Tuesday, January 13, 2009

No Longer Too Big to Fail

"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.


  1. After writing this I realized I did something that I am critical of others doing, criticizing without offering up a better solution. The government is always any easy target for criticism. And the use of TARP (Troubled Asset Relief Program) has made criticism especially easy. It is an extraordinarily difficult proposition for the Treasury Department and those in Congress who have to make these decisions. Since most of the legislators have little or no knowledge of the subject, it is almost impossible for them to make a truly informed decision. I don't envy their position. The money is being authorized by Congress in two parts. The first half ($350 billion) was done in the fall and is the subject of criticism for the lack of oversight and accountability. The second half was just requested by the Treasury (at President Elect Obama's request) and must be authorized by Congress. That debate now begins. I think they will do a better job this time. There is push for much of the money to be used to prevent foreclosures. The methods are not yet known, but it will benefit not only those individuals, but the entire housing market to slow foreclosures. High the levels of inventory are what is continuing the slide in real estate prices and slowing foreclosures will help inventory levels return to a proper balance.

    I wish the Congress and President Obama's team good luck as they try and help the situation. My hope is that egos and unhelpful spending projects don't take center stage.

  2. 'I agreed not to say anything negative about Citi in a public forum.'

    Thankfully, I have no such obligation.

    When all is said and done, Citi will prove to be an epic tale of malfeasance and failure. This firm was poorly designed, carelessly managed, and shamefully under-regulated. At the heart of the matter, it's not really about Citi's being "too big to fail" - it's about it being TOO BIG TO SUCCEED. Chuck Prince utterly failed, primarily for failing to understand the key risks his company was taking. I seriously doubt if Prince could even describe how a CDO worked prior to a year ago. http://www.nytimes.com/2008/11/23/business/23citi.html?_r=1&ref=business

    Now, Pandit would get my vote for "least likely to succeed in his new job" if that wasn't already a lock for Obama. Sorry, Chris - I do wish him the best of luck too - but the deck is totally stacked against him. If the new administration sets the expectation that the measure of success is "stopping foreclosures" it will be just as foolish as the old administration setting the measure of success as "winning the war" in Iraq.