Well, imagine my surprise when we now hear that the federal government may have to bail out Citigroup because the company is teetering on the brink of going belly up.
Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.
“There is no question that Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”
While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating agencies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was “on the right track” five days before the firm went bankrupt.
“The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients today. “In situations where the government has stepped in, the equity holders have not fared well.”
Citigroup CEO Vikram Pandit told employees today that he doesn’t plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 cents, or 20 percent, to $3.77 at 4:08 p.m. in New York, giving the company a market value of about $21 billion. The stock pared its loss after the close of official trading, fetching $4.07 as of 4:35 p.m.
Pandit and Chief Financial Officer Gary Crittenden, speaking on a worldwide conference call this morning, also said they don’t expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it wasn’t open to the public.
How is that possible? How could the federal government have been so wrong about Citigroup's viability when they were pushing Citigroup to buy Wachovia, which was in even more dire straits a few weeks back? Did they know and figured that they would bail them out eventually anyways? Did they not know? Answering yes to either of those questions raises serious questions about the whole idea of bailing out entities and what the government really knows about the situation, let alone what kind of guidance it is receiving from the Treasury Department and the Federal Reserve.
It's a smart idea to keep in mind that there really aren't any entities that are truly too big to fail. While real estate assets may not be worth what the paper says they are, they still have value, which can be unwound through actual market sales. Papering over the failure of Citigroup with a bailout doesn't actually establish value for the toxic paper, it only delays the reckoning, and while that's good for politicians, it's bad for taxpayers and everyone else since the markets simply don't know what anything is worth and delays and changes of tactics by the government on how to deal with the crisis inserts still more uncertainty and volatility to the markets.
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