"Too big to fail" has been the reason for bailout after bailout. As Americans we cannot live without some companies, so it is our responsibility as taxpayers to pay for their mistakes. Whether it's Bear Sterns' debt or saving automakers from bankruptcy, we the taxpayer are here to keep failing companies afloat. One of the companies that the government chose to spend our hard earned money to assist is Citigroup.
About a year ago I left a 16 year career with Countrywide to take a job as a Regional Manager for Citi's mortgage company. Four months later I was let go as the entire division was dismantled. I hold no hard feelings toward Citi. When I signed my severance agreement (which was generous considering I had only been there for four months) I agreed not to say anything negative about Citi in a public forum. So let me be clear, any negative comments concern the government, not Citi.
Now that I have that disclosure out of the way I can move on. Citigroup is the financial goliath created by Sandy Weil in 1998 when Citicorp and Travelers merged. The idea was to create a diversified financial supermarket that crontained various cross-sell and synergistic opportunities. Well, it didn't really perform like it was drawn up. There have now been five quarters of very large losses and questions about whether Citi would survive.
But Citi is the largest diversified financial organization in the universe. The federal government was fearful of what would happen if Citi filed for bankruptcy. I agree it would probably be very bad, and the stock market would tank like it did when Lehman went down. So far the feds have injected $45 billion in cash into Citi as well as guaranteed $260 billion in debt. That total exposure is 44% of the entire $700 billion TARP funds. Of course even in a worst case scenario you still wouldn't lose that amount, but it demonstrates how much support our federal government is providing to this private (albeit publicly traded) company.
But now Citi is doing what they need to in order to survive. They are getting smaller. Does that mean they will no longer be too big to fail? They are shedding businesses including Smith Barney which will be a part of a joint venture with Morgan Stanley. It appears as though Citi will be more of a wholesale bank with large corporate clients and retail banking operations in only select markets around the globe. Would the fed actually bail out a firm that is what Citi will look like when the shedding is complete? I would hope not. But it's too late, the bailing out has been done.
Citi will shrink itself by roughly a third. Is that still too big to fail? I am not alone in my opinion that the government has done a lousy job so far with the TARP. It has been widely criticized. But the critisism must continue if things are going to change.