky assets to a government-supported “bad bank” to reassure investors that all of their other investments are “good”. I wish I could do that. I wonder if I can move all of my “risky bills” to a government-supported fund and convince my creditors that all my other bills are “good” and payable? Do you think they might fall for that? Yeah, I doubt it.
According to the plan, the federal government will inject $20 billion into Citigroup in the form of preferred stocks and protect $306 billion in loans and securities against losses. The $20 billion will come from the government’s Troubled Asset Relief Program (TARP) which is also known as ‘The Great Bailout of 2008’. Don’t be fooled by that $20 billion number either.
I’m sure the government will keep touting the low $20 billion price tag, because they’ll want you to ignore the fact that we (you and I) are now insuring $306 billion in loans and securities against losses. What does this mean? It means that you and I, as American taxpayers, are now responsible for those loans. If Citibank starts to lose money, the feds will simply print up some more money to foot the bill. Heck, it’s only $306 billion. What’s a few billion when we already owe trillions, right?
So don’t worry. The next time you hear a strange crunching noise, remember it’s not an iceberg. It’s just the federal government at work in your pocketbook or wallet doing what they need to do to save the economy and save the world.