Citigroup Imminent Failure and Government Rescue Bailout
Companies / Credit Crisis Bailouts Nov 23, 2008 - 11:53 PM GMT
Citigroup, the nation's second largest banking conglomerate, is on the brink of failure.
Its stock price collapse is the canary in the coal mine, wiping out over nine-tenths of the company's market cap since its 2007 peak, decimating two-thirds of its value just last week alone.
At the same time, the collapse in its market cap is also the bank's nail in the coffin, making it virtually impossible for it to raise the capital it desperately needs to save itself.
If it fails, it will be, by far, the largest banking disaster in history, involving $2 trillion in assets. That makes it approximately six times larger than Washington Mutual and three times bigger than Wachovia.
Moreover, the prospect of a failure by Citigroup poses far greater challenges to regulators than a typical large bank. Due to its massive derivatives holdings — side bets on interest rates, currencies, and the probability of defaults by other large corporations — it could be extremely difficult to save Citigroup without serious disruptions, raising serious questions about the global banking system and the world economy.
At mid-year, June 30, 2008, the Office of the Comptroller of the Currency (OCC) reported that Citi's primary banking unit, Citibank NA, held $37.1 trillion in total notional value derivatives, including $3.6 trillion in credit default swaps, which, in recent months, have proven to be the most dangerous category.
In contrast, Wachovia bank, bought out by JP Morgan Chase in a deal brokered by the regulators, had only $4.4 trillion in derivatives, among which $404 billion were in credit default swaps, or only one-ninth the size of Citigroup's.
Thus, whereas it was possible for the authorities to arrange buy-outs for banks like Wachovia and Washington Mutual, there is no buyer big enough in the United States to absorb Citigroup. Nor is it likely that an international consortium of banks would want to squander the precious capital they have left on a sinking titanic the size of Citigroup.
What will happen next? No one can say with certainty. However, it's likely that:
- The Treasury Secretary, the Fed Chairman, as well as FDIC and Citigroup officials are currently holding tense and intense discussions in a desperate attempt to somehow stem the megabank's demise.
- They will soon announce a massive federal bailout that could make the $150 billion AIG rescue seem small by comparison.
- And, ultimately, these kinds of bailout efforts will fail.
It is preposterous to assume that any government, no matter how powerful it may seem, can save the entire world. It is naive to believe that a few government bureaucrats, with a grab-bag of gimmicks and tricks, are a match for billions of consumers in revolt, millions of investors desperate to sell, and thousands of banks pulling in their horns.
The government cannot repeal the law of gravity and stop markets from falling. Nor can it turn back the clock to reverse our financial blunders.
My recommendations are unchanged:
Recommendation #1. Keep up to 90% of your money in the highest rated, most liquid safe haven in the world — short-term U.S. Treasury bills, bought through Treasury Direct or a money market fund that invests exclusively in Treasury securities.
Recommendation #2. If you have substantial assets or securities held in any other venue — a brokerage account, insurance company, or bank — pull away a reasonable portion of those funds for safekeeping in Treasuries as well.
Recommendation #3. For urgent self defense, go on the offense. Click here to read Mike Larson's latest report on how to convert this crisis into a steady stream of high-profit results.
Recommendation #4. Above all, stay out of the stock market. Do not be lured back in by so-called “bargains” or temporary rallies like Friday's. Our next target for the Dow is 5500, and it could get there very quickly.
Good luck and God bless!
Martin
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